Ridgecrest NZ Ltd v Iag New Zealand Ltd

• Jurisdiction: New Zealand
• Judge: Dobson J
• Judgment Date: 08 November 2012
• Neutral Citation: [2012] NZHC 2954
• Court: High Court
• Docket Number: CIV-2012-409-000295
• Date: 08 November 2012

Between

Ridgecrest NZ Limited

Plaintiff

and

Iag New Zealand Limited

Defendant

[2012] NZHC 2954

CIV-2012-409-000295

IN THE HIGH COURT OF NEW ZEALAND

CHRISTCHURCH REGISTRY

Preliminary question for determination in proceedings involving a dispute between an insurer and insured in relation to the extent of the insurer's liability for damage to a commercial building in central Christchurch — building damaged on number of occasions by earthquakes before suffering irreparable damage and being demolished — parties agreed: (1) there were four “happenings” within a period of insurance; (2) each caused damage to building; (3) subsequent to the first two happenings, repairs were commenced but not completed by the time of next happening; (4) following third or fourth happening, the building damaged so that the cost of repair exceeded the sum insured; (5) the building damaged beyond repair as a result of either the third or fourth happening — whether insured was entitled to be paid for damage resulting from each happening up to the limit of the sum insured in each case — whether doctrine of merger applied — whether subsequent destruction of building frustrated contractual terms of policy.

Counsel:

C R Carruthers QC and P A Cowey for plaintiff

B D Gray QC and P M Smith for defendant

RESERVED JUDGMENT OF Dobson J

Contents

Background, and the preliminary question	[1]
The policy	[6]
Competing contractual interpretations	[16]
Interpreting the terms of the contract	[25]
Merger	[37]
Frustration	[54]
Conclusion	[77]

Background, and the preliminary question

1 These proceedings involve a dispute between an insurer and insured in relation to the extent of the insurer's liability for damage to a commercial building in Gloucester Street, central Christchurch. The building was damaged on a number of occasions by some of the more severe of the earthquakes suffered by Christchurch in the relevant period. Eventually, the building suffered irreparable damage and has subsequently been demolished.

2 In those circumstances, the defendant (the insurer) has paid the plaintiff (the insured) the amount that represents the limit on liability under the policy for any one happening of $1.984 million. The insurer had earlier incurred some $125,000 as the partial cost of repairs needed on account of damage caused in earlier earthquakes. The insurer treats these payments as fully discharging its liabilities under the policy.

3 In contrast, the insured claims that it is entitled to additional sums comprising the estimated costs of all repairs that would have been necessary to restore the building to its pre-earthquake condition, after each of the earlier earthquakes. The extent of such repairs had been assessed by quantity surveyors on each occasion.

4 For the purposes of determining the preliminary question to which this judgment relates, the parties agreed on a statement of facts which included the following:

• • At material times, there was a policy of insurance between the parties whereby the insurer provided replacement cover for the insured's commercial building situated at 215 Gloucester Street for events including earthquake damage, with a limit of $1.984m for each happening.

• • The building sustained damage in an earthquake on 4 September 2010. The cost of repairing that damage was assessed and estimated to be between $110,115.09 (inclusive of GST) and $196,352 (plus GST). Such repairs had been commenced but were not completed by the time the second relevant earthquake occurred.

• • In a second relevant earthquake on 26 December 2010, the building suffered further, distinct damage. The cost of repairing the building following that earthquake was assessed and estimated to be between $200,000 (inclusive of GST) and $337,056 (plus GST). Such repairs had been commenced but had not been completed by the time of the third relevant earthquake.

• • The building sustained further distinct damage as a result of a third earthquake on 22 February 2011. The insured contended that the cost to repair the damage caused by the 22 February 2011 earthquake was assessed and estimated to be $1.924 million plus GST. The insurer's position was that the building was damaged beyond repair as a result of the 22 February 2011 earthquake, or that the cost of repairs exceeded the sum insured.

• • A fourth earthquake on 13 June 2011 caused additional damage to the building. The insured considered this was further and distinct damage, whereas the insurer considered that the June 2011 earthquake only exacerbated existing damage. The insured treated the damage from the 13 June 2011 earthquake as sufficient to render the building irreparable. The insurer considered that having paid the limit of its liability, it had already performed its obligations under the policy and in addition contended that the building had been damaged beyond repair prior to the 13 June 2011 earthquake.

5 The parties formulated a preliminary question for determination in the proceedings in the following terms:

Where –

• 1. There have been four happenings within a period of insurance;

• 2. Each happening caused damage to the Plaintiff's building;

• 3. Subsequent to the first two happenings repairs were commenced but not completed by the time of the next happening;

• 4. Following the third or fourth happening, the building was damaged so that the cost of repair exceeded the sum insured;

• 5. The building has been damaged beyond repair as a result of either the third or fourth happening;

  Then:

• 6. Is [the insured] entitled to be paid for the damage resulting from each happening up to the limit of the sum insured in each case?

The policy

6 The relevant contract of insurance was for the period from 10 August 2010 to 10 August 2011. 1 The policy provided cover in respect of business assets with the building at 215 Gloucester Street being particularised. In terms of the scope of the insurance, under a heading “The Insurance”, the policy provided:

This Policy covers only those Parts for which a Limit is shown in the Schedule and the maximum amount you can claim under any Part in respect of any one happening (inclusive of fees and costs) is the current Limit for that Part.

7 The limit of the insurer's liability was $1,984,000 and an option providing that the cover would be on replacement terms was confirmed as applying.

8 The insurance was for sudden and accidental loss of, or damage to, the business assets of the insured and Part C of the policy began with the following provisions:

C. THE AMOUNTS YOU CAN CLAIM

• 1. This insurance will pay the amount of loss or damage or the estimated cost of restoring your Business Assets as nearly as possible to the same condition they were in immediately before the loss or damage happened using current materials and methods.

• 2. Where Replacement cover has been agreed by us and specified in the Schedule and following loss or damage you restore or replace the lost or damaged Business Assets this insurance will pay

  (a) for Buildings

  • (i) where repairable, the cost of restoration of damage to the same condition when new,

    or

  • (ii) if unable to be repaired because of such damage, the cost of replacement by an

    equivalent building which meets your requirements at any site provided we shall not pay more than the cost of replacement at the Site stated in the Schedule.

  Such restoration will use current materials and methods and include the cost of changes to meet the lawful requirements of any local authority or statute but not for work you have already been instructed to do prior to the loss or damage.

9 The policy did not contain any definition of what constituted a “happening”. Nor were there any provisions addressing the terms that would apply in a situation after a claim had been made during the period of insurance. In contrast, some policies of this type include a procedure for reinstatement of cover after a claim has been met by the insurer, usually affording the insurer an opportunity to re-assess the risk, and charge an additional premium. 2 In this policy, the insurer was limited to cancelling the policy (which had to be on 30 days' notice) in the event that circumstances material to the extent of risk changed.

10 Mr Carruthers QC accepted that it is relatively common for material damage policies to include a provision that gives the insurer an option, at its election to either:

• • supervise repairs to insured property, thereby keeping control over the contractors involved, and presumably the costs incurred; or

• • leave the supervision of repairs to the insured, so that the insurer pays the insured amounts either projected to be incurred, or in fact already incurred by the insured.

11 There is no such provision in the present policy. The insurer's obligation under both clauses C1 and C2 was simply to pay quantified amounts. However, notwithstanding the absence of a provision authorising repairs to be effected under the control of the insurer, the repairs to the building that were undertaken after the first and second earthquakes were arranged by consultants retained by the insurer.

Those consultants and physical works were paid for by the insurer. That occurred notwithstanding the insured purporting to reject the services of the project manager appointed by the insurer in December 2010, and notifying its election to take a “cash settlement” in respect of the damage caused by the first earthquake. There was no explanation as to the grounds relied on by the insurer to resist that course

12 The agreed facts make no reference to the timeliness of the repairs that were being undertaken at the direction of the insurer. Disruption to the works being undertaken after each of the first two earthquakes that was caused by the next relevant one can be seen as an unforeseen fortuity.

13 Within this dispute, the...