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Body Corporate 398983 v Zurich Australian Insurance Limited [2013] NZHC 1109 (15 May 2013)

Last Updated: 10 August 2013

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-002723 [2013] NZHC 1109

BETWEEN BODY CORPORATE 398983

Plaintiff

AND ZURICH AUSTRALIAN INSURANCE LIMITED

First Defendant

AND FIRM PI 1 LIMITED Second Defendant

Hearing: 12 April 2013

Court: Heath and Courtney JJ Appearances: R G S Hay for Plaintiff

W A Holden and B J Sanders for First Defendant

C R Langstone and T A Spinka for Second Defendant

Judgment: 15 May 2013

_{JUDGMENT OF THE COURT DELIVERED BY COURTNEY J}

This judgment was delivered by Justice Courtney on 15 May 2013 at 4:30 pm

pursuant to R 11.5 of the High Court Rules Registrar / Deputy Registrar Date............................

Solicitors: Morgan Coakle, P O Box 114 Shortland Street, Auckland 1140

Fax: (09) 379-9155 – Email: rhay@morgancoakle.co.nz

DAC Beachcroft NZ, P O Box 106869, Auckland

Fax: (09) 377-1864 – Email: waholden@beachcroft.com

Jones Fee, P O Box 1801, Auckland 1140

_{Fax: (09) 379-3679 – Email: craig.langstone@jonesfee.com / tanya.spinka@jonesfee.com}

BODY CORPORATE 398983 V ZURICH AUSTRALIAN INSURANCE LTD HC AK CIV-2012-404-002723 [15 May 2013]

Table of Contents

_{Para No.}

Introduction [1]

Statutory context: the effect of s 30(2) on the Zurich policy

Double insurance [6]

The Earthquake Commission Act 1993 [11]

The effect of s 30(2) on the Zurich policy [14]

The plain meaning of MD15

The meaning of “loss” in MD15 [21]

Is this meaning consistent with the other terms of the policy? [30]

Comparative wording [38] The principle of indemnity [40] Does the way the premium was calculated affect the plain meaning

of MD15?

The issue [45]

How the insurance was arranged [48] Whose agent was ACM? [56] Is the Body Corporate fixed with ACM’s knowledge about the way

the premium was calculated? [64]

The effect of ACM’s knowledge [69]

Result [83]

Introduction

[1] The plaintiff is the Body Corporate of the Salisbury Apartment complex in Christchurch, which was badly damaged in the February 2011 earthquake.1 The Body Corporate holds a material damage policy with the first defendant, Zurich Australian Insurance Company Limited. The policy was arranged by the second defendant, Firm PI 1 Ltd (formerly ACM and still referred to as such). These proceedings concern the extent to which Zurich is required to indemnify the Body

Corporate in respect of its loss. The parties have agreed that one of the questions in the case is to be determined separately. That question is whether the amount payable under the policy is inclusive or exclusive of the amounts payable to the Body Corporate under the Earthquake Commission Act 1993 (ECA).2

[2] The estimated cost of reinstating the complex is about $25m plus GST.3 The Body Corporate has received $6.8m from the Earthquake Commission (EQC).4 The sum insured under the policy is agreed, for present purposes, to be $12.95m. The Body Corporate asserts that it is entitled to a total of $19.75m, being the sum insured

under the policy in addition to the amount paid by the EQC. On that argument Zurich would have to pay $12.95m. Zurich maintains that the most the Body Corporate is entitled to is $12.95m, being the amount payable by the EQC and the difference between that figure and the sum insured under the policy. On that argument Zurich would only have to pay $6.1m.

[3] The question for determination turns on the interpretation of the Natural Disaster Damage clause MD15 of the policy, which purports to limit the amount payable by Zurich for natural disaster damage where the statutory cover is also available by providing that “the Insurers liability will be limited to the amount of loss

_{in excess of the Natural Disaster Damage cover.”}

1 The complex comprised 68 apartments spread over two buildings. One building has been

_{demolished. The Body Corporate asserts that the other, although habitable, is a constructive total loss.}

2 _{Minute of Heath J, 12 October 2012.}

3 _{For convenience we refer only to the round figure of $25m.}

4 This figure is GST exclusive and is the maximum payable under the Earthquake Commission Act

1993.

[4] The interpretation of a contract is a search for the meaning intended by the parties to that contract. It is, however, a search undertaken on an objective basis, tested by reference to what a reasonable and properly informed third party would consider that the parties intended.5 The inquiry is to be conducted against the commercial background in which the parties were operating, taking into account the background knowledge that would reasonably have been available to the parties at the time.6 The plain and ordinary meaning of a contract can be displaced once that context is taken into account. There must, however, be a strong case to persuade the Court that something has gone wrong with the contractual language used to justify this course.7 A bad bargain is not, in itself, sufficient. These well established rules of contractual interpretation apply equally to an insurance policy as to any other type of contract.8

[5] The issues that arise are:

(a) The effect of s 30(2) of the ECA; this provision alters the order in which the EQC and Zurich would otherwise respond to the earthquake damage under the ECA so that the statutory cover responds first. MD15 was written into the policy specifically to trigger s 30(2);

(b) The plain meaning of MD15;

(c) Whether the principle of indemnity applies so as to limit the total amount that the Body Corporate can receive from all sources to

$12.95m;

(d) Whether the factual matrix against which MD15 is to be interpreted includes the fact that the premium Zurich charged for natural disaster damage cover was calculated on the difference between the sum

_{insured and the amount of the statutory cover. This depends on}

5 _{Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19].}

6 Vector at [61], applying Investors Compensation Scheme Ltd v West Bromwich Building Society

_{[1998] 1 WLR 896 at 912-913.}

7 _{Vector at 470-47; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 at [14]- [15].}

8 Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608, (2010) 16 ANZ Ins

Cas 61-874.

whether ACM’s knowledge of the premium calculation is to be imputed to the Body Corporate. If it is, the question becomes whether that context should displace the interpretation that the Body Corporate contends for.

Statutory context: the effect of s 30(2) on the Zurich policy

Double insurance

[6] Double insurance occurs when the same insured holds cover in respect of the same subject matter and same risk with two or more insurers. Because the statutory cover and the Zurich policy both respond to the Body Corporate’s loss there is double insurance in relation to the Salisbury Apartments.

[7] Where two policies respond to the same loss there arises an equitable right of contribution between the insurers.9 However, insurers typically include in their policies “other insurance” clauses. These clauses may either relieve the insurer of liability if there is another policy that responds to the loss or, alternatively, limit the insurer’s liability to the amount in excess of the cover provided by the other policy. Where both policies contain such clauses the law requires both to contribute so as to avoid the situation of neither policy responding.10

[8] Section 30(1) ECA is essentially an “other insurance” clause. It provides that where natural disaster damage is covered by both the statutory cover and a contract of insurance the statutory cover is deemed to be in respect of so much of the damage as exceeds the cover under the contract of insurance and any deductible. Section

30(1) was drawn from its predecessor, s 18 of the Earthquake and War Damage Act

_{1944 (EQWD Act), which had the same effect.}

9 _{North British and Mercantile Insurance Co v London and Globe Insurance Co (1877) 5 Ch D 569.}

10 Weddell v Road Transport & General Insurance Co Ltd [1932] 2 KB 563.

The Earthquake and War Damage Act 1944

[9] Statutory cover for earthquake was first provided through the EQWD Act, which extended the cover granted by the War Damage Act 1941. Initially the statutory cover was for indemnity cover to the same amount as provided by private sector insurers for fire damage. That later changed so that where the contract for fire insurance provided settlement on a basis more favourable than indemnity value (i.e. replacement) the property was deemed to be insured under the EQWD Act for

indemnity value only.11

[10] Section 18 was introduced to ensure that where a property owner held an insurance policy that policy would respond ahead of the statutory cover, with the EQC only making up the difference.12 Section 18(1) was in the form of an “other insurance” clause and provided that where property was insured under a contract of insurance against the same risks as the statutory cover then the statutory cover would respond only once the insurance policy and the amount of any deductible had been exhausted. The primacy of that provision over any similar provision in an insurance contract was ensured by s 18(2), which provided that where both the statutory cover

and an insurance contract responded, the insurance contract was to respond as if there was no statutory cover.

The Earthquake Commission Act 1993

[11] The ECA made significant changes to the statutory cover for what is now termed natural disaster damage. Cover for non-residential buildings was phased out altogether. Cover for residential property was altered to replacement cover with a

$100,000 cap for any one dwelling.

[12] As initially proposed, the double insurance provision (clause 23 of the

Earthquake Commission Bill) was in the same terms as s 18(1) and (2) EQWD Act.13

However, the Insurance Council of New Zealand and the Earthquake Commission expressed concerns about the possibility of the wording effectively precluding

11 _{Earthquake and War Damage Amendment Act 1951.}

12 _{Hansard debate, 22 November 1944.}

13 Earthquake Commission Bill 1992 (210-1) (explanatory note).

homeowners from arranging “top-up” cover and, consequently, being seriously under-insured in the event of natural disaster damage, given the number of homes that would cost more than $100,000 to reinstate.14

[13] As enacted, s 30(1) and (3) ECA remained in the same terms as s 18 EQWD, defeating any clause in a policy that would have the effect of requiring the statutory cover to respond first. However, the introduction of s 30(2) qualified s 30(1) so that it would apply only “to the extent that the contract provides for cover in excess of the amount to which cover is provided under this Act”. Section 30 provides:

(1) Where on the occurrence to any property of natural disaster damage against which it is insured under any of sections 18 to 20, or section 22, of this Act, the property is also insured against that damage under any contract or contracts made otherwise than under this Act, the insurance of the property under this Act (to the amount to which it is so insured) shall be deemed to be in respect of so much of that natural disaster damage as exceeds the sum of—

(a) The total amount payable under that contract or those contracts in respect of that natural disaster damage; and

(b) The proportion of the natural disaster damage to be borne by the insured person under the conditions applying to the insurance of the property under this Act.

(2) Subsection (1) of this section shall not apply with respect to any contract of insurance made otherwise than under this Act to the extent that the contract provides for cover in excess of the amount to which cover is provided under this Act.

(3) Notwithstanding anything to the contrary in any contract whereby any property is insured against natural disaster damage otherwise than under this Act, where the property is or has at any time also been insured against that natural disaster damage under any of sections 18 to 20, or section 22, of this Act, the contract shall have effect in all respects as if the property were not and had never been insured under this Act.

(emphasis added)

The effect of s 30(2) on the Zurich policy

[14] The Zurich policy contains two “other insurance” clauses, GC09 and MD15.

Read in isolation, GC09 would postpone the Zurich policy’s response until all other

_{cover had been exhausted. However, the effect of s 30(3) would defeat this clause}

14 Insurance Council of New Zealand “Submission on the Earthquake Commission Bill”.

insofar as it might relate to natural disaster damage. So we do not need to consider

GC09.

[15] MD15 was incorporated into the policy specifically to trigger s 30(2) and overcome the effect of s 30(1) and (3). In the absence of s 30(2) and MD15 the Zurich policy would respond first: Zurich would be liable to pay the entire sum insured of $12.95m. Because the total cost of reinstatement is $25m, the EQC would then be liable to pay the maximum statutory cover of $6.8m. So if s 30(2) did not apply, the Body Corporate would receive a total of $19.75m. It is common ground however, that s 30(2) does apply. The question is whether the total amount to which the Body Corporate is entitled from all sources is the same if s 30(2) applies (as the Body Corporate contends) or less (as Zurich contends).

[16] Mr Langstone, who appeared for ACM but also carried the argument for the Body Corporate, argued that the effect of MD15 is simply to postpone the point at which the Zurich policy first responds from the “ground up” (i.e. the first dollar of loss) to the point at which the EQC cover is exhausted. But it does not affect the extent of Zurich’s liability, which is the lesser of $12.95m or the actual amount of the Body Corporate’s loss.

[17] Mr Holden, for Zurich, argued that the sum insured of $12.95m was the overriding limit of cover for the purposes of both the statutory cover and under the policy so that once s 30(2) is triggered the Body Corporate could not receive more than that figure in total. On this argument s 30(2) and MD15 would operate not only to reverse the effect of s 30(1) and require the EQC to respond first but also to limit Zurich’s liability to the difference between the amount payable by the EQC and the sum insured.

[18] We consider that it would be a most unusual result if the amount to which the Body Corporate were entitled differed, depending on whether the statutory cover or the private insurance responded first. We acknowledge that, on ACM’s argument, the Body Corporate would be entitled to a maximum of $12.95m for fire damage, so that its interpretation would produce a different result for fire as opposed to natural disaster damage. This also would be an unusual outcome and one which we consider

later.15 But, as between the two, we find it less convincing for the risk of earthquake to produce two different results than for the different risks of fire and earthquake to produce different results.

[19] Section 30(2) was introduced because it was recognised that the $100,000 cap would be inadequate in many cases. Its purpose was to ensure that home owners could arrange cover in excess of the statutory cap. Its effect is to alter the order in which the statutory cover and the contract of insurance respond so that, instead of requiring the insurer to pay first, the EQC would respond first, leaving the insurer to meet the excess. But it does not speak to the amount of any insurance arranged in excess of the statutory cover.

[20] Section 30(2) merely qualifies the effect of s 30(1) “to the extent” that the contract of insurance provides cover “in excess of the amount to which cover is provided under this Act”. What that figure is must be determined by reference to MD15 itself with the question: to what extent does the policy provide cover in excess of the statutory cover? The answer is that under MD15 the policy provides cover in excess of the statutory cover to the extent of “the amount of loss in excess of the natural disaster damage cover” (subject of course to the limit of indemnity represented by the sum insured). So the meaning of MD15 turns on what “loss” means. In short, s 30(2) changes the point at which the insurance commences but has no effect on the point at which it finishes.

The plain meaning of MD15

The meaning of “loss” in MD15

[21] The operative clause of the policy provides cover for:

..all Loss or Damage to the Property Insured ... due to an Event ... Provided that the liability of the Insurer, for any one Loss or Damage under this section, shall not exceed the Sum Insured ...

[22] It is agreed that the damage to the apartment complex falls within the operative clause; earthquake damage falls within the definition of “Event” and is not

15 See [70], [72]-[73].

excluded. However, in relation to natural disaster damage, the operative clause must be read subject to MD15:

In the event of the Insured having insured residential property for which compulsory Natural Disaster Damage cover under the Earthquake Commission Act 1993 applies then in the event of such property suffering natural Disaster Damage during the Period of Cover and covered by Natural Disaster Damage cover, then the Insurers liability will be limited to the amount of loss in excess of the Natural Disaster Damage cover.

(emphasis added)

[23] Mr Langstone submitted that “loss” in MD15 it bears its ordinary meaning of the Body Corporate’s actual loss, whether insured or uninsured. This would be

$25m. On this interpretation Zurich would have to pay $12.95m. Mr Holden argued that “loss” in MD15 means the Body Corporate’s loss within the sum insured. On that interpretation Zurich would only have to pay $6.1m.

[24] The word “loss” is defined in the policy. It is part of the phrase “Loss or Damage” and bears the defined meaning of “physical loss of or damage to the Property Insured that is unintended or unforeseen by the Insured.” The definition is not qualified by reference to the sum insured. It simply identifies the type of loss or damage to which the policy responds. As is usual, when reference is made to loss in the defined sense, it appears in the policy with an upper case “L”.

[25] “Loss” as it appears in MD15, however, appears with a lower case “l”. It is common ground that “loss” in MD15 does not bear a defined meaning. It is also common ground that it refers to the Body Corporate’s loss in dollar terms.

[26] Had “loss” been intended to be qualified in the way Zurich contends, it is likely to have been defined in that way. It would be an unusual result for the parties, who have gone to the trouble of defining many of the words used in the policy to have intended an undefined word to bear a meaning so much more restrictive than its ordinary meaning. In our view “loss” bears its ordinary meaning of being deprived of something or of the diminution of possessions resulting from a change in

conditions.16 In this case, that would mean the Body Corporate’s actual loss, which is $25m.

[27] We do not accept Mr Holden’s submission that the words “will be limited to”, which precede “to the amount of loss in excess of the natural disaster damage cover”, precluded this interpretation. He argued that ACM’s interpretation gives no meaning to the words “will be limited to” and that for those words to have any meaning they are interpreted as limiting Zurich’s existing liability under the insuring clause to a figure less than the $12.95m sum insured. That lesser figure must be the difference between the statutory cover and the sum insured under the policy.

[28] We do not consider that the words are, in fact, superfluous. MD15 was included specifically to trigger s 30(2). The words “will be limited to” serve the important purpose of emphasising that the cover under the policy is only cover in excess of the statutory cover. This ensures that there can be no argument that s 30(2) is triggered. Even if Mr Holden were right that ACM’s interpretation attributed no specific meaning to the words, that would still not justify reading into MD15 words that are not needed to make sense of the clause.

[29] Our conclusion makes it unnecessary to consider Zurich’s argument that ambiguity in MD15 should be construed against the Body Corporate because the wording was prepared by the Body Corporate’s agent, ACM.

Is this meaning consistent with the other terms of the policy?

[30] Mr Holden submitted that the other terms of the policy were consistent with reading “loss” in MD15 as the “actual amount of the insured’s loss within the limitations of the contract.” He referred, in particular, to three other clauses which he said were consistent with this interpretation, MD16 (other interests), MD18 (progress payments) and GC10 (subrogation). We do not consider that the meaning

_{he contended for is, in fact, consistent with these other clauses.}

16 Oxford English Dictionary Online “loss, n” (March 2013) Oxford English Dictionary

<www.oed.com>.

[31] The first clause relied on was MD16, the “other interests” clause, which extends cover to any person having an insurable interest in the insured’s property:

This section of the policy extends to cover any person or entity having an insurable interest in the Property Insured. This includes contractors and subcontractors as co-insured’s to the extent required by any contract. Subrogation is waived against such interested parties as to the extent required by the contract. The words “unintended or unforeseen” in this section of the policy are to be interpreted from the standpoint of the Insured person seeking cover in respect of such loss.

[32] The use of “such” to qualify “loss” suggests that it is intended to refer back to a loss already described. But “loss” does not appear in that clause again. The words “unintended and unforeseen” make it likely that the reference is “Loss or Damage” in the operative clause which is defined.

[33] The second clause relied on was MD18, which provides:

In the event of Loss, Damage of [sic] any Property Insured and liability being admitted, the Insured shall be entitled to obtain from the Insurers reasonable progress payments provided that where required by Insurers, evidence of an interim statement of loss be supplied and approved by the Assessor.

Where the Property Insured is subject to Replacement Value under the basis of loss of settlement and the Insured elects to replace the Insured shall be entitled to receive the indemnity value as soon as such sum has been established and in the event of expenditure or reinstatement exceeding such amount, then the Insured shall be entitled to reimbursement of the excess expenditure but not in the aggregate in excess of the Sum Insured.

[34] The use of “loss” in the first limb of MD18 could be read either as referring to the insured’s actual loss or to the loss within the policy limit. However, the second limb of MD18 makes it clear that it is the insured’s actual loss that is being referred to because it specifically contemplates the possibility of the “loss” exceeding the sum insured with indemnity being limited to the sum insured.

[35] The third clause relied on was GC10 which provides:

The Insured shall at the request of and at the expense of the Insurer take such action as may be necessary or reasonably required by the Insurer for the purpose of enforcing any right and remedies or of obtaining relief or cover from other parties to which the Insurer shall be or would become entitled or subrogated upon paying for or making good any loss under this policy whether before or after being paid by the Insurer.

[36] This clause does not assist because, in exercising its right of subrogation, an insurer must seek to recover the full amount of an insured’s loss, both insured and uninsured. The cause of action for both insured and uninsured loss is indivisible. The insurer is entitled to receive the amount it has paid under the policy from the proceeds of such action ahead of the insured but there can only be one subrogated recovery action.

[37] Finally, we note that “loss” is also used in various exclusion clauses such as SE01 (terrorism), SE02 (loss of electronic data) and SE03 (building defects). Self- evidently, “loss” in an exclusion clause cannot mean insured loss because the subject matter of such clauses is always loss that is not insured.

Comparative wording

[38] The plain meaning of MD15 is usefully illustrated by comparing the wording of MD15 with its counterpart in a different policy underwritten by Zurich. The parties put before us several other wordings used in the market at the relevant time, one of which was prepared by another broker, Crombie Lockwood, and underwritten by Zurich. Clause 1.26 in that policy was equivalent to MD15 and provided that:

Where any Property Insured detailed in the Schedule/Placing Slips comprises residential buildings or personal property (both as defined in the Earthquake Commission Act), the indemnity expressed in this policy shall extend to include loss or damage caused by earthquake, volcanic eruption, hydrothermal activity or tsunami provided always that:

(a) The Earthquake Commission (EQC) admits liability, either in full or in part, for such damage.

(b) The liability of the company under this Clause

(i) shall not apply to that amount

(ii) shall not exceed the difference between the Sum Insured and the maximum amount for which the EQC would be liable if no excess applied.

[39] This clause specifically addresses the end point of the insurer’s liability by limiting the amount payable under the policy to the difference between the sum insured and the statutory cover. This is the effect that Zurich says MD15 has, even though it chose not to underwrite the Body Corporate’s loss in the same clear terms.

However, the difference between the two wordings could not be clearer; one specifies an end point and the other does not.

The principle of indemnity

[40] Mr Holden argued that the meaning of “loss” under MD15 was constrained

by the principle of indemnity and that if the Body Corporate were to receive

$12.95m from Zurich it would receive a windfall. As a result, he submitted, interpreting “loss” in MD15 to mean the Body Corporate’s actual loss would offend against the principle of indemnity because it would result in the Body Corporate being paid more than the sum insured under the policy. On this argument the Body Corporate’s loss would be limited to $12.95m regardless of what its actual loss was.

[41] This argument does not correctly reflect the principle of indemnity. The principle of indemnity is that under an indemnity policy17 an insured cannot recover more than its actual loss.18 The simplest statement of the principle19 is that of Megaw LJ in Leppard v Excess Insurance Co Ltd:20

The insured may recover his actual loss, subject, of course to any provision in the policy as to maximum amount recoverable. The insured may not recover more than his actual loss.

[42] The amount of an insured’s actual loss is a question of fact in the particular

case.21 In this case, that figure is $25m.

[43] Interpreting “loss” in MD15 as being the actual loss to the insured, without reference to the policy conditions, does not offend against the principle of indemnity. To the contrary, it is essential to the correct application of that principle to know

_{what the actual loss is.}

17 Not all contracts of insurance are indemnity contracts e.g. life insurance policies are not contracts of indemnity because payment under the policy is not assessed by reference to any actual loss sustained by the insured but by reference to an agreed amount.

18 Castellain v Preston & Ors (1883) 11 QBD 380 (CA); Leppard v Excess Insurance Co Ltd [1979] 2

_{All ER 668 (CA); Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA).}

19 Mr Holden relied on AMP Fire & General Insurance Co (NZ) Ltd v The Earthquake & War

Damage Commission (1983) 2 ANZ Insurance Cases 60-529 as the statement of this principle but that case was not directly concerned with this principle and did no more than refer to the statement in Halsbury’s Laws of England as “something helpful to bear in mind.”

20 _{Leppard v Excess Insurance Co Ltd [1979] 2 All ER 668 (CA).}

21 Bryant v Primary Industries Insurance Co Ltd, above n 18.

[44] Mr Holden also argued that the EQC payment had to be taken into account so as to reduce the amount payable by Zurich, relying on the principle that “anything which reduces or diminishes that loss reduces or diminishes the amount which the indemnifier is bound to pay”.22 However, this argument does not advance Zurich’s case at all. The Body Corporate acknowledges that, in calculating its loss, the EQC payment is to be taken into account. The principle can only affect Zurich’s case if

“loss” means the loss within the sum insured. We have already discussed the fact that under the principle of indemnity it is the Body Corporate’s actual loss that is relevant. The effect of this principle is simply that, in identifying the Body Corporate’s loss for the purposes of the policy the EQC payment of $6.8m is deducted from its actual loss of $25m. The balance is then subject to the terms of the policy, including the sum insured.

Does the way the premium was calculated affect the plain meaning of MD15?

The issue

[45] The premium that Zurich charged for natural disaster damage cover was calculated on $6.1m, being the difference between the statutory cover ($6.8m) and the sum insured under the policy ($12.95m). This is the figure that Zurich assessed to be its maximum exposure for natural disaster damage. Zurich maintains that this is part of the factual matrix and, when taken into account, would displace the interpretation of MD15 that we consider to be the plain meaning of the clause.

[46] The amount on which the premium for natural disaster damage was calculated could only be part of the factual matrix if the Body Corporate knew about it.23 It is common ground that the Body Corporate did not have direct knowledge of how the premium was calculated but ACM did. So the information is only relevant

_{if ACM’s knowledge is to be imputed to the Body Corporate.}

22 _{Castellain, above n 18.}

23 Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 per Lord

Bingham; QBE Insurance Australia Ltd v Vasic [2010] NSWCA 166; (2010) 16 ANZ Insurance Cases 61-851 at 78, 339-

78, 340.

[47] If the Body Corporate is fixed with that knowledge, the question then arises whether it has the effect of altering what we have concluded is the plain meaning of MD15. Zurich asserts that the consequences of the plain meaning are so contrary to commercial sense that the parties cannot be presumed to have intended that Zurich’s maximum liability for natural disaster damage would be $12.95m.

How the insurance was arranged

[48] In 2007 ACM and Boutique Body Corporates Ltd (BBCL), a company that acts as agent for bodies corporate, reached an agreement under which BBCL would introduce general insurance business to ACM. In return, ACM would pay commission at the rate of 25 per cent of its brokerage on policies that it placed.

[49] The Salisbury Apartments were completed in 2008. The Body Corporate engaged BBCL to act as its agent for arranging insurance. BBCL instructed ACM to obtain quotes from insurers. The cost of insuring the Salisbury Apartments was made up of the premium for fire insurance, the premium for natural disaster damage in excess of the EQC cover (commonly referred to as the company earthquake premium), the EQC levy for the statutory cover and the fire levy payable under the Fire Service Act 1975.

[50] The initial insurance was placed with NZI. In 2009, however, the Body Corporate moved the insurance to Zurich and renewed that cover in 2010. The process for arranging the insurance with Zurich was as follows. BBCL provided a valuation containing a reinstatement estimate (the estimated cost of reinstating the property in the event of a total loss) and instructed ACM to obtain quotes. In 2010 the reinstatement estimate was $12.95m and that was selected as the sum insured.

[51] ACM gave the valuation to Zurich and sought a quote on the basis of the Brokernet wording it had developed in conjunction with other independent brokers. Zurich quoted simply by providing rates for fire and company earthquake respectively. They were referred to in an email as being “non EQ” and “top up EQ”. Providing a quote solely by way of rates is common when an insurer is dealing with a broker.

[52] Using the rates quoted, ACM calculated the fire, company earthquake, statutory earthquake levy and fire levy. It had its own premium calculation template which allowed for the various relevant inputs. When it calculated the company earthquake premium it did so using the sum of $6.1m, the difference between the statutory cover and the sum insured.

[53] ACM did not revert to Zurich with its calculation at that point and nor did Zurich require it to. ACM simply provided BBCL with a total figure as being the Zurich quote. BBCL obtained instructions from the Body Corporate to place the cover with Zurich. It conveyed those instructions to ACM, which forwarded a closing advice and premium calculation sheet to Zurich. At the same time it sent an invoice to the Body Corporate care of BBCL.

[54] The closing advice was received by Zurich on 4 August 2010. It recorded the renewed cover as being effective on 13 August 2010. Handwritten notations on the advice showed that it was not processed internally within Zurich until 18 August

2010. However, there can be no argument that Zurich was on risk from 13 August

2010, regardless of when it actually checked the premium calculation and processed the placing advice.

[55] Looked at in terms of offer and acceptance, Zurich’s quotation of rates clearly

constituted an offer and the closing advice acceptance of that offer.

Whose agent was ACM?

[56] It is apparent from our description of how the insurance was arranged that BBCL was the Body Corporate’s agent and ACM was its sub-agent. Although this fact was not addressed in argument, it does not affect our consideration of this issue; the knowledge of a sub-agent is imputed to the principal in the same way as the knowledge of an agent.24

[57] However, Mr Langstone argued that, for the purposes of calculating and

_{invoicing the premium, ACM was acting as Zurich’s agent. Mr Langstone relied on}

24 Dollars and Sense Ltd v Nathan [2008] NZSC 20; [2008] 2 NZLR 557.

Norwich Union Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd25 and the definition of “broker” in the Insurance Intermediaries Act 1994. We do not find either of assistance on this issue. Norwich was concerned with the payment of premium in circumstances where, on the evidence, the insurer had authorised the broker to accept payment so that payment to the broker was to be treated as payment to the insurer. The Insurance Intermediaries Act 1994 is not helpful because it deals specifically with the treatment of payments received by the broker from either the insured or insurer. The issue here is quite different; for whom was ACM authorised to act in negotiating the cover?

[58] Determining agency in this context does, however, require reference to s 10 of the Insurance Law Reform Act 1977, which specifically addresses the question of who a broker acts for in arranging cover. It was introduced to address the problem of an insurer avoiding a policy for non-disclosure of material facts that had been disclosed to the broker. It is, however, framed in general terms. In certain circumstances s 10(1) deems a broker to be the agent of the insurer during the period prior to the conclusion of the contract:

A representative of the insurer who acts for the insurer during the negotiation of any contract of insurance, and so acts within the scope of his actual or apparent authority, shall be deemed, as between the insured and the insurer and at all times during the negotiations until the contract comes into being, to be the agent of the insurer.

[59] Because ACM received a commission from Zurich for placing the cover it was a “representative of the insurer” for the purposes of s 10(1).26 However, we are satisfied that it is not deemed by s 10(1) to have been Zurich’s agent. In Harewood Orchard Partnership v Mabey and Wallace & Ors the Court of Appeal (describing s10(1) as “difficult”) considered that it required:27

... a practical approach giving effect to its obvious purpose of clarifying the capacity of the representative during the negotiations. Plainly if he or she acts beyond the scope of authority the deeming provision will not apply. But the scope of authority should not be examined with such particularity as denies the provision its intended effect. The fact that commission is paid

25 Norwich Union Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd (1981) 1 ANZ Ins Cas

_60-446.

26 _{Section 10(3) Insurance Law Reform Act 1977.}

27 Harewood Orchard Partnership v Mabey & Wallace Primary Produce Assurance Brokers Ltd

CA72/96 27 August 1997.

itself suggests that the representative is acting for the insurer in some capacity. If, to earn that commission, the representative participates in negotiating the terms of the contract and does so with the authority of the insurer the requirements of the subsection prima facie will be met. It will then be a matter of ascertaining whether in the particular fact situation the representative is shown not to have been acting for the insurer within the scope of actual or apparent authority.

(emphasis added)

[60] The facts in Harewood Orchard provide a helpful counterpoint to the facts in this case. There, the broker had been given authority to market the insurer’s standard policy wording. The broker received applications for insurance. It was authorised to provide quotes. Cover was effective from the time the broker received acceptance of the quotes. The insurer accepted that the broker had been acting for it in issuing placing slips.

[61] In comparison, ACM went into the market at the behest of the insured, promoting its own wording and soliciting quotes from several insurers. It received a quote in the form of rates. When instructed to accept the quote, it confirmed acceptance by sending a closing advice to the insurer. There was no suggestion that ACM had the authority to bind Zurich and no suggestion that cover could be regarded as placed until ACM had communicated acceptance of Zurich’s quote. In these circumstances ACM did not have Zurich’s authority to negotiate with the Body Corporate. We are satisfied that ACM had authority only to act for BCCL and was not Zurich’s agent during the period leading up to the quote being accepted.

[62] We do not regard as significant the fact that ACM actually undertook the calculation required to convert the rates provided by Zurich into a premium. The calculation was a mechanical task which either the insurer or the broker could undertake. Indeed, both undertook the calculation at different points; after cover was placed, Zurich re-did the calculation to check ACM’s work. It was the rate that mattered, not the calculation.

[63] By way of supporting his assertion that ACM was Zurich’s agent, Mr Langstone suggested that if ACM had wrongly calculated the premium Zurich would be bound by ACM’s error. However, that approach begs the very question of whether ACM was acting as Zurich’s agent; if it was not, then it is difficult to see

why Zurich would be bound by the error. The position would presumably fall to be resolved by rectification, given that both parties knew what the intended rate was.

Is the Body Corporate fixed with ACM’s knowledge about the way the premium was

calculated?

[64] Knowledge acquired by an agent while acting for a principal is imputed to the principal, the rationale being primarily the protection of third parties dealing with an agent.28 However, ACM’s knowledge that the company earthquake premium was calculated on the difference between the sum insured and the statutory cover was not acquired in its capacity as the Body Corporate’s sub-agent. It was knowledge derived from its experience in the market. Zurich did not, and did not need to, advise ACM that the rate it quoted for company earthquake was to be applied to

$6.1m rather than $12.95m; that was a matter that Zurich correctly assumed would be known to ACM through its own experience as a broker.

[65] The extent to which knowledge acquired outside the scope of the agency is to be imputed to a principal is a question on which judges and commentators have expressed diverse views.29 However, one recognised exception is the agent who is engaged, in part, for his own knowledge. In Jessett Properties Ltd v UDC Finance the Court of Appeal considered that knowledge acquired other than during the scope of the agency is not generally to be imputed to the principal unless the agent is an

“agent to know”:

The general principle that notice given to or knowledge acquired by an agent is imputed to his principal only if the agent was at the time employed on the principal’s behalf is recognised in the texts and the cases: see for example Bowstead on Agency 15 ed 412-416, Fridman’s Law of Agency 6 ed 319, The Societé and Génerale de Paris v The Tramways Union Co Ltd (1884) 14 QBD 424 and Taylor v The Yorkshire Insurance Co Ltd [1913] 2

IR 1. This accords with good sense and justice.

...

Whichever be the true basis, [for the principle] it is apparent that knowledge acquired before the agency began or probably even during its currency but

28 Jessett Properties Ltd v UDC Finance [1992] 1 NZLR 138 at 143 (CA); Niak v Macdonald [2001]

_{3 NZLR 334; Hickman v Turn and Wave [2011] NZCA 100, [2011] 3 NZLR 318 at [192] – [197].}

29 Peter Watts “Imputed Knowledge in Agency Law” [2005] New Zealand Law Review 307.

outside the scope of the engagement, should not in general be imputed to the principal.

In Taylor Palles CB noted two exceptions: one where the principal “purchases the previously obtained knowledge of the agent” in relation to the particular subject matter; the other where the agent is “an agent to know”. The latter expression comes from the judgment of Lord Halsbury LC in Blackburn, Low & Co v Vigors (1887) 12 AC531, 537 where his Lordship pointed out that the somewhat vague use of the word “agent” leads to confusion and added:

“Some agents so far represent the principal that in all respects their acts and intentions and their knowledge may truly be said to be acts, intentions and knowledge of the principal. Other agents may have so limited and narrow an authority both in fact and in the common understanding of their form of employment that it would be quite inaccurate to say that such an agent’s knowledge or intentions are the knowledge or intentions of his principal; and whether his acts are the acts of his principal depends upon the specific authority he has received.”

All turns on the nature of the agent’s engagement.

[66] Jessett Properties was cited with approval by the New South Wales Court of Appeal in Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd, a non-disclosure case decided in the context of the Insurance Contracts Act 1984.30

The insured, Permanent, secured an extension of its professional indemnity cover. FAI had a portion of both the first and second excess layers. FAI refused to indemnify in respect of claims notified during the extension period on the ground that when Permanent’s broker, Sedgwick, sought the extension it did not tell FAI that Permanent intended arranging its renewal programme without FAI. Sedgwick knew that if this information was conveyed to FAI the extension was unlikely to be granted. The Court of Appeal held that the broker in this situation was an “agent to know” and its knowledge of FAI’s probable response was imputed to Permanent.

Handley JA observed that:31

In Blackburn, Low & Co v Vigors, Lord Halsbury LC said (at 537) that when a person is “an agent to know” his knowledge binds his principal. In Taylor v Yorkshire Insurance Co Ltd [1913] 2 IR 1 at 20-21 Palles CB said that the general rule is that an agent’s knowledge is only imputed to a principal if it was acquired in the course of the agency. This was subject to exceptions where the principal had purchased the previously obtained knowledge of the

30 Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd [2001] NSWCA 20; (2001) 50

_{NSWLR 679, 692-697.}

31 At 698.

agent or the agent was an agent to know: see also Jessett Properties Ltd v

UDC Finance Ltd (at 143-144).

An insured presumably retains a broker because he expects that the latter’s knowledge of the insurance market will enable him to obtain more favourable terms than the principal could secure himself. It could equally be said that by retaining the broker, the insured purchases his knowledge of the market, however and whenever acquired: see Taylor v Yorkshire Insurance Co Ltd (at 32) per Gibson J.

[67] This decision was later reversed by the High Court of Australia but on a ground unrelated to whether Sedgwick’s knowledge was imputed to Permanent and without disapproval of Handley J’s statement of the law on this point.32

[68] We consider that ACM was engaged, not only to solicit quotes for insurance, but also to use its long experience in the market to advise on appropriate arrangements. It was engaged for its knowledge of how the insurance market operated. It was this knowledge that enabled it to accurately turn a quoted rate into a premium without reference back to Zurich. ACM was, in our view, an “agent to know” and the Body Corporate was fixed with ACM’s knowledge that the premium was calculated on $6.1m.

The effect of ACM’s knowledge

[69] We accept that the sum on which a premium is calculated is part of the factual matrix. It would be pointless to ignore the reality that parties to an insurance contract expect there to be some correlation between the premium and the amount of cover being provided. The question in this case is whether the consequences for Zurich of being liable for a sum insured of $12.95m but having charged a premium on only $6.1m are so lacking in commercial sense that the parties cannot be taken to

have intended them.33 If so, MD15 would effectively have to be rewritten so that

Zurich’s exposure is limited to the difference between the statutory cover and the

_{sum insured.}

32 Permanent Trustee Australia Limited v FAI General Insurance Co Ltd (in Liq) [2003] HCA 25,214

_{CLR 514.}

33 Vector, above n 5.

[70] Mr Holden pointed to two consequences of the plain meaning contended for by the Body Corporate (and accepted by us) that he argued are so exceptional as to displace that meaning. The first is that it would have the effect of providing the Body Corporate with up to $12.95m cover in the event of fire but $19m in the event of earthquake (if one counts the statutory cover). The second is that Zurich will have inadvertently assumed an exposure of $12.95m for earthquake damage but received a premium based only on $6.1m, the corollary being that the Body Corporate will have paid a premium based on $6.1m but received cover of $12.95m.

[71] ACM asserted, without challenge, that insurers commonly offer additional benefits without charging an additional premium. However, Mr Holden pointed out that this invariably occurs as a result of negotiation. We agree that the fact that insurers often agree to provide additional cover without an additional premium does not assist in resolving this case; the question here is whether the parties can be presumed to have intended that $12.95m worth of cover would be provided for the same premium as would have been charged for $6.1m worth of cover.

[72] We turn, then, to the consequences that Zurich say flow from the plain meaning of the policy. We agree that different exposure for fire and earthquake risk would be a very unusual outcome. We are confident that it would not accord with the expectations of either insurers or the brokers and would never have been contemplated at the time the policy was arranged. Experience may have shown that there can be a difference in the amount required to reinstate following a total loss caused by earthquake as opposed to fire. But when this policy was written risks were assessed on the basis of the same reinstatement estimate.

[73] We are not satisfied, however, that this outcome, in itself, would justify departing from the plain wording of the policy. Fire and earthquake risks are assessed separately and priced separately. It is very unlikely that an insurer would be called upon to respond to damage caused by both risks in the same policy period and, for Zurich, this has not happened. So, whilst unusual, the consequence is theoretical and will not result in a real commercial consequence for Zurich.

[74] Further, and as already noted, Zurich’s interpretation would see different entitlements for natural disaster damage depending on whether s 30(2) applied or not. This would be an equally unsatisfactory outcome.34

[75] The question of the policy providing double the amount of cover for the same premium is of greater concern because the commercial consequences are very real for Zurich. There can be no doubt that Zurich assessed its risk on the basis of an exposure of $6.1m but, if the policy wording prevails, will be liable for $12.95m. Is this a consequence that is so lacking in commercial sense that it should justify departing from the terms of the policy or is it simply a bad bargain on Zurich’s part?

[76] It is clear from the evidence that Zurich had the benefit of experienced underwriters who took care over the wording that it agreed to. It is also apparent from the evidence that the expectation in the industry prior to the 2011 earthquake was that an insurer’s exposure for natural disaster damage would be the difference between the statutory cover and the sum insured. However, as Mr Langstone pointed out, this expectation has never been tested because the 2011 earthquake is the first event giving rise to significant natural disaster damage claims since the introduction of the ECA.,

[77] Zurich could have ensured that its maximum exposure for natural disaster damage was specified as the difference between the statutory cover and the sum insured, rather than the sum insured. Had its underwriters turned their minds to the difference between the Brokernet wording and, for example, the Crombie Lockwood wording they may have identified the problem that now confronts them. But that does not necessarily mean that they would, or could, have done anything differently.

[78] Had Zurich appreciated the effect of MD15, there seems to us to have been only three possible responses: refuse to write the natural disaster damage cover as presented, price the cover to reflect the fact that Zurich’s maximum exposure was

$12.95m or accept the wording and price the cover in accordance with market practice (the last being what was actually done). In our view, the most likely

_{outcome was the last. We are not satisfied that, even if Zurich had appreciated that it}

34 See our earlier discussion at [18].

was exposed up to $12.95m, it would have either refused to accept the Brokernet wording or would have priced the cover on the total sum insured. It is most likely to have adopted the course that it actually took, albeit with a proper understanding of the risk that it was running.

[79] The wording was the product of collaboration between ACM and other brokers. It was a selling point for ACM in its quest for body corporate business; in its communications with the Body Corporate, ACM referred to the wording as “speciality” policy wording that provided “benefits above those available in the Standard market wordings” and “enhanced benefits”. Another insurer, Vero, had also quoted for the business on the basis of the Brokernet wording. A third insurer, NZI, had quoted on its own standard terms and its quote was not recommended by ACM. It is apparent that the insurer prepared to write the Body Corporate’s business on the Brokernet wording would be more likely to get the business. There is nothing to suggest that Zurich could have secured a change to the wording or would have forgone the business rather than write on that wording.

[80] We see the alternative of pricing the cover on the basis of the sum insured of

12.95m as equally unlikely. If the price increase was significant there would inevitably have been resistance from the Body Corporate; although price was not determinative, it was clearly a consideration in the Body Corporate’s decision. More importantly, it is unlikely that Zurich would have viewed its exposure as significantly greater than $6.1m in any event and so it would have no reason to significantly increase the price.

[81] Zurich assessed its risk by reference to the reinstatement estimate. Both it and the Body Corporate accepted that as the best estimate of what it would cost to reinstate in the event of a total loss. The sum insured was agreed on the basis of the reinstatement estimate. Occasionally (as in this case) a reinstatement estimate proves not to be accurate. But generally, insurers and insureds both act on the assumption that it will be. Because there was no basis on which Zurich might reasonably have thought that the estimate was likely to be inaccurate (or significantly so) its best assessment of its exposure could still have been $6.1m even if it had appreciated the effect of the wording. So there is no basis on which to

conclude that Zurich would have viewed the risk of it having to pay more than

$6.1m as anything other than minimal.

[82] In short, we consider that, even if the parties had appreciated the effect of the policy wording, it is unlikely that they would have regarded the actual risk of Zurich having to meet a claim in excess of $6.1m as significant. For that reason we cannot conclude that the wording of MD15 creates such an unacceptable commercial result as to justify rewriting the bargain that Zurich entered into.

Result

[83] The following question was ordered to be determined before trial:

Is the Sum Insured for buildings under the material damage section of the contract of insurance between the plaintiff and the first defendant in respect of the Salisbury Apartments inclusive or exclusive of all amounts payable to the plaintiff from the Earthquake Commission on Natural Disaster Damage cover under the Earthquake Commission Act 1993 for Natural Disaster Damage to the buildings from the 22 February 2011 earthquake?

[84] We answer the question as follows: the sum insured is exclusive of all amounts payable to the plaintiff from the EQC.

[85] The result is that the Body Corporate is entitled to the sum insured of

$12.95m in addition to the $6.8m it has received under the ECA. Our reasons are that:

(a) This is the plain and ordinary meaning of the policy;

(b) The principle of indemnity does not preclude this result;

(c) Although the fact that the premium was calculated on the difference between the statutory cover and the insurance cover is a relevant part of the factual matrix, it does not justify departing from the plain and ordinary meaning of MD15.

[86] There are other aspects of the proceeding that may need to proceed to trial. The Registrar is directed to arrange a telephone conference before Heath J on the first available date after 10 June 2013. The plaintiff shall file and serve a memorandum for that conference no less than 10 working days beforehand and the defendants shall file and serve memoranda in reply no later than five working days before the conference.

[87] Costs are reserved. If there were a need for judicial determination of costs on the preliminary question, counsel shall raise that issue in their memoranda for the case management conference. Directions will then be made for the exchange of

_{submissions on costs.}

P Courtney J For the Court