Between September 2010 and June 2011 the Christchurch area of New Zealand was hit by a series of earthquakes of differing levels of intensity, causing extensive property damage. The claims that were made in the wake of these events have thrown up a number of issues as to how the Basis for Indemnity provisions in various Insurers’ wordings are to be applied, particularly in the event of successive losses within the same period of insurance.
CAR policies tend to provide for the Insured to provide indemnity by meeting the cost of repair, reinstatement or replacement of the contract works when that cost is incurred. By contrast, property policies often provide a basic level of indemnification in respect of loss or damage which is usually calculated by reference either to the estimated cost of restoring the property to its condition immediately prior to the loss, or, in the event of a total loss, to the diminution in value of the property by reason of the loss. This basis of calculation is described as “indemnity” and it is simply a calculation: there is no automatic requirement for work actually to be carried out before payment is made. Property policies also often contain extended cover (which is usually the subject of an AP) which enables the Insured to recover from the Insurers the cost of repairing or re-building the property to its condition “when” or “as” new, provided that the Insured actually carries out the reinstatement work. Sometimes the Insured is allowed, in the event of a total loss, to rebuild on another site. This basis of calculation is described as “reinstatement” and payment is only made as and when works are carried out.
Many CAR and property policies cover property up to a specific Sum Insured, without clearly stipulating that this is a maximum limit in the event of multiple losses. There is some suggestion in the text books that the Sum Insured available to meet future claims in the event of a partial loss is automatically eroded to the extent of that loss, with the result that if the Insured wants to continue to enjoy the benefit of full coverage he needs the policy to provide for automatic reinstatement of the Sum Insured in the event of a claim, normally in return for an AP.
The language used in defining the basis for indemnification under all risks covers varies in detail, sometimes crucially, between forms, with the result that most decided cases are very fact critical. Judgments in these matters can, however, be helpful in highlighting the problems that can arise in practice and in enabling Insurers to revisit and tighten up their wordings in response.
Turvey Trustee Ltd v Southern Response Earthquake Services Ltd  NZHC 3344 is an example on the issues that can arise in deciding what an insured under a property policy is entitled to have the Insurers pay for in a “new for old” reinstatement, when the property is old and incorporates original features that the owner wants reproduced in the new property, sometimes using redundant methods and materials. The court was able to find, on the wording used in that case, that the issue of new for old replacement needed to be looked at with an element of reasonableness so as to provide an equivalent reinstatement by standards relevant at the date of loss. In other words, the Insurers were not required to pay for the construction of a new property using identical methods and materials to the original.
In many cases policies will stipulate that if a building is rebuilt on a new site they will not meet more than the notional cost of reinstatement on the old. In Turvey the court found that any enhanced building control compliance costs on the new site were to be met under the policy, even if such controls would not have applied if the building had been replaced in its original position.
In TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd  NZHC 298 the court was faced with an expedited judgment application by an Insured who had elected to reinstate a property following a second incident of earthquake damage within 5 months, but who had not yet started work. The Insured wanted to receive an interim payment calculated on the indemnity basis, on the understanding that he would look to recover the balance of the reinstatement cost if he did in fact reinstate. The court found that he was entitled to do so and rejected an argument from the Insurer that having elected to reinstate there was no obligation to pay until the reinstatement had been completed.
A controversial case, because of its potential wider implications, is Ridgecrest NZ Ltd v IAG New Zealand Ltd  NZHC 2954. In this matter the Insured, who had underinsured his property, suffered four earthquakes between 2010 and 2011. Arguably by reason of the third, and certainly by reason of the fourth, of these events the property became a total loss. The Insured argued that the estimated actual cost of repairing the first, second and third incidents of damage was respectively a maximum of NZ$196,532, NZ$337,056 and NZ$1,924,000 + sales tax and claimed the total maximum sum of NZ 2,457,588 + sales tax plus the total loss figure of NZ$1,984,000 by way of indemnification (ie around NZ$4.4M). The insurers argued that they were only obliged to pay the NZ$125,000 that they had paid on earlier repairs when the third quake hit, together with the full Sum Insured in relation to the total loss of the building (NZ$1,984,000), a total of approx NZ$2.2M.The court found for the Insurers but the reasoning is controversial.
It should be noted at the outset that the Ridgecrest policy provided cover up to the sum insured for each “happening”. Furthermore there was no provision for the reinstatement of the Sum Insured in the event of a partial loss. The judge rejected the contention that there was an assumption under insurance law that the available indemnity under such a policy would be reduced by a partial loss and found that there was no reason per se why the Insured could not have recovered in full up to the Sum Insured for each “happening” if the policy so provided.
The Insurers then contended that the doctrine of merger which applies to marine insurance by virtue of the Marine Insurance Act 1908 (as reproduced in NZ law) also applies to non marine insurance. The effect of the Act is that where a partial loss is not made good and is followed under the same policy by a total loss the assured can only recover in respect of the total loss. (Any abortive repair costs will also be recoverable). The effect of applying the doctrine of merger in the current case would have brought the judge neatly to where he ultimately ended up but the judge rejected Insurers’ assertions here also. The issue of whether the merger doctrine applies to non marine policies remains live in the UK, and the NZ decision has been criticized by UK commentators1 who maintain that the judge has misunderstood the basis for the marine doctrine. It should be noted that one of these commentators also believes that the merger doctrine would not in any event apply if the policy expressly provides for policy limits to be reinstated following a partial loss: it is not entirely clear why this should be so.
The Insurers in Ridgecrest finally prevailed by relying on the doctrine of frustration. Eschewing the conventional wisdom that the courts should be reluctant to use the doctrine to imply a term in the contract of insurance to authorize a different mode of performance of the insurer’s obligations the judge did precisely this. He found as a matter of fact that if the parties had been asked at the outset whether the Insured might be entitled to recover by way of indemnification repair costs that were rendered unnecessary by a later earthquake they would, acting reasonably, have agreed that he should not. The judge therefore implied a term to this effect, concluding that the original obligation to meet repair costs had been frustrated by the later quakes. This provides a rather precarious footing for any further such arguments to be run if the facts or evidence differ only slightly. There must also be real doubts about whether the same conclusions as to frustration would necessarily be followed in an English court.
The main moral of the story for Insurers in the light of these cases is that there is sense in revisiting policy language and testing some of the assumptions that have thus far been made by adjusters as to how these Basis of Indemnification provisions work. This said, it is probably impossible to cater for every eventuality in necessarily standardized wordings, with the result that disputes are likely to recur, particularly in unusual cases such as applied in New Zealand during the earthquakes. The need for good, common sense, adjusting has never been more acute.