Wild South Holdings Ltd & Maxims Fashions Ltd v Qbe Insurance (International) Ltd

• Jurisdiction: New Zealand
• Judge: FOGARTY J
• Judgment Date: 23 October 2013
• Neutral Citation: [2013] NZHC 2781
• Docket Number: CIV 2013-409-758
• Court: High Court
• Date: 23 October 2013

Between

Wild South Holdings Limited

Plaintiff

and

QBE Insurance (International) Limited

Defendant

Between

Maxims Fashions Limited

Plaintiff

and

QBE Insurance (International) Limited

Defendant

[2013] NZHC 2781

CIV 2013-409-758

CIV 2013-409-898

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

Preliminary questions to an insurance dispute — plaintiffs had insurance policies with the defendant — each had automatic reinstatement policies — buildings damaged in the Christchurch earthquakes — what was the basis and measure of indemnity under the policies and when was it payable — what was the proper interpretation and application of the automatic reinstatement clauses in the policies — whether the defendant was liable for the insureds' reasonable and actual claim preparation costs incurred and, if so, up to what is the maximum amount — what was the proper application of any excess or deductible under the policies — discussion of the principles of insurance contract interpretation.

Appearances:

S P Rennie and J E Bayley for Plaintiffs

M Ring QC and F W Rose for Defendant

JUDGMENT OF FOGARTY J

Contents

Introduction	[1]
Agreed Facts	[5]
The preliminary questions	[13]
The respective proposed answers to the preliminary questions	[13]
Question 1 — What is the basis and measure of indemnity under the policies and when is it payable?	[13]
Insureds' answer to question 1	[13]
QBE's answer to question 1	[13]
Question 2 — What is the proper interpretation and application of the automatic reinstatement clauses in the policies?	[13]
Insureds' answer	[13]
QBE's answer	[13]
Question 3 — What are the limitations (if any) on QBE's liability under the policies and the effects of any limitation?	[14]
Special conditions (3)(b) and (3)(c)	[14]
Insureds' answer	[15]
QBE's answer	[15]
Question 4 — Is the insurer liable for the insureds' reasonable and actual claim preparation costs incurred and, if so, up to what is maximum amount?	[15]
Insureds' answer	[15]
QBE's answer	[15]
Question 5 — What is the proper application of any excess or deductible under the policies?	[15]
Insureds' answer	[15]
QBE's answer	[15]
Central Issue	[16]
The insurer's argument	[17]
The insureds' argument	[19]
The interpretation problem	[20]
General principles of interpretation of insurance policies	[23]
Distinguishing regulatory case law	[25]
Analysis	[44]
Resolution of interpretation of the automatic reinstatement clauses	[84]
Cancelled by loss	[90]
Conclusion	[99]
Question 1 — What is the basis and measure of indemnity under the policies and when is it payable?	[101]
Question 3 — What are the limitations (if any) on QBE's liability under the policies and the effects of any limitation?	[107]
3(c) — Average	[108]
Question 4 — Is the insurer liable for the insureds' reasonable and actual claim preparation costs incurred and, if so, up to what is the maximum amount?	[126]
Analysis	[130]
Question 5 — What is the proper application of any excess or deductible under the policies?	[136]
Summary	[145]
Question 1 — What is the basis and measure of indemnity under the policies and when is it payable?	[145]
Question 2 — What is the proper interpretation and application of the automatic reinstatement clauses in the policies?	[147]
Question 3 — What are the limitations (if any) on the insurer's liability under the policies imposed by:
(a) any stated sum insured;
(b) Special Conditions 3(b) and 3(c);
(c) any average condition; and what is the effect of each?	[148]
Question 4 — Is the insurer liable for the insureds' reasonable and actual claim preparation costs incurred and, if so, up to what is the maximum amount?	[150]
Question 5 — What is the proper application of any excess or deductible under the policies?	[152]
Costs	[154]

Introduction

1 These proceedings concern earthquake claims in respect of two large commercial buildings. The two owners deliberately under insured each building, but purchased an insurance policy with an automatic reinstatement cover provision, subject to notice by either party, including the ability of the insurer to adjust the premium.

2 In a practical effort to avoid the costs of a full trial, the parties have agreed five preliminary questions for submission to the Court, all going to the construction of the two policies. The policies are not identical, but are similar.

3 This judgment answers most but not all of the questions, leave being reserved for the parties to apply to the Court for answers to the questions put to one side.

4 The judgment begins with the questions and each party's answers. The judgment ends with the questions and the Court's answers to them.

Agreed Facts

5 Wild South Holdings Limited (Wild South) and Maxims Fashions Limited (Maxims) each own a commercial building in Christchurch. Both of the buildings were damaged in the earthquakes that occurred in Christchurch. These were the significant earthquakes on 4 September 2010, 22 February 2011 and 13 June 2011. Both the owners, as “insureds” hold an insurance policy with QBE Insurance (International) Limited (QBE), the “insurer”.

6 The Maxims policy indemnity provision provides:

The insured will be indemnified by payment or at QBE's option, by repair or by replacement of the lost or damaged property and by payment of the insured costs.

The policy period is one year, 1 July 2010 to 1 July 2011. The sum insured is $3,610,000. Maxims' policy is expressed to be subject to average. It is common ground that the replacement cost of the whole of the building was more than $8 million.

7 The Wild South policy indemnifies the insured (for damage or loss to the property). The period was from 1 September 2010 to 1 September 2011, the sum insured being $3,035,700. It is common ground that Wild South's replacement cost for the whole building is in excess of $8 million.

8 The insurer accepts coverage under the policies for damage caused by the earthquake events, but disputes the application of an automatic reinstatement clause.

9 The two relevant reinstatement provisions are:

• (a) Maxims:

  5. Reinstatement of Amount of Insurance

  In the event of a loss for which a claim is payable under Part 1, and in the absence of written notice by QBE or the Insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss. The Insured undertakes to pay such pro-rata premium at the rate applicable to the item(s) concerned as may be required for the reinstatement.

• (b) Wild South:

  Reinstatement of Amount

  In the absence of written notice by the Insurers or the Insured to the contrary, the amount of insurance cancelled by loss or damage is automatically reinstated as from the date of loss or damage. The Insured undertakes to pay such pro rata premium at the rate applicable to the item or items concerned as may be required for the reinstatement.

  …

10 To date, no party has given written notice which would preclude the operation of these clauses.

11 Both Wild South and Maxims have made claims under the policies, and provided the insurer with experts' reports, costings and invoices.

12 The insurer has made payments to the insureds. Wild South has received $1,502,475. Maxims has received $1,523,420. There are factual disputes, not resolved by this judgment, as to whether these are settlements.

The preliminary questions

13 The parties have agreed five preliminary questions. These are:

Preliminary Questions

• 1 What is the basis and measure of indemnity under the policies and when is it payable?

• (2) What is the proper interpretation and application of the automatic reinstatement clauses in the policies?

• (3) What are the limitations (if any) on the insurer's liability under the policies imposed by:

  • a. any stated sum insured;

  • b. Special Conditions 3(b) and 3(c);

  • c. any average condition; and what is the effect of each?

• (4) Is the insurer liable for the insureds' reasonable and actual claim preparation costs incurred and, if so, up to what is the maximum amount?

• (5) What is the proper application of any excess or deductible under the policies?

Insureds' answer to question 1:

QBE immediately owes as indemnity the estimated total cost of replacement/repair less appropriate depreciation up to the sum insured per event (with the cost of replacement/repair less appropriate depreciation apportioned on a percentage basis per event).

QBE owes a further amount to bring the cover up to full cost of Reinstatement (as defined) payable up to the sum insured per event (with the cost of Reinstatement apportioned on a percentage basis per event):

• (a) upon the conditions within SP 4 being met as appropriate; and

• (b) subject to any limitations within SP 3.

QBE's answer to question 1

• (1) If the building is damaged by an insured event, the insured is entitled to a payment calculated on an indemnity basis, as soon as this can be reasonably and practically assessed.

• (2) Indemnity basis is the actual value of the building to the insured at the time of the loss, having regard to its age and condition, and the insured's current purpose for owing [sic] the building, its current use and future intentions. This may be market value less salvage, or the cost of repair or rebuilding less betterment. The appropriate basis depends on the evidence.

• (3) Because each building is insured for its replacement value, if the insured elects to reinstate the damage, by repair or rebuilding, it is entitled to the reasonable costs of the reinstatement actually incurred, once these...