Tjk (Nz) Ltd v Mitsui Sumitomo Insurance Company Ltd Hc Chch

JurisdictionNew Zealand
JudgeMiller J
Judgment Date22 February 2013
Neutral Citation[2013] NZHC 298
Docket NumberCIV-2012-409-2138
CourtHigh Court
Date22 February 2013
BETWEEN
Tjk (Nz) Limited
Plaintiff
and
Mitsui Sumitomo Insurance Company Limited
Defendant

[2013] NZHC 298

CIV-2012-409-2138

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

Application for summary judgment seeking declarations to the effect that an insurer was obliged to pay the indemnity value of a building before the plaintiff incurred costs of its reinstatement — building ordered to be demolished as a result of the Christchurch earthquakes — insurance policy included extension, under which insurer had to pay cost of reinstating earthquake damage up to a specified sum, if insured elected reinstatement — insured had elected reinstatement but had yet to incur the cost of reinstatement — reinstatement cost would exceed building's lost market value following the earthquakes — parties agreed that lost market value represented the least measure of the building's indemnity value — parties disagreed about source of insurer's obligation to pay indemnity value under extension — whether insurer's obligation to pay indemnity on proof of loss was conditional on insured's election to reinstate or the insured actually incurring any reinstatement cost.

Counsel:

N R Campbell, P J Woods and L Taylor for Plaintiff

B Gray QC and A J McElhinney for Defendant

JUDGMENT OF Miller J

Introduction
1

Clarendon Tower, an office building at 78 Worcester Street, Christchurch, suffered damage in the earthquakes of 4 September 2010 and 22 February 2011. The Canterbury Earthquake Recovery Authority (CERA) has pronounced the building dangerous and commissioned its demolition.

2

The owner, TJK (NZ) Limited, insured the building with Mitsui Sumitomo Insurance Co Limited. The policy included an extension under which Mitsui must pay the cost of reinstating earthquake damage up to a specified sum, if TJK elected reinstatement. TJK has done so, but has yet to incur the cost of reinstatement. Whether it takes the form of notional repair or actual rebuilding, reinstatement cost will exceed the building's lost market value following the earthquakes. The parties accordingly agree that lost market value represents the least measure of the building's indemnity value.

3

TJK says it has suffered a loss, being the indemnity value, and Mitsui must pay that sum now, before reinstatement. In this summary judgment application it seeks declarations to that effect. Mitsui concedes that it must pay the indemnity value, but says it need not do so until TJK incurs the cost of reinstatement.

Context
4

Clarendon Tower comprised 18 floors with a total lettable area of 12,983 square metres. It was built in 1988, and is said to have been a premium office building. When the first earthquake struck some floors had recently been refurbished.

5

Mitsui insured TJK for the building under comprehensive Business Package Policies for the periods 13 October 2009 to 13 October 2010, 13 October 2010 to 31 March 2011, and 1 April 2011 to 25 May 2011. I note that the short term of the second policy had nothing to do with the first earthquake — it was altered to coincide with TJK's balance date — and Mitsui cancelled the third policy, which is not presently relevant, as at the last of these dates. The policies were materially identical, except that the reinstatement sum insured was substantially higher under the second policy than the first.

6

I will examine the policy language later. By way of overview, Mitsui structured the material damage section of each policy in the following way. It first established an indemnity to pay for damage to the property, such indemnity to be satisfied by payment or, at Mitsui's option, repair or replacement. It next added certain automatic extensions, including the costs of demolishing a building, removing contents and disposing of debris. It then excluded all cover for earthquake damage. It finally displayed a menu of additional extensions among which the insured might choose by having them specified in a schedule to the policy.

7

Two of the additional extensions offered an indemnity for earthquake damage. Under extension number MD020 TJK might recover indemnity value. This extension was not specified in the schedule, but both counsel suggested that it may affect interpretation of the earthquake full reinstatement cover extension, number MD022, which was. The reinstatement obligation was capped. Schedules to the first and second policies respectively recorded reinstatement sums of $67,125,000 and $78,150,000, of which $55,175,000 and $65,000,000 were allocated to reinstatement of the building including the landlord's fixtures and fittings, and the balance to inflation and demolition costs.

8

After the first earthquake TJK notified Mitsui of damage and commissioned repairs, which were under way when the second earthquake struck. As at 22 February 2011 work costing $2.4m had been completed. Mitsui has paid for that work.

9

The building fared badly in the second earthquake. Damage assessment took some time. In the meantime CERA notified TJK, on 2 June 2011, that the building was dangerous and must be demolished.

10

TJK's solicitor advised Mitsui's solicitors on 11 August 2011 that demolition seemed inevitable, and stated that TJK was entitled to reinstatement cover. He called on Mitsui to pay the demolition costs and/or indemnity value in the meantime. Mitsui evidently never responded to that request, but it has paid nearly $10m for damage from the February earthquake, apparently without explaining how it categorised the payment. The payment may cover the out of pocket costs that TJK has incurred to date from the February earthquake.

11

I record in passing that I have set aside Mr Campbell's submission that the parties' correspondence evidences an admission that Mitsui faces a present liability to pay. Even if the admission were unequivocal its implications for the present application, which turns on the construction of the policy, would be debateable.

12

TJK says that the building was damaged beyond repair and must now be rebuilt at a cost of about $90m. Mitsui responds that the building was economically repairable for about $45m-$50m. The dispute turns substantially upon a single question: whether structural steel beams in the north and south elevations experienced low cycle fatigue in the earthquakes. Other important controversies include a lean from which the building suffered and a bulge in structural frames on the north and south elevations at mid-floor level. Mitsui says the lean may have predated the earthquakes and anyway fell within accepted tolerances, and it thinks the bulge immaterial. It acknowledges that the cost of rebuilding will exceed the reinstatement sum insured under extension MD022.

13

A valuation prepared as at 30 March 2010 assessed the market value of Clarendon Tower at $37m. That figure is not agreed; Mitsui estimates its value at approximately $30m-$35m. I am not asked to fix quantum here. For present purposes what matters is that lost market value is less than the cost of repairs and represents the lowest measure of indemnity value under the policy. The parties agree that lost market value is the least amount that Mitsui must pay when its obligation to pay falls due. The question is whether it must pay a larger sum by way of reinstatement cost. If so, the Court must decide which of repair or rebuilding represents the correct measure of reinstatement cost.

14

Neither party will actually get the opportunity to repair the building. CERA has arranged demolition down to ground level, relying on a notice to demolish issued under s 38(4) of the Canterbury Earthquake Recovery Act 2011. TJK must reimburse CERA for the work, which should be completed by 1 March 2013. It seems that TJK will be permitted to rebuild on the same site.

TJK's claim
15

The pleadings establish that the building suffered damage in the earthquakes and that Mitsui must indemnify TJK under extension MD022. Mitsui has put TJK to proof of its allegation that it means to reinstate, but Mitsui accepted the allegation for the purposes of this hearing. Mr Gray QC acknowledged that had TJK not elected reinstatement, Mitsui must attract a present liability to pay indemnity value, subject to proof of quantum.

16

The relief sought under the first cause of action comprises declarations that Mitsui is liable to pay at least indemnity value under extension MD022 of each of the first and second policies, whether or not TJK has incurred the cost of reinstatement. TJK pleads that the indemnity value under the first policy was not less than $9.66m (the estimated cost of repairs from the September earthquake) and under the second policy not less than $31,4m. 1

17

Under the second cause of action TJK seeks judgment for indemnity value, and propping and demolition costs.

18

Under the third cause of action TJK seeks declarations that Mitsui must pay the cost of reinstatement, being the cost of repairs after the September earthquake under the first policy and the cost of replacing the building under the second policy after the February earthquake. Mitsui responds that the building was repairable after both earthquakes. It pleads too that the CERA demolition precluded repairs, meaning that liability under extension MD022 is confined to indemnity value anyway. The second plea will assume prominence at trial.

The summary judgment application: the parties' positions
19

For TJK, Mr Campbell argued that Mitsui's policy was structured in typical form, as an obligation to pay indemnity value and a top-up for reinstatement where the insured elected to reinstate and incurred the cost of doing so. In such a policy the insurer must pay indemnity value on proof of loss; the obligation is not conditional on the insured's election to reinstate or the insured actually incurring any reinstatement cost. He argued, relying on Commonwealth authorities, for a general rule to that effect. Where indemnity...

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