Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd

• Jurisdiction: New Zealand
• Judge: Miller J
• Judgment Date: 14 March 2016
• Neutral Citation: [2016] NZCA 67
• Docket Number: CA400/2015
• Court: Court of Appeal
• Date: 14 March 2016

Between

Prattley Enterprises Limited

Appellant

and

Vero Insurance New Zealand Limited

Respondent

[2016] NZCA 67

Court:

Ellen France P, Stevens and Miller JJ

CA400/2015

IN THE COURT OF APPEAL OF NEW ZEALAND

Counsel:

FMR Cooke QC and S P Rennie for Appellant

D J Goddard QC and C M Brick for Respondent

JUDGMENT OF THE COURT

A The appeal is dismissed.

B Prattley must pay Vero costs for a complex appeal on a band B basis, with usual disbursements. We certify for second counsel.

REASONS OF THE COURT

(Given by Miller J)

TABLE OF CONTENTS

Introduction	[1]
Context	[3]
The policy terms	[15]
Destruction	[26]
Settlement	[30]
Appellate decisions since settlement	[42]
Mistake	[47]
Does the settlement assign the risk of mistake to Prattley?	[53]
What was the mistake, if any?	[71]
Was there a substantially unequal exchange of values?	[80]
Mr Keys' evidence	[84]
The evidence	[84]
The trial	[86]
The Judge's assessment	[91]
The appeal	[92]
Admissibility of expert evidence	[93]
Should Mr Keys' evidence be accepted?	[103]
Prattley's entitlement under the policy	[110]
Decision	[129]
Costs	[130]

Introduction

1 An insured negotiated a settlement with its insurer following damage to its building from a series of earthquakes. They agreed that the insurer's payment was made in final settlement and discharge of all claims present and future arising out of the policy or the earthquake damage. The insured now seeks to reopen its claim, saying that when they settled both parties were mistaken about the measure of its entitlement. The primary question on this appeal is whether the insured assumed the risk of mistake so as to preclude relief under the Contractual Mistakes Act 1977.

2 The appeal raises secondary questions worthy of note. One is whether the appropriate measure of indemnity under the indemnity-only policy following destruction is market value or depreciated replacement cost. Another is whether any weight should be attached to the evidence of an expert witness whom the trial Judge found unhelpful and whom we consider partial.

Context

3 Worcester Towers stood at Cathedral Junction, in the central business district of Christchurch. It was a three-storey building of double brick construction, erected in the 1920s and possessing a degree of character attributable to its design and appearance. In 2010 its tenants included a cinema, the Britten Motorcycle Museum and a management company used by the Britten family, the ultimate owners, to manage their various property interests. The site is owned by Prattley Enterprises Ltd (Prattley), which is itself owned by the estate of John Britten, whose trustees control the property and make all major decisions about it. 1 They are Kirsteen Britten, Bruce Irvine, Christopher Weir and Timothy Corcoran. Mr Irvine is an experienced accountant and Messrs Weir and Corcoran are experienced lawyers.

4 The building suffered successive damage in three earthquakes. Damage from the first, on 4 September 2010, was moderate and the building remained in use. Damage from the second, on Boxing Day 2010, was extensive; the building was red-stickered, meaning that it could not be occupied. Damage from the third, on 22 February 2011, was severe, partly because the adjoining Christchurch Press building fell onto Worcester Towers.

5 No substantial repairs were ever undertaken. In June 2011 the Canterbury Earthquake Recovery Authority (CERA) ordered that the building be demolished.

6 Vero Insurance Ltd insured the building for indemnity value with a per-claim limit or sum insured of $1,605,000. There is no evidence about how the sum insured, which Prattley nominated, was calculated, and nothing to suggest that it corresponded to the actual indemnity value. The evidence does establish that, the building's age and character notwithstanding, a conscious decision was made, on cost grounds, not to purchase full reinstatement or excess of indemnity cover.

7 The policy obliged Vero to repair or reinstate up to the sum insured for any one claim, subject to the proviso that Prattley could not recover more than it would

get if the building were destroyed. On destruction, Prattley's entitlement was limited to the building's indemnity value.

8 The policy also provided that insurance that had been cancelled by damage was reinstated automatically from the date of damage. It is common ground that cover reinstated after each of the three earthquakes, meaning that Vero's liability was potentially as high as $4,815,000.

9 At trial the parties agreed that the earthquakes destroyed the building, although we must address the issue since Prattley did not concede destruction by earthquake before us, suggesting rather that it resulted from the demolition order, and Vero argues that destruction was complete in December 2010 rather than, as Dunningham J found, in February 2011. 2

10 On 23 August 2011 Prattley settled all its claims with Vero for $1,050,000. That sum was Prattley's own estimate of the building's pre-earthquake market value, which the parties took to be the correct measure of indemnity value. The agreement, which we discuss at [30] below, provided that the payment was made in full and final settlement and discharge of all claims in connection with the earthquakes and the policy.

11 Prattley came to regret the settlement. It now believes that is entitled to that proportion of total reinstatement cost attributable to each earthquake, subject to a per-claim limit of $1,605,000. The evidence suggests that it would cost some $5,400,000 or more to reinstate the original building using modern methods and materials, and $6,240,000 to build a functional equivalent; that is, an office building offering the same lettable floor area. Prattley quantifies its recoverable loss at $3,400,000 plus GST. That sum is less than the maximum available under the policy for three events because Prattley accepts that damage from the first earthquake could be repaired for less than the sum insured.

12 Prattley attributes its decision to enter the settlement agreement to a mistake, shared with Vero, to the effect that market value was the correct measure of indemnity. We examine the mistake at [47] below. Prattley's awareness of it is said to arise, at least in part, from a better understanding, resulting from decisions such as that of the Supreme Court in Ridgecrest and this Court in Wild South, of an insured's entitlement following successive losses. 3 It says that the settlement resulted in a substantially unequal exchange of values and should be set aside under the Contractual Mistakes Act. Vero responds that relief is precluded because the settlement agreement assigned the risk of mistake to Prattley, and in any event there was no mistake and no resulting inequality in value exchanged.

13 In July 2012 Prattley instructed Risk Worldwide New Zealand Ltd to “assist in the preparation, analysis, presentation and settlement” of Prattley's claim on a no-win, no-fee basis. Risk Worldwide bears all of the costs of this litigation and in return will be paid a substantial percentage of any settlement or award. One of the firm's principals, George Keys, is a loss adjuster by profession. Through a company of his own he holds one-third of Risk Worldwide.

14 On 8 May 2013 Mr Keys wrote to Vero in his capacity as Prattley's “claims advocate”. He advanced a claim for some $8.8 million less the settlement payment. At trial he gave evidence as an expert witness on depreciation. He was admittedly interested in the outcome not only of this case but also of others that might challenge earthquake settlements, were Prattley to succeed. There was no evidence that his “elemental” or item by item approach, which resulted in an overall depreciation rate of 8.5 per cent for the 90 year old building, was accepted in any relevant community of experts. The Judge discounted his evidence but we are asked to rely upon it, which leads us to reflect upon whether it ought to have been admitted at all.

The policy terms

15 There were two policies; the policy anniversary fell on 21 December 2010, between the first and second earthquakes. Nothing turns on the renewal and the

policies are identical but for the method of calculating the policy excess, which is not in issue, so it is convenient to speak of “the policy”.

16 The policy began with a reference to the Fair Insurance Code: 4

As members of the Insurance Council of New Zealand, we are committed to complying with the Council's Fair Insurance Code.

This means we will:

• 1. provide insurance contracts which are understandable and show the legal rights and obligations of both us and the policyholder;

• 2. explain the meaning of legal or technical words or phrases;

• 3. explain the special meanings of particular words or phrases as they apply in the policy;

• 4. settle all valid claims fairly and promptly;

• 5. clearly explain the reason(s) why a claim has been declined;

• 6. provide policyholders with a written summary of our complaints procedure as soon as disputes arise and advise them how to lodge a complaint and tell them about the Insurance and Savings Ombudsman Scheme;

• 7 be financially sound as measured by our Claims paying rating;

…

17 The insuring clause followed:

In consideration of you having paid or promised to pay the required premium we agree to indemnify you in the manner and to the extent set out in the applicable parts of this policy.

The insurance contract consists of any statements on which this insurance is based, your proposal, the applicable parts of this policy, and the schedule.

18 The policy contained a number of sections dealing with material damage, business interruption and so on. In the material damage section the policy...