Natural disaster cover under household insurance cover is often payable only to top up what the Earthquake Commission (EQC) has paid. Usually there is cooperation between the EQC and insurers to agree on apportionment between earthquakes and whether damage is over or under the cap which triggers insurance cover. If agreement is not reached, the EQC may settle directly with the home owners. This issue caused problems for the plaintiffs in Jarden v Lumley General Insurance (NZ) Ltd  NZCA 193.
The Court of Appeal made it clear that – in respect of certain policy wording at least – owners cannot rely on what the EQC has paid in order to claim that the insurers are liable for the balance of repair costs if an issue remains regarding whether the EQC has met its full liability under the Earthquake Commission Act.
The Jardens obtained a High Court judgment to the effect that Lumley General Insurance would be liable for repair costs over and above what the EQC had paid out to them under a settlement agreement reached just before trial. The policy required Lumley to pay for any loss arising as a direct result of the earthquake but not for "any loss for which compensation is payable" under the act. Lumley would pay the difference between the earthquake cover, being the insurance provided under the act, and the cover under the policy. The arrangement in the Lumley policy is known as 'top-up cover'.
The EQC had paid the statutory cap of NZ$100,000 plus goods and services tax for the September 2010 earthquake, but had made just a small payment regarding the February 2011 earthquake. It had not yet been determined how much the repairs for the February event would cost, so the insurer had not agreed that the EQC had met its full statutory liability. The insurer appealed the court's finding that it was bound to accept that the earthquake cover was the amount for which the EQC had settled with the Jardens. The Jardens appealed the High Court's dismissal of certain areas of alleged earthquake damage and the calculation of the EQC payment.
The Jardens successfully showed that part of their EQC payment had related to legal costs and therefore should not have been taken into account in what the EQC had paid them under the Earthquake Commission Act. The Court of Appeal dismissed their appeal on damage and allowed Lumley's appeal on the effect of the EQC's settlement.
The main principle confirmed by the Court of Appeal was that an insurer is not bound to accept an agreement reached between a home owner and the EQC regarding the level of cover under the act. The High Court's ruling could have left Lumley with a higher repair bill, if it had transpired that the EQC had not paid enough to meet its liability under the act due to more repair costs being attributed to damage from the February 2011 earthquake.
The Court of Appeal accepted Lumley's argument that the policy required it only to top up anything beyond what was covered by the act, even if that was more than the owners had accepted in settlement. The amount payable under the act may be higher than the settlement amount. If all parties do not agree, then an insurer would be entitled to have the court decide how much cover the EQC should have paid in order to determine an insurer's liability under a policy.
The rest of the Court of Appeal judgment was a dismissal of the appeal regarding discrete items of specific damage. The real lesson is that the plaintiffs should have invested more in expert evidence at trial in order to substantiate their claims. They had relied heavily on their own view of the effect of the earthquake on their home and failed to undertake expert investigation and testing that could have been sufficient to counter Lumley's experts.
The Court of Appeal decision confirms what insurers and their lawyers have always taken to be the case – a policy wording can be wide enough to mean that what the EQC pays out and what it is liable to pay can differ. From the plaintiffs' perspective, this case reinforces the general view that when settling it is better to include all parties in the settlement to ensure finality.
There are many earthquake claims left to be finalised from the 2010 and 2011 Canterbury earthquakes. In recent months the EQC has passed on to insurers another tranche of claims that have been determined to be over the NZ$100,000 cap for damage. Where these involve some under-cap and over-cap claims there remains scope for more negotiations and tricky navigation of the different statutory obligations on the EQC and contractual rights under the policy.
For further information on this topic please contact Sarah Wroe or Lorraine MacDonald at Jones & Co by telephone (+64 9 601 9600) or email (firstname.lastname@example.org or email@example.com). The Jones & Co website can be accessed at www.jonesandco.nz.
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