On September 4 2010 a magnitude 7.1 earthquake struck the Canterbury region of New Zealand and a more lethal magnitude 6.3 aftershock quake killed 185 people when it struck on February 22 2011. Both caused widespread property damage. Six and seven years later, there are many thousands of unresolved property claims.
A recent High Court judgment – Southern Response Unresolved Claims Group v Southern Response Earthquake Services Ltd ( NZHC 3105) – has surprised some observers by allowing a representative action of homeowners to proceed against a government-owned earthquake insurer. The judgment is of note because it followed an earlier refusal by the same court to give the group leave to proceed. The second hearing was also a finely balanced matter. The insurer has filed an appeal.
When this earthquake-related class action is compared with securities or product liability class actions or the recent bank fees action in New Zealand and Australia, the obvious difficulty for the claimants is that their houses will be different, the physical damage will be different and their resulting claims will be different. However, this may not be a bar to a successful class action if the cause of the alleged loss can be imputed to the defendant treating each claim under the same policy in a similar and identifiable way.
The first High Court judge in charge of the specially constituted Earthquake List, Justice Miller, remarked in a paper that "We [the High Court in the Earthquake List] hope that we would see class actions" and "The Courts recognise that class actions are sometimes needed if a large group of people sharing the same interest are to secure access to justice".(1)
The case offers the opportunity to compare the unsuccessful and successful applications and briefly survey the landscape of such actions.
There is no class action legislation in New Zealand. A bill is in the pipeline, but has been languishing there since the draft Class Actions Bill and Rules was sent for consultation in 2008. A final draft was sent to the secretary for justice in 2009, but has not been a legislative priority, despite the issue of lack of access to justice in the civil courts being regularly aired, including by the chief justice of the High Court.(2)
Other reasons why this type of action is still relatively rare in New Zealand – at least relative to similar common law jurisdictions – might be the small population, the statutory bar on personal injury litigation since the advent of the no-fault accident compensation system and the low number of awards of exemplary or punitive damages by the New Zealand courts (which, when awarded, are modest).
It is not because the courts have set the threshold of what constitutes a common interest or claim particularly high. The expressed intention of the courts – including the Supreme Court – is to provide for a flexible regime for representative actions to take the place of multiple cases, consistent with the "just, speedy and inexpensive determination" of proceedings.
Rule 4.24 of the High Court Rules allows such claims to proceed where there is "the same interest in the subject matter of a proceeding". Leave is not mandatory, but in reality most defendants seek a declaration that the case not proceed as a class action. The courts have overlaid non-onerous strictures onto Rule 4.24 that no defendant be deprived of a defence that would have been available to defend a claim brought by an individual and no one within a class should be able to succeed if he or she would not have been able to bring an individual claim.
In Southern Response Unresolved Claims Group Suing By Its Representative Cameron James Preston v Southern Response Earthquake Services Limited ( NZHC 245, February 24 2016) a claim was brought under two heads: breach of policy which arose from issues relating to the interpretation and application of the insurance policy and breach of process/the duty of good faith. Various actions of Southern Response were pleaded in support of the claim – for example:
- conditions in the 'decision packs' which were sent to policyholders were additional to and inconsistent with the terms of the original policy;
- the rebuilds were done by the insurer's single nominated contractor, with the result that rebuilds were being delayed by many years; and
- the building rates used by Southern Response were calculated using bulk discounts and thus misrepresented the true cost of each rebuild within the insurer's design repair/rebuild analysis.
Notably, by the time of the second hearing, Southern Response submitted that it was no longer using bulk costings and was using market rates.
Justice Mander declined the claim, stating:
"[A] representative proceeding cannot be expected to manage such a wide range of different issues of fact and law as proposed in the present case in the absence of the identification of the core or predominant and overriding question or questions in dispute between the parties which is common to the Group's membership and will materially advance each of the members' claims."
In deciding that the threshold of common interest had not been reached, Mander expressly left the door open for a second chance by declining leave to proceed without prejudice to the group filing an amended statement of claim. He foresaw the possibility of an initial litigated group claim being decided before separate claims, perhaps as sub-groups being dealt with afterwards:
"I also observe the possibility of dialogue between the parties to identify appropriate sub-groupings of members' claims according to agreed heads of issues relating to the interpretation and application of the policy. This may provide the basis for the determination of an initial issue or issues likely to advance the resolution of members of that sub-group's claims before proceeding to the individual circumstances of a member's case."
Although more detail was provided in the amended statement of claim, there was not a wholesale change to the way that the claim was pleaded. Rather, many of the same specific behaviours of the insurer were pleaded as well as some new ones; but this time they were characterised as being not merely approaches taken to the claims, but part of a deliberate and designed "strategy" comprising different techniques to delay, deter and ultimately reduce the amounts payable on claims.
Justice Gendall was satisfied that the allegation of a strategy employed by the insurer provided the group a common "spine" of the general damages claim that allowed for a representative action:
"I accept that the common interest pleaded by the plaintiffs now that Southern Response engaged in a deliberate strategy designed to deceive policyholders and delay claims with a view to reducing the financial liability that Southern Response might have to its policyholders is a proper one for a 4.24 representative action… A reasonable argument exists, as I see it that it is in everyone's interests, including the plaintiffs' group, other parties, and indeed Southern Response, to have this matter properly ventilated and determined before the Court."
The litigation will presumably focus on how and whether such a "strategy" employed by Southern Response was designed to cause people to accept lower settlements than they were entitled to. The strategy comprises the "litigation" claim with the individual claims of the insureds being linked but able to be dealt with, perhaps by way of case management after the group litigation issue was decided. It remains to be seen how those individual claims would be managed.
At the time of the first High Court judgment, there were 46 claimants. By the time of the second judgment, the number was 41 and the original named representatives (Prestons) were among those who had settled since the first judgment. The class now numbers 36. However, the group was given opt-in time to advertise and try to bring in more policyholders.
A discovery direction sought by the group plaintiffs – for Southern Response to hand over details of its policyholders with outstanding claims – was declined as potentially being a breach of confidentiality. A three-month opt-in date was directed from the time that the solicitors for the plaintiff group can communicate with the unresolved Southern response claimants.
The litigation funding agreement can be enquired into by a court in every case where leave for a representative action is sought. This agreement has unusual features: along with the common 'no win, no fee' arrangement which attracts those who cannot fund litigation, the funders have contracted to accept a significantly smaller percentage than normal if the action succeeds, because there is no dispute that there is some insurer liability – the question is how much. There is also a 'no worse off' funding clause so that fees will be taken only if a policyholder ends up with more than the insurer has already offered through its design repair/rebuild analysis.
Southern Response was established for the sole purpose of settling claims of domestic policyholders after the insurer AMI could not meet its liabilities. The resultant cash bail-out to the tune of NZ$500 million was accompanied by a restructuring of AMI and its earthquake liabilities being transferred to Southern Response, a government-owned entity. This is the first such class action since the earthquake, apart from an action against the government-owned earthquake commission which provides a capped NZ$100,000 payment to all insured homes. The government ownership is perhaps less relevant to the observer than the notion that such run-off claim entities may have a different incentive than ongoing concerns, in that renewing, increasing or attracting customers is not on the agenda. This was part of the group plaintiff's submission at the second hearing.
After the first ruling, insurance law expert Rob Merkin told Insurance Business that he would have been amazed if the court had found that there was a basis for a representative action. "Each claim depends on its own facts, relating to policy wording and the type of damage," he was quoted as saying. He further noted:
"It is distressing that some claims have taken so long to be resolved, but the correct response is to co-operate with insurers, who have no interest in depriving policyholders of their entitlements, rather than to surrender significant parts of their claims to funding organisations who care only about profit and whose intervention can only delay the settlement process by the making of unrealistically large claims."
Southern Response also voiced these concerns for its policyholders – that the claims would be further delayed and the policyholders would be out of pocket. It remains to be seen whether the Court of Appeal is similarly concerned and whether any success will encourage other class actions either arising from Christchurch or from the recent earthquake affecting both the small town of Kaikoura and the capital city, Wellington.
For further information on this topic please contact Lorraine MacDonald at Jones & Co by telephone (+64 9 601 9600) or email (firstname.lastname@example.org). The Jones & Co website can be accessed at www.jonesandco.nz.
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