This case is of interest to parties who may seek to unwind a settlement agreement on the basis that the parties were operating under a mistake as to the terms of the policy. It is also of note to brokers who may be blamed for not having advised their client regarding the effect of reinstatement provisions on the maximum indemnity available.
The decision of the High Court of New Zealand concerns a summary judgment application in favour of an insurer, IAG, in a claim by its assured, Annex Developments.
The claim arose under a material damage and business interruption policy, issued by IAG and placed by broker, Peter Taylor. The claim arose out of damage to and loss of rent from properties that were damaged by earthquakes in 2010 and 2011.
Following two interim payments to Annex, the parties entered into a settlement agreement in respect of Annex’s material damage and business interruption claims. However, following the settlement, Annex alleged that the parties had failed to appreciate that the policy limit fell to be reinstated when IAG made each interim payment and when it ought to have made further payments in respect of Annex’s claim. On Annex’s case, therefore, the maximum indemnity available under the policy was substantially higher than either party had appreciated when they agreed to settle.
Annex also sued the broker for advising what Annex alleged to be the wrong maximum limit.
Annex’s claim arose under the New Zealand Contractual Mistakes Act 1977. Comparable remedies are available in other common law jurisdictions.
IAG’s summary judgment application succeeded because the judge found that although the policy limit fell to be reinstated in the amount of each of the interim payments, it did not fall to be reinstated in respect of payments that IAG ought to have made because IAG’s payment obligation did not arise until Annex had provided and IAG had accepted evidence as to the indemnity to which Annex was entitled. This had not occurred and the reinstatement of the policy limit had therefore not been triggered. Moreover, the judge found that whilst the parties had mistakenly failed to appreciate that the interim payments had reinstated the limit (by 2.4%) they had treated these as being in addition to the maximum policy limit, which had much the same effect as the relevant reinstatement. Accordingly, the settlement could not be set aside.
This decision is a reminder to policyholders and brokers to have close regard to contractual reinstatement provisions as failure to do so could prove very costly. It also serves as a reminder to ensure that all settlement agreements are drafted so as to minimise the possibility that they may be voided if a party later decides that it was agreed on the basis of a mistake.