In our October 2015 bulletin2, we considered three cases arising out of the Christchurch earthquakes of 2010 and 2011 which considered the meaning of “physical loss or damage” to property.

One of those cases, C&S Kelly Properties Ltd v Earthquake Commission and Southern Response Earthquake Services Ltd3 also considered issues relating to insurers’ rights of election and delay in exercising such a right. In Kelly, it was held that delay by the Earthquake Commission (EQC) in making an election to reinstate the subject property meant that its purported election was ineffective and the discretion to choose between payment or reinstatement should be exercised by the court. The court then provided the property owners with the choice between payment of a monetary sum by EQC or holding EQC to its purported (but ineffective) election to reinstate.

The decision in Kelly followed the High Court judgment in Domenico Trustee Ltd v Tower Insurance Ltdwhich similarly had held that an insurer’s right of election must be exercised within a reasonable time and that delay in exercising that right could result in it being lost with the election being made by the court instead.

The High Court’s decision that, by reason of delay by the insurer, it was appropriate for the court to make the election instead has been overturned by the Court of Appeal in Tower Insurance Ltd v Domenico Trustee Ltd5 and the proceeding has been sent back to the High Court for a rehearing.

The Court of Appeal decision should provide some relief to insurers of Christchurch properties. However, it should be noted that the Court of Appeal did not determine whether unreasonable delay by an insurer could, in some circumstances, entitle the court to make an election for the parties. It will be interesting to see how these issues are addressed and dealt with in the High Court rehearing, if settlement is not reached first.

Facts

Domenico was the owner of a house which was damaged by the Christchurch earthquakes and became a total loss. The house was insured by Tower Insurance under a policy which provided that, in the event of a total loss:

  • Tower Insurance could elect to satisfy a claim for full replacement value by choosing whether to reinstate the property or pay cash.
  • If Tower Insurance elected to pay cash, the insured could choose to rebuild on the original site or another site (capped at the cost of rebuilding on the original site) or buy another house (capped at the cost of rebuilding on the original site).
  • If the insured chose to rebuild, Tower Insurance was only required to pay rebuild costs actually and reasonably incurred.
  • An insured who did not wish to repair, replace or rebuild was limited to payment of the present day value (which was defined effectively as an indemnity sum).

Tower Insurance admitted liability for the damage, but Domenico and Tower Insurance were unable to agree on an amount payable under the policy. This was despite lengthy negotiations, including a cash settlement offer made by Tower Insurance based on the full replacement cost of rebuilding the house even though Tower Insurance was not obliged to pay for the costs of rebuilding the property before that cost had actually been incurred.

Domenico issued proceedings in the High Court claiming that Tower Insurance had elected to settle the claim by paying to Domenico in cash the costs to rebuild the house without the need for Domenico to actually rebuild or incur these costs. In the original statement of claim, the rebuild cost were said to be $842,392, but this figure had reduced to $370,000 by the time of the High Court trial.

Whether an election had been made?

In the High Court, Associate Justice Gendall considered commentary and case law (including from the United Kingdom and Australia) and set out eight general principles applicable to the concept of election with the first of these being that: “election is an irrevocable act between two or more inconsistent rights that must be unequivocal, unqualified and communicated to the other party.”

Having reviewed the negotiations between the parties, the judge held that Tower Insurance had not at any stage, by either words or conduct, unequivocally made an election to make payment (or to reinstate). Instead, he found that Tower Insurance had made it clear that it stood willing to settle by reinstatement of the property and, when Tower Insurance was faced with a claim which it considered exaggerated, its inclination was towards the rebuild option, while at the same time holding out hope that the parties could reach a sensible cash settlement outside the strict terms of the policy.

The Court of Appeal also considered the negotiations between the parties and held that the judge was correct to find that there was no unequivocal election made by Tower Insurance as to the mode of settlement.

Effect of delay

Following on from these findings, the High Court and Court of Appeal then considered the effect of delay when an election has not been made.

In the High Court, Associate Justice Gendall held the party entitled to elect had only a reasonable time in which to make an election and, if no election was made, then the law would make the election for that party.  As the election must be for an option under the policy, the election deemed by the court was for Tower Insurance to make an immediate payment of indemnity value, unless Domenico decided to rebuild or buy another house, in which case Tower Insurance’s liability would likely increase.

The Court of Appeal held that it was not open on the pleadings for the High Court to find that Tower Insurance had made an election through delay or for the court to itself make the election on that ground. The judgment noted that:

“If the Judge was contemplating a finding that was plainly outside the pleadings and argument, he ought  to have given the opportunity to both sides to address the issue and to seek an amendment to the pleadings. That did not occur.”

The Court of Appeal found that Tower Insurance was seriously prejudiced by this course of events and it allowed Tower Insurance’s appeal on the issue of election through delay. The Court of Appeal ordered that the judgment of the High Court be set aside and the proceeding has now been sent back to the High Court for a rehearing. The Court of Appeal offered no view as to the correctness of the judge’s finding on the facts that there had been an unreasonable delay.

Without deciding the point, the Court of Appeal expressed reservations as to whether the judge was correct to conclude that the court can itself make the election for an insurer by reason of delay. The Court of Appeal noted that other approaches are available. For example, there may be circumstances where an insurer’s words or conduct are consistent with an election having been made. Alternatively, if an insurer is in breach of its obligation to make a decision within a reasonable time, the court may order the insurer to make an election, or an award of damages may also be an available remedy.