Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd

• Jurisdiction: New Zealand
• Judge: Dunningham J
• Judgment Date: 24 June 2015
• Neutral Citation: [2015] NZHC 1444
• Docket Number: CIV 2013-409-001511
• Court: High Court
• Date: 24 June 2015

BETWEEN

Prattley Enterprises Limited

Plaintiff

and

Vero Insurance New Zealand Limited

Defendant

[2015] NZHC 1444

CIV 2013-409-001511

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

Claim by the insured seeking to set aside a settlement agreement related to an insurance policy — the plaintiff owned building which was damaged and ultimately destroyed in three successive earthquakes — the building was subject to an indemnity policy which gave the insurer the option to indemnify by payment or to elect repair or replacement — a settlement was reached to pay the pre — earthquake market value, on the understanding that this was full extent of the loss, whether it occurred over one or several claim events — subsequently Ridgecrest v IAG NZ held that the doctrine of merger did not apply to successive losses to commercial property — the plaintiff sought to have settlement set aside and its entitlement reassessed on an event by event basis — whether the policy limited indemnity cover to the cost of repair or reinstatement less depreciation — whether the approach in Ridgecrest applied to determining entitlement under the policy — whether the settlement agreement should be set aside as a result of breach of contractual obligations of good faith by misrepresentation of the insured's entitlements — whether section 9 Fair Trading Act 1989 (Misleading and deceptive conduct generally) was breached; whether s6 Contractual Mistakes Act 1977 (mistake by one party is known to opposing party or is common or mutual) applied — whether the agreement could be set aside for want of consideration.

Appearances:

FMR Cooke QC with S P Rennie for Plaintiff

D J Goddard QC with SWB Foote and C M Brick for Defendant

JUDGMENT OF Dunningham J

Contents

Introduction	[1]
The factual background	[7]
The building	[7]
Management of Prattley	[9]
Placement of insurance	[11]
The insurance claims	[14]
How did the parties negotiate the Agreement?	[20]
Prattley reopens the claim	[44]
The contract of insurance	[50]
General	[50]
Is Prattley entitled to have each claim for earthquake damage separately assessed and adjusted?	[63]
What was the measure of indemnity in the policy?	[68]
Factual findings in relation to Prattley's claims	[84]
What damage was sustained in each earthquake event?	[84]
Was Worcester Towers destroyed in December or February?	[105]
What was Prattley's intention at each claim event?	[110]
In light of the policy terms and my factual findings, what was Prattley's entitlement?	[125]
Is the correct measure of the insured's loss market value or depreciated replacement cost in the February event?	[125]
Calculation of depreciated replacement cost	[130]
What was Prattley's entitlement under the policy?	[135]
Setting aside the Agreement.	[150]
Did Vero breach its contractual obligations to Prattley?	[152]
The alleged breaches	[152]
Vero's response	[162]
Discussion	[165]
Was there a breach of the Fair Trading Act?	[180]
The alleged breaches	[180]
Vero's response	[183]
Discussion	[184]
Can the Agreement be set aside under the Contractual Mistakes Act 1977?	[195]
The alleged mistakes	[195]
Was there a qualifying mistake?	[197]
Was there a substantially unequal exchange of values?	[198]
Did the contract allocate the risk of mistake?	[204]
Absence of consideration for the Agreement	[211]
Prattley's arguments	[211]
Vero's response	[220]
Conclusion	[227]
Vero's counterclaim	[232]
Costs	[239]

Introduction

1 In the heart of Christchurch, just east of Cathedral Square, stood the plaintiff's building, Worcester Towers. Like so many of Christchurch's older buildings, it was progressively damaged by the earthquakes of 4 September and 26 December 2010, and 22 February 2011. It could not be reoccupied after the Boxing Day earthquake and, in June 2011, the Canterbury Earthquake Recovery Authority issued a notice requiring its demolition.

2 Such facts have given rise to a number of insurance law cases to determine the insured's right to cover under its policy, especially where a building is affected by multiple earthquake events. This would be one such a case but for a further complication. In August 2011 the plaintiff, Prattley Enterprises Limited (Prattley), agreed to resolve its claim for material damage to Worcester Towers on payment of $1,050,000 plus GST, less the insurance excess, in “full and final settlement and discharge of the claim” (“the Agreement”). I must therefore determine whether there are circumstances which make it unfair to hold Prattley to the Agreement, before I can decide whether it is entitled to any greater sum under the terms of the policy.

3 Prattley's position is that its insurer, Vero, did not comply with its contractual obligations to correctly explain Prattley's entitlement under the contract of insurance. It says Vero misrepresented to Prattley that its entitlement was measured by the market value of the building, when it fact it was entitled to the cost of reinstatement on each of the 2010 earthquake events, plus the depreciated replacement cost of the building on the third earthquake event in 2011. While each of those payments would be subject to the agreed indemnity value cap of approximately $1,600,000, Prattley would have been entitled to significantly more than it settled for.

4 Vero's position can be summarised by saying that the Agreement is valid and binding. Prattley entered into it in reliance on its own independent advice and, in any event, there are sound policy reasons to uphold the effectiveness and integrity of settlement agreements. In any event, it was not wrong in the context of a policy which ensures a building on an indemnity basis to measure the insured's loss as being the market value of the building.

5 To resolve the issues in dispute I must determine:

• (a) Vero and Prattley's legal obligations and entitlements under the contract of insurance;

• (b) the damage suffered by Prattley as a consequence of each insured event;

• (c) the correct measure of Prattley's loss as a consequence of the damage suffered;

• (d) if Prattley's entitlement under the policy exceeded what was paid under the Agreement, whether any of the following grounds exist to justify reopening the Agreement:

  • (i) Vero breached its obligations under the contract, including obligations it had under the Fair Insurance Code;

  • (ii) the Agreement was not a true contract of compromise;

  • (iii) the Agreement was reached in breach of the Fair Trading Act 1986;

  • (iv) the Agreement was entered into because of a qualifying mistake under the Contractual Mistakes Act 1979.

6 With those issues in mind, I outline the relevant factual background.

The factual background

The building

7 Worcester Towers was located at 103-105 Worcester Street next to the Cathedral Junction development. It was built in the 1920's and comprised three storeys and a basement, arranged in two main wings which were connected at the rear of the property. An historic Edwardian building which had stood on the front of the site, had been demolished in 1984 and the cleared space allowed for tenant car parking. At the same time a concrete block stairwell was added to the front of the west wing and some other strengthening work was undertaken to other parts of the building, although this was not comprehensive strengthening work.

8 The building was one of several buildings owned by the late John Britten, who was well known because of his development of the revolutionary Britten motorcycle. The building housed the Britten Motorcycle Company and Motorcycle Museum, as well as a range of commercial tenants, the most significant of which was the Metro Theatre which operated a boutique theatre complex in the east wing of the building. The income received from the building was used to support the Britten family.

Management of Prattley

9 On John Britten's death in 1995, his assets, including those held by the companies he owned such as Prattley (“the Britten Group companies”), were transferred to the trustees of Mr Britten's estate. The four trustees comprised Mrs Kirsteen Britten, his wife, Mr Bruce Irvine, a highly experienced accountant and company director with legal qualifications, Mr Chris Weir, a senior partner of a large commercial law firm, and Mr Timothy Corcoran, a retired lawyer and company director.

10 While Mrs Britten and Mr Corcoran were the directors of Prattley, it was uncontentious that major decisions for all estate assets, including those held by Prattley, required approval of the trustees. The trustees were assisted in the day to day running of the estate by Mr Ray Minehan, who was engaged to manage the Britten Group properties, and Ms Eileen Yates, who was responsible for general administration of the Britten Group companies.

Placement of insurance

11 The insurance needs of the Britten Group companies were, from December 2009, handled by Ms Karen Austin of Amicus Brokers Limited. She dealt with Mrs Britten, Ms Yates and Mr Minehan to arrange insurance for Worcester Towers, and three other commercial buildings owned by the Britten estate, as well as for the residential houses owned by Mrs Britten, and for associated contents and motor vehicles.

12 At the time Ms Austin took over, there were discussions regarding whether the commercial buildings should be insured for indemnity value or reinstatement cost. In the end Ms Yates advised Ms Austin that replacement cover would only be required for the newest of the four Britten Group properties, being a building in Hereford Street, and the balance would continue with indemnity cover, because the trustees “would not want to pay the extra premium for...