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Lee v IAG New Zealand Limited [2017] NZHC 2626 (26 October 2017)

Last Updated: 15 December 2017

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2016-409-764 [2017] NZHC 2626

JUDGMENT OF NICHOLAS DAVIDSON J (ANSWERS TO QUESTIONS PRELIMINARY TO TRIAL)

A. INTRODUCTION

[1] This judgment addresses the application of an insurance policy following earthquake damage to a three storey commercial building in Christchurch. The main element of the building, made of clay brick unreinforced masonry, was built in

_{about 1880.}

LEE & ORS v IAG NEW ZEALAND LIMITED [2017] NZHC 2626 [26 October 2017]

[2] The building was damaged by the magnitude 7.1 Canterbury earthquake on 4 September 2010. The more destructive magnitude 6.3 earthquake on

22 February 2011 caused separate and distinct damage, and the building was demolished in November 2011.

[3] The plaintiffs say that they intend to reinstate the building, the first plaintiff having resettled the ownership trust in the names of the second plaintiffs, and assigned rights under the insurance policy with the defendant insurer, IAG New Zealand Limited (“IAG”).

IAG’s response

[4] IAG made payments of $41,388 (excluding GST) for the 4 September 2010 event and $67,773 (excluding GST) for the 22 February 2011 event. In January 2013, IAG paid the first plaintiff $585,000 (excluding GST), which the insurer calculated as the market indemnity value of the building of $600,000 (excluding GST), less the policy excess of 2.5 per cent. On 12 November 2014, IAG offered to pay the first plaintiff the further sum of $752,589 (excluding GST) in full settlement as an offer outside the policy wording, calculated on the basis of a single sum, rather than adjusting for each event.

[5] IAG had not been told of resettlement of the first plaintiff in the names of the second plaintiffs on 23 April 2014, with assignment of rights under the insurance contract. Had the offer been accepted the total payout would amount to the Sum Insured for earthquake damage, of $1,499,000 (excluding GST), nett of excess.

B. THE POLICY

[6] IAG agreed to insure the first plaintiff for loss of or damage to business assets including buildings, for commercial use only.

[7] Clause C1 provides:

This insurance will pay the amount of loss or damage or the estimated cost of restoring your business assets as nearly as possible to the same condition they were in immediately before the loss or damage happened, using current materials and methods.

[8] Clause C2 provides:

Where replacement covers has been selected (shown as R in the schedule) and following loss or damage you restore or replace the lost or damaged business assets this insurance will pay:

a. For buildings

(i) where repairable, the cost of restoration of damage to the same condition when new, or

(ii) if unable to be repaired because of such damage, the cost of replacement by an equivalent building which meets your requirements at any site provided State shall not pay more than the cost of replacement at the site stated in the schedule.

Such restoration will use current materials and methods and include the cost of changes to meet the lawful requirements of any local authority or statute but not for work you have already been instructed to do prior to the loss or damage.

...

C. THE PRELIMINARY QUESTIONS

[9] The Court has been asked to address two preliminary questions: (1) Question 1 is drawn from Clause C1:

How is “the estimated cost of restoring your business assets as nearly as possible to the same condition they were in immediately before the loss or damage happened using current materials and methods” to be calculated?

(2) Question 2 relates to “Consequences of delay in payment”:

(a) If there has been a delay in making a payment due under the policy pursuant to Clause C1, is the defendant liable to pay interest as a result of the delay?

(b) If the answer to (a), above, is yes, is interest to be calculated from:

(i) The accrual of the cause of action; or

(ii) The date when the payment obligation could reasonably have been estimated; or

(iii) Some other date determined at the preliminary hearing;

or

(iv) Some other date to be determined at trial.

[10] While this judgment does not determine the application of interest to any sum payable by the insurer, if interest is payable then the answer to Question 2(b) is (iv), as I agree with Mr Raymond QC for IAG that this should only be addressed at trial. There are guiding principles, and insurance practice is relevant to the application of interest. These principles have been developed by the courts, some of specialist jurisdiction, in New Zealand and elsewhere. The application of interest will reflect these principles always with an eye to the facts of the case and the insurance contract in question. I will make some observations about interest having regard to the submissions of counsel so their commendable enterprise may be reflected. The question of interest is of important general application.

D. QUESTION 1

The competing positions

[11] The plaintiffs say that Clause C1 creates an obligation on IAG to pay a “provisional” or “default” sum so they can commence reinstatement work. This Judgment will refer to a “provisional” sum or payment. They say that “top-up” cover is available under Clause C2 to reimburse the actual costs of replacement by an equivalent building, described as restoration using current materials and methods under Clause C2(a)(ii).

[12] If that proposition is correct, IAG must make a “provisional” payment, being the estimated cost to restore the building as nearly as possible to its pre-earthquake condition using current materials and methods. That is not the cost of restoration to

the same condition when new, nor to comply with the lawful requirements of (in this case) the Christchurch City Council or any statute.

[13] Mr Cowey, for the plaintiffs, says that the estimated provisional sum should make no deduction for “wear and tear” because it is a provisional payment towards restoring the building “as nearly as possible” to its pre-earthquake condition. However, if the Court finds that the contract requires the age of the damaged assets to be reflected in the provisional sum, he submits that should be calculated only by reference to recycled materials, for example using “old bricks”.

[14] Mr Raymond says the insurer’s obligations are founded on the necessary repairs when they are determined, then the life expectancy of the various components must be brought to account to produce a depreciated repair cost, which IAG calculates at 77.63 per cent, over all components of the building. By using the plaintiffs’ scope of works (as to which IAG reserves its position), the difference between the parties in the estimated costs for each event is reflected in the following

_table:

[15] The practical position is that if the plaintiffs restore the property, subject to any other terms, the cover under Clause C2 will be calculated as the difference between the Sum Insured and the applicable Clause C1 calculation for the February 2011 event. The Clause C2 entitlement is limited, so the total sum paid by IAG under Clauses C1 and C2 will not exceed the cost to replace the insured property to the Clause C2 policy standard.

Discussion

[16] Mr Cowey says that the policy provides “new for old” replacement cover, which is different from “old for old” cover, being restoration to the pre-event condition. He refers to authority that betterment applies if there is an assumption

that old materials would be used.¹ Betterment will be reflected when something new replaces something old, but Mr Cowey submits that it only applies in the context of an insurance contract which does not expressly provide for replacement. Here, the policy does so under Clause C2, so the plaintiffs were entitled to receive something “new for old”.

[17] Mr Cowey’s construction of the Clause C1 payment is thus based on this proposition, that the insurer must make an “agreed initial default payment” because the policy provides for “replacement”.² He says two tranches of payment are contemplated, the first being a provisional payment upon the activating occurrence or event.³ That is based on the intention of the insured to reinstate, which triggers “the estimated cost of restoring your business assets”, as opposed to “loss” or “damage” under Clause C1.

[18] The effect of the construction of the contract in this way is that a provisional sum is paid “so that the insured actually has funds to begin reinstatement”. Mr Cowey says this is what should be taken as intended under the policy. The provisional Clause C1 payment assessed in this way will likely leave a shortfall when the building is constructed to an “as new” standard, so the top-up C2 payment

is made after those costs are incurred and known.⁴

[19] Mr Cowey recognises the vagaries of this submission when put into practice. Because his submission is that the Clause C1 obligation is an “estimate” triggered by the (necessary) intent of the insured to restore the building, this interpretation must encompass a change of mind by the insured, or for some other reason there is no restoration. He says “a lack of precision is acceptable”, as undue delay in reinstatement would follow if the repair costs had to be “precisely calculated”. He submits that there has to be a realistic approach to a repair methodology to the restoration standard under Clause C1, and in practical terms the restoration work on

_{which the provisional sum is calculated must be “buildable”.}

¹ _{Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd’s Rep 440.}

2. Brkich & Brkich Enterprises Limited v American Home Assurance Co (1995) 127 DLR (4^th) 115 at [29]; TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd [2013] NZHC 298 at [32]- [40].

³ _{Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 117, [2015] 1 NZLR 40 at [9].}

⁴ Ridgecrest, above n 3, at [25].

[20] This approach is submitted to be consistent with the Supreme Court judgment in Prattley Enterprises v Vero Insurance, which is otherwise distinguishable as it did not concern “new for old” cover, so reading a deduction for betterment into the policy was appropriate.⁵ The Supreme Court in Ridgecrest described the subject policy as unusual, but Mr Cowey says that case is materially different, as here a higher premium was negotiated in return for replacement “new for old” cover, so

betterment was expressly agreed.

[21] If Mr Cowey is correct, the only issue presented by Clause C1 is how the “estimate” should be calculated, for example, whether the re-use of bricks from the building is viable. He says that is not contemplated by the contract, but if it is then adjustment to the provisional sum estimated should only extend to the incorporation of re-used materials.

[22] Mr Raymond, for IAG, contends that Clause C1 is a straightforward indemnity clause and the plaintiffs are wrong to treat it as a “form of upfront reinstatement payment”. He submits that the Supreme Court in Ridgecrest made no more than an observation about Clause C1 when the Court said:⁶

(a) The policy provides for both indemnity and replacement cover. It is therefore quite possible for an insured to make a profit in the sense of recovering (on a replacement basis) more than the actual (that is the indemnity) value of the building.

(b) ...

(c) Under clause C1, the insurer may be required to pay before any repairs are effected and the liability to pay is unaffected even if such repairs are not effected.

[23] I pause to observe that the indemnity nature of a Clause C1 payment is exemplified by the last passage cited, as replacement or reinstatement cover is based on costs incurred. The Court of Appeal in Ridgecrest commented to this effect on Clause C1:⁷

Clause C1 provides for traditional indemnity cover, compensating for loss or damage so the property is restored, (or replaced) to the standard it was in

⁵ _{Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZSC 158 at [47].}

⁶ _{At [50].}

⁷ Ridgecrest New Zealand v IAG New Zealand Ltd [2013] NZCA 291, [2013] 3 NZLR 618 at [12].

before the insured event. Clause C1 is also awkwardly worded: the cover for “loss or damage” is typical of indemnity provisions, but the addition of “or the estimated cost of restoring...” is less clear. IAG says it does not add to the indemnity cover, but rather is a guide to quantification of loss or damage for which cover is provided under cl C1. Ridgecrest’s argument is to the effect that cl C1 provides a separate head of liability for the insurer for the estimated cost of restoration as an alternative to the actual loss or damage suffered in indemnity cover terms. We find Ridgecrest’s argument hard to reconcile with the nature of the cover provided under the operative clause ... but on the view we take of the case we do not need to resolve the point.

[24] The Court of Appeal observed that the pleaded cost of repairing the damage caused by each earthquake event makes no difference to the “estimated cost” where a claim is made under Clause C1, nor to the fact that such “estimated cost” would be based on an “old for old” provision, with a deduction for betterment.⁸ The estimates obtained by Ridgecrest were based on the cost of repair on a “new for old” basis, so they made no allowance for betterment. The Court observed that:⁹

It would have defied commercial common sense for Ridgecrest to make a claim against IAG to repair its building on the old for old indemnity measure provided by cl C1 when replacement or new for old cover was available under cl C2.

(emphasis added for this judgment)

[25] Mr Raymond submits that the Court in Ridgecrest reasoned that a payment under Clause C1 would require deduction for betterment, although it has the “awkward” wording which the Court of Appeal described, as it extends beyond loss or damage to the “estimated cost of restoring...”. On the facts of this case reinstatement ‘new for old’ is the end consequence of the February 2011 earthquake, presumably as an overlay on the September 2010 earthquake, and other aftershocks.

[26] Mr Raymond refers to the judgment of William Young J in Prattley,¹⁰ where the Court approved the following passage about a contract of indemnity from

_{Castellain v Preston:}¹¹

⁸ _{At [33].}

⁹ _{Ridgecrest, above n 7, at [36].}

¹⁰ _{Prattley, above n 5, at [35].}

¹¹ Castellain v Preston (1883) 11 QBD 380. Its application has also been noted in QBE Insurance

(International) Limited v Wild South Holdings Limited [2014] NZCA 447; [2015] 2 NZLR 24 (CA).

... in the case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance ...

[27] In Prattley, the Court held that the obligation of the insurer was to indemnify the insured for damage suffered. That was the primary entitlement, an indemnity payment, although the insurer had the option to meet the indemnity by repair or replacement. The insurer may limit the moral hazard as it elects, under that long established principle in insurance law, but that does not mean that the indemnity payment is to be calculated simply by the cost of repair or replacement.

[28] An indemnity obligation may vary, according to the facts, but the purpose is to make good the insured’s actual economic loss.¹² Repair and reinstatement were discussed by the Supreme Court which held:¹³

... the estimated costs will usually provide a better basis for calculating loss, particularly if the building is well suited to the business needs of the insured and thus could not easily be replicated. Similar considerations apply if a particular building is to be replaced with a like building. It is, however, elementary that the resulting calculations must recognise that an indemnity policy does not, without specific language, operate on a “new for old” basis. An insured whose property is repaired, reinstated or replaced might, in the absence of a compensating allowance, be better off than before the damage. This can be avoided by a betterment allowance or, alternatively, by deducting from the assessed repair or reinstatement cost an allowance representing the depreciated condition of the insured property immediately before it was damaged. Where replacement cost has been adopted as the measure of indemnity, similar considerations will apply if the actual or notional replacement building is of better quality than the insured building. The entitlement of an insurer to allowances for betterment or depreciation is part and parcel of the indemnity principle and need not be provided for explicitly in the policy. (emphasis added)

(footnotes omitted)

[29] Mr Raymond refers to authorities which support an allowance for betterment and while I do not consider they add to the interpretative exercise, in the construction of the contract, they reflect the nature of an indemnity provision.

[30] In Keystone Properties Limited v Sun Alliance & London Insurance Plc, the

_{Court of Session addressed a policy’s application to a warehouse and nightclub in}

¹² _{Prattley, above n 5, at [39] and [40].}

¹³ At [41].

Edinburgh which were destroyed by fire.¹⁴ Under the policy, the insurers undertook to pay the cost of reinstatement, defined as:

The cost of rebuilding the buildings destroyed or of restoring the damaged portions to a condition substantially the same as but not better or more extensive than the condition of the buildings ... when new.

[31] Where the cost of reinstatement had not been incurred, the insured was entitled to recover “the value of the buildings at the time of their destruction”. The Court of Session held that the best measure of loss on the alternative basis, in that case at least, was the estimated probable cost of restoring the damaged buildings to their pre-fire state, less an allowance for betterment.

[32] In Vintix Pty Limited v Lumley General Insurance Limited, the Supreme Court of New South Wales considered an allowance for betterment where a fire policy obliged the insurer to:¹⁵

Pay to the insured the value of the property at the time of the happening of its destruction or the amount of such damage or at its option reinstate or replace such property or any part thereof.”

[33] The insurer had not elected to reinstate or replace, and the assessment of the amount payable was governed by the words “amount of such damage”. The Court recognised that insurance law has long reflected an allowance for betterment, although some policies provide for reinstatement regardless of benefit.¹⁶ The rationale is that the insured should not receive more than indemnity for its loss, which it would do if it received an improved property as the result of replacement by “new for old”, or repair with new materials. The result may well cause hardship to an insured, if it has to pay from its own pocket the additional cost of new goods, but

the Court observed that hardship does not always follow and the insured may be happy with the improvement forced upon it, or may in reality be much better off with

_{a more productive plant and equipment.}¹⁷

¹⁴ _{Keystone Properties Limited v Sun Alliance & London Insurance Plc 1993 SC 494.}

15. Vintix Pty Limited v Lunmley General Insurance Limited (1991) 6 ANZ Insurance Cases 61-050 at 77, 079 – 77,081.

¹⁶ _{At 77,079.}

¹⁷ At 77,080.

[34] In Vance v Forster, machinery was destroyed by fire and replaced as new.¹⁸

It was held that the insurer’s liability was to be ascertained by taking the cost of the new machinery and deducting the difference in value between the new and the old, thus allowing for betterment.

[35] In Roumeli Food Stores (NSW) Pty Limited v The New India Assurance Co Limited, the measure of the insured’s loss was the value of the chattels destroyed as part of a going concern.¹⁹ The Court arrived at this value by taking the price of the new chattels and allowing for depreciation.

[36] In Reynolds v Phoenix Assurance Co Limited, the cost of repairs to buildings damaged by fire was left without deduction for betterment because the estimate of the cost of repair took into account the use of second-hand material.²⁰ The Court made an allowance for betterment on the alternative measure of market value and said:²¹

The principle of betterment is too well established in the law of insurance to be departed from at this stage even though it may sometimes work hardship on the assured.

[37] In Spina v Mutual Acceptance (Insurance) Limited, the insured conceded that an allowance for betterment should be made.²² The Court isolated the repair works needed to bring the house from its condition before the fire to a state comparable to a new building, and made a deduction for those works.

[38] The cases cited turn on different insurance policies, but reinstatement was addressed as the cost of restoration to a condition substantially the same as, but not more extensive than, the condition of the buildings when new or, if reinstatement had not occurred, the value of the building at the time of destruction. They were cited for the proposition that insurance law recognises an allowance for betterment, but some policies expressly provide for reinstatement without such an allowance. Without

_{such express provision, an insured should not otherwise receive more than indemnity}

¹⁸ _{Vance v Forster (1841) Ir Cir Rep 47.}

¹⁹ Roumeli Food Stores (NSW) Pty Limited v The New India Assurance Co Limited (1972)

_{1 NSWLR 227.}

²⁰ _{Reynolds v Phoenix Assurance Co Limited, above n 1.}

²¹ _{At 453.}

²² Spina v Mutual Acceptance (Insurance) Limited (1984) 3 ANZ Insurance Cases 60-554.

for its loss, and it would do so if it received an improved property on a “new for old” or new materials basis. Sometimes the contract directs that the insured must pay the difference. It is trite that indemnity value may be exceeded by the cost of rebuilding, and that is a reflection of the fact that traditional indemnity cover may not provide sufficient funds for reinstatement.²³

Principles of interpretation

[39] The Supreme Court recently addressed whether insurance for the replacement value of an apartment complex to an insured limit was inclusive or exclusive of statutory insurance under the Earthquake Commission Act 1993.²⁴ The complex was damaged in the Canterbury earthquake on 22 February 2011. The majority of the Court addressed contractual interpretation, which is, in order to ascertain:²⁵

the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

[40] While there is no conceptual limit to what can be regarded as “background” it has to be background that a reasonable person would regard as relevant.²⁶ The Court referred to circumstances where the conclusion is that something has gone wrong with the contractual language and that the Court is not required to “to attribute to the parties an intention which a reasonable person would not have understood them to have”.²⁷

[41] Under what is described as the unitary principle, the contractual language, as with all language, should thus be interpreted and understood within the overall contractual context. The Supreme Court said the contextual interpretation of

_{contracts was historically restricted to situations of ambiguity but a purposive or}

²³ _{Tower Insurance Limited v Skyward Aviation 2008 Limited [2014] NZSC 185; [2015] 1 NZLR 341 at [24].}

²⁴ Firm PI 1 Limited v Zurich Australian Insurance Ltd t/a Zurich New Zealand and Body

_{Corporate 398983 [2014] NZSC 147.}

²⁵ Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL)

at 912 per Lord Hoffmann. See also Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14] per Lord Hoffmann.

²⁶ Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 at [39]

_{per Lord Hoffmann.}

27. Investors Compensation Scheme Ltd v West Bromwich Building Society, above n 25, at 912 per Lord Hoffmann, and see Charbrooke, above n 25, at [14] per Lord Hoffmann.

contextual interpretation is not dependent on there being an ambiguity. As to that, Lord Sumption has said:²⁸

It is generally unhelpful to look for an “ambiguity”, if by that is meant an expression capable of more than one meaning simply as a matter of language. True linguistic ambiguities are comparatively rare. The real issue is whether the meaning of the language is open to question. There are many reasons why it may be open to question, which are not limited to cases of ambiguity.

[42] The application of these principles first addresses the language of the contract, with reference to the juxtaposition of clauses with different meanings, but with the intent that they work together in circumstances such as this case presents.

[43] Under Clause C1, the indemnity agreed is based on the amount of loss or damage, or the estimated cost of restoring the business assets as nearly as possible to the same condition they were in immediately before the loss or damage occurred, using current materials and methods.

[44] The indemnity is curiously worded, going beyond loss or damage to the “estimated cost of restoration”. This is at heart the question for this judgment as Mr Cowey submits that this is to be read in the context of Clause C2, and those costs are paid by the insurer within the Sum Insured, so where both clauses are in play they should be harmonised in their application by Clause C1 being the provisional or “upfront” payment contemplated by Clause C2.

[45] Yet the indemnity provided by Clause C1 is quite distinct from cover under Clause C2, which can be purchased if the insured wishes to do so, which allows “new for old” cover if the lost or damaged business assets are replaced. In that case the restoration or replacement work must be carried out (unless the insurer waives that requirement).

[46] Mr Raymond thus submits that Clause C1 is not a precursor to cover under Clause C2, and must be read to stand alone. Clause C2 is optional, and may not apply at all because that cover is not purchased or it has no application on the facts.

[47] As Clause C1 must be read to apply whether or not Clause C2 is engaged, other than the amount of loss, or damage, it expressly covers the costs of restoring the assets “to the same condition they were in immediately before the loss or damage happened”. That is expressly not “new for old” cover, but to restore the insured’s position. This “old for old” is to make good the insured’s actual economic loss. This is consistent with the Supreme Court’s approach in Prattley that an indemnity policy

does not, without specific language, operate on a “new for old” basis.²⁹

[48] Clause C1 is not therefore intended to confer a more valuable interest in the insured asset. That may well result by the application of Clause C2, as the Supreme Court has observed, but Clause C1 does not require that the work be carried out, unlike Clause C2. Mr Raymond submits Clause C1 is intended simply to put the insured back in the same position, prior to the earthquake event, from an economic perspective, but no more than that and it follows that an allowance for betterment in respect of any payment under Clause C1 is required to reflect the “old for old” outcome contemplated.

Conclusion

[49] Clauses C1 and C2 must first be interpreted as standalone provisions. By definition they provide quite different forms of cover.

[50] This judgment is concerned with how the policy should be read when Clause C1 and Clause C2 both have application. For any single event that damages the property, the insured can claim under either Clause C1 or Clause C2, if Clause C2 has been purchased. The “choice” primarily depends on whether the insured repairs or reinstates the building, which does not give the insured carte blanche to do so, without that being warranted under the policy.

[51] Clause C1 is an orthodox indemnity insurance provision which requires the insurer, at its discretion, to pay the insured “either the diminution in value associated with the damage to the building, or the estimated cost of restoring it to its

pre-earthquake condition using current methods and materials”.³⁰ This “old for old” policy provision fits with the principle of insurance law that an insured will never be more than fully indemnified. Thus, where an insured whose property is repaired or reinstated is better off than before the damage, by virtue of the property being in a new condition, a betterment allowance should be applied so that the insured gains the indemnity value only.³¹

[52] Under Clause C2 the insured is effectively “buying the betterment”. The insurer takes on the greater risk of having to provide a new building in return for a higher premium.³² This “buying of betterment” applies only to a claim made under Clause C2, and payment will only be made on reinstatement. The plaintiffs made no repairs following the 4 September 2010 earthquake, so their claim for that event must lie under Clause C1. In this case, two separate events caused damage to the building. Two claims were made. After each event the policy limit resets. The Supreme Court in Ridgecrest held that the policy limit may be paid out for each separate event if required.³³ However the Court qualified that the insurer’s total

liability for all pay-outs is limited to the replacement cost of the building.³⁴ This

overarching check, based on the indemnity principle, was not engaged in Ridgecrest

where the policy limit was below the replacement value of the property.³⁵

[53] This conclusion is largely predicated on interpretation of the contract, with its distinct and express provisions for indemnity on the one hand, and reinstatement on the other. There is no case for a Clause C1 payment to morph into a provisional Clause C2 payment. A principle of interpretation is not to address the commerciality of a bargain but, to address whether the reasonable person, properly informed, would regard the construction for which a party contends as commercially realistic. Not only would the “provisional” payment which the plaintiffs seek under Clause C1 not be an indemnity payment, but a payment in advance for work that might never be

_{done, subject to imprecision and uncertainty which does not attend payment}

³⁰ _{Ridgecrest, above n 3, at [9].}

³¹ _{See Prattley, above n 5, at [41].}

³² _{Subject to any policy limit agreed to by the parties.}

³³ _{At [51] – [52].}

³⁴ _{At [54] and [62].}

³⁵ At [61].

following reinstatement work when the costs are known. This is simply not tenable and of itself defeats the construction for which the plaintiffs contend.

Question One – Answer

[54] Cover under Clause C1 is calculated by finding the estimated cost of restoring the property to the same condition as it was before the event which caused the damage or loss, and deducting for any betterment to the insured because the restored building would in whole or in part be in new condition rather than old. Clause C1 is not a “provisional” payment which is subject to a “top-up” under Clause C2. The two clauses provide for different forms of cover, and when they both apply, the indemnity cover does not morph into a first stage, or provisional payment under Clause C2.

E. QUESTION TWO

(a) If there has been a delay in making a payment due under the policy pursuant to Clause C1, is the defendant liable to pay interest as a result of the delay?

(b) If the answer to (a), above, is yes, is interest to be calculated from: (i) the accrual of the cause of action; or

(ii) the date when the payment obligation could reasonably have been estimated; or

(iii) some other date determined at the preliminary hearing; or

(iv) some other date to be determined at trial.

[55] Because the answer to Question 2(b) should only be determined at trial, this judgment goes no further than to make observations about the principles which apply to interest on a sum payable by an insurer. The observations assume a delay in payment beyond the date when the insured should have been paid, which

circumstances may trigger an award of interest. The corollary in those circumstances is that the insurer has received a wrongful benefit.

Facts which may be relevant to interest

[56] The facts in any case potentially bear on an award of interest. These few mentioned for IAG are illustrative.

[57] IAG was in a position to offer settlement by 12 September 2012 and a payment was made on 15 January 2013, subject to a partial discharge. IAG thought it had discharged its liability under Clause C1 but that further sums might be payable up to the Sum Insured in the event that reinstatement took place. The payment and partial discharge made no reference to a claim for interest. A “full and final” settlement offer was made on 12 November 2014, also without reference to interest. That comprised the balance of the Sum Insured available for one claim. When the insurer became aware of resettlement of the ownership trust, it asked for details so payment would be made to the correct party or parties. The solicitors for the plaintiffs were engaged on 11 June 2015 but the claim was not quantified until

31 March 2016. Requests for disclosure of the relevant trust deeds were declined or went unanswered before proceedings were issued in September 2016. The full basis of the plaintiffs’ claim was not known until 31 March 2016, when interest was first claimed.

[58] On the facts in this case, the insurer says that no interest is payable on the Clause C1 sum because a full Sum Insured payment was offered prior to proceedings being issued. That is the sort of factual issue which must be addressed at trial, which may influence the exercise of discretion to award interest.

[59] IAG says the sums payable for the February 2011 event rely on up-to-date costings, which are less than the Sum Insured, so the plaintiffs have not suffered any losses arising from the delay, thus meeting the concern about costs exceeding the value of the Sum Insured.

Discussion

[60] The Court may (currently) award interest under s 87 Judicature Act 1980 which (relevantly) reads:

Interest on money

87 Interest on debts and damages

(1) In any proceedings in the High Court, the Court of Appeal, or the Supreme Court for the recovery of any debt or damages, the court may, if it thinks fit, order that there shall be included in the sum for which judgment is given interest at such rate, not exceeding the prescribed rate, as it thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment:

provided that nothing in this subsection shall—

(a) authorise the giving of interest upon interest; or

(b) apply in relation to any debt upon which interest is payable as of right, whether by virtue of any agreement, enactment, or rule of law, or otherwise; or

(c) ...

(2) In any proceedings in the High Court, the Court of Appeal, or the Supreme Court for the recovery of any debt upon which interest is payable as of right, and in respect of which the rate of interest is not agreed upon, prescribed, or ascertained under any agreement, enactment, or rule of law or otherwise, there shall be included in the sum for which judgment is given interest at such rate, not exceeding the prescribed rate, as the court thinks fit for the period between the date as from which the interest became payable and the date of the judgment.

(3) In this section the term the prescribed rate means the rate of 7.5% per annum, or such other rate as may from time to time be prescribed for the purposes of this section by the Governor-General by Order in Council.

(emphasis added)

[61] An award of interest is to be distinguished from damages for breach, for which remedies may extend beyond interest, and is at the discretion of the court.

The rationale for the application of interest

[62] In the insurance context Mr Cowey refers to the rationale of “wrongful benefit” to the insurer which implicitly turns on the proposition that the insured

should have had its money at a given date. The New Zealand Supreme Court has approved this principle³⁶ In Adcock v Co-operative Insurance Society, the Court of Appeal held that “interest is intended to compensate a claimant from being kept out of money which ought to have been paid to him”.³⁷ This followed the Court of Appeal judgment in Jefford v Gee where Denning LJ held that:³⁸

Interest should not be awarded as compensation for the damage done. It should only be awarded to a plaintiff for being kept out of money which ought to have been paid to him.

[63] In Stuart v Guardian Royal Exchange Assurance of New Zealand Ltd, the

Court held in different language but directed to the same underlying principle that:³⁹

the refusal to award interest at 11% over the period concerned, would make substantial inroads into the integrity of the monetary award, and would in fact be a windfall for the defendant.

Accrual of the cause of action

[64] Mr Cowey’s primary submission is that interest usually runs from accrual of the cause of action and in this case that is the date of economic loss, when Clause C1 became applicable to each event. He cites Kuwait Airways Corp v Kuwait Insurance Co.⁴⁰ The judgment holds that an award of interest is not necessarily predicated on fault, or wrongful withholding of payment by an insurer, and in the case of indemnity insurance it is usually the “date of loss”. The fact that a claim has

to be investigated, often as to liability and quantum, does not of itself postpone the running of interest.⁴¹

[65] Mr Cowey’s submission is that Kuwait Airways should apply, that the cause

of action accrued as of 4 September 2010, being the “date of loss”, so interest should

_{run from that date.}

³⁶ Worldwide NZ LLC v NZ Venue Event Management Limited [2014] NZSC 108; [2015] 1 NZLR 1 at [23], approving

_{Day v Mead [1987] NZCA 74; [1987] 2 NZLR 443, in particular Somers J at 463.}

³⁷ _{Adcock v Co-Operative Insurance Society [2000] EWCA Civ 117; [2000] Lloyds Rep IR 657 (CA) at 662.}

³⁸ _{Jefford v Gee [1970] EWCA Civ 8; [1970] 1 All ER 1202 (CA) at 1208.}

39. Stuart v Guardian Royal Exchange Assurance of New Zealand Ltd (No. 2) (1988) 5 ANZ Insurance Cases 60-844 at 75-279.

⁴⁰ _{Kuwait Airways Corp v Kuwait Insurance Co SAK [2000] 1 All ER (Comm) 972 (HC).}

⁴¹ At 986.

[66] For the February 2011 event, Mr Cowey submits that the Clause C2 payment has been delayed by the insurer’s failure to make the Clause C1 payment as a provisional reinstatement payment. I have rejected that submission, but recognise the Sum Insured may be superseded as the result of unreasonable delay by the insurer which comprehends inflation in the costs of repair or reinstatement.

[67] The plaintiffs’ submission is that not to award interest from

4 September 2010 would provide an “incentive” to insurers to delay payment. This submission rests on an assumed obligation of the insurer to make payment as of

4 September 2010, even though the quantum of payment is necessarily determined later. The Court should address the issue based on when the insured should have had its money, and I do not see how any ‘incentive’ to the insurer to delay payment falls for consideration in the exercise of discretion.

[68] Under Clause C1 “loss” or “damage” should not invoke different considerations any more than the “cost of restoration” as they are all indemnity provisions, based on economic loss.

A loss of “buying power”

[69] Mr Cowey submits that the “buying power of [the] claim is reduced through the effluxion of time”. The insured limit is $1,499,000 (excluding GST) under Clause C1 and Clause C2. The rebuild cost, on the insurer’s estimate, would be approximately $2,473,075 (excluding GST), as assessed on 12 November 2014. Mr Cowey says the insurer is benefitting through delay, by having the use of money, which should have been paid to the insured; and the insured suffers in the loss of use of that money. This does not always fit under “interest”, as delay in resolution of a claim, including reinstatement or repair works, may result in the insured limit depreciating in its effect. That involves questions about the conduct of the claim by the insured and insurer, relevant to interest, and, as observed above, to a potential award of damages which involves different considerations.

The issue of proceedings

[70] The Supreme Court has held that the discretion is to be exercised as the justice of the case requires, so that it is not uncommon in tort cases to delay the running of interest until the date of issue of the proceedings.⁴² The insurer contemplates that an award of interest would defeat the intention of the parties to limit the insurer’s exposure set out in the policy schedule, and that interest is not available on any settlement sum prior to proceedings being issued. An award of interest is at heart to preserve the integrity of an award, payable from the time that the insurer should have paid the insured, and the prospect of proceedings having to

be commenced to ensure interest runs from the earliest date is, in my view, unthinkable in the context of thousands of claims, as in the Canterbury earthquakes.

Various approaches to the application of interest

[71] Mr Raymond acknowledges that a Court may award interest from the date the cause of action arises, which is not the date proceedings are commenced. The well-known authority of Robert Goff J in BP Exploration Co (Libya) v Hunt (No. 2) is cited.⁴³ Robert Goff J recognised that the fundamental principle is that interest is not awarded as a punishment but because the plaintiff has been deprived of the use of money due to him. Therefore, interest will usually run from the date the cause of

action accrues. However, he noted that the power to award interest is discretionary and there is no invariable rule that interest will run from the date of accrual.

[72] There are exceptions to the general principle, when it is not considered just for an insurer to have to pay interest from the date of loss. Mr Raymond’s argument is derived in part from the judgment of Robert Goff J, where a defendant insurer does not know nor reasonably could be expected to know that the plaintiff was likely to make a claim, so was in no position to tender payment, or make provision for payment of money should it be found due. In such a case, the discretion may be exercised to award interest from the date of the plaintiff’s claim, or from such other

_{date as would have allowed reasonable investigation of the claim.}

⁴² _{Wilson & Horton Limited v Attorney General [1997] 2 NZLR 513 at 530.}

⁴³ BP Exploration Co (Libya) v Hunt (No. 2) [1982] 1 All ER 925 at 974-975.

[73] This is comprehended in what Lord Wilberforce said in General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd:⁴⁴

In a commercial setting, it would be proper to take account of the manner in which and at the time at which persons acting honestly and reasonably would pay.

[74] Mr Raymond submits it is wrong to say a claimant is being kept out, or deprived, of the use of money, where he or she has not sought payment.⁴⁵ He submits that interest is not awarded under insurance contracts before a claim is made because an insured is not kept out of its money until then and there is no unjust corresponding advantage to the insurer until demand has been made. He submits that the principal approach under insurance contracts is to award interest only after a “reasonable investigation of a claim ought to have been completed”. This is problematic and will potentially result adversely to the insured, depending on the

scale of the event. In Canterbury thousands of claims were made and the “reasonable investigation” period was and is complex, with uncertainties, shortage of available expertise, and a developing understanding of seismic impact. It is also problematic because what is reasonable investigation for one claim may not be for another, and the right response, may differ in engineering, construction, and insurance terms.

[75] That interest runs from the date the insured event occurred is by no means a rule of standard application, as shown in Blackley v National Mutual Life Association of Australasia Ltd.⁴⁶ The Court held that interest should run from the point when the plaintiff was wrongly kept out of her money, and this was found to be some years after the event because it was not until then that the defendant/insurer wrongly repudiated its liability. Before then the insurer was reasonably investigating the claim.

[76] Mr Raymond, in my view, is right when he submits that two issues must not be conflated, being the date loss occurs and contractual rights accrue, and the date on

_{which an insured is entitled to payment of a sum of money. The two may go hand in}

⁴⁴ _{General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd [1975] 2 All ER 173 (HC) at 188.}

⁴⁵ _{Kuwait Airways Corporation, above n 41.}

⁴⁶ Blackley v National Mutual Life Association of Australasia Ltd [1973] 1 NZLR 668 (HC) at 672.

hand, but that is not an invariable outcome. Where an insurer is at fault, for example by wrongful declinature, the loss will usually arise from the date of the insured event. However, where indemnity is confirmed, but quantum requires investigation and assessment, that is a different matter. Further, under a reinstatement policy, nothing is payable until reinstatement is effected, but that does not postpone the

running of time against the insurer from the date of the loss.⁴⁷

[77] In New Zealand, the deferral of the insurer’s obligation to pay may be based on the need for EQC’s agreement to pay its share to the insured or the liability of EQC being established, as in Jarden v Lumley.⁴⁸ Payment by the insurer was not required until EQC agreed to make its payment. A more practical consideration is that subsequent events may impact on an insured’s indemnity entitlement, in particular, further damage within the same policy period.

Observations

[78] I draw from the brief discussion the following observations.

[79] It cannot be that an insurer is in breach of contract simply because it does not pay “on the spot”, based on an event which causes the insured loss for which indemnity is available under the policy. It also does not follow that just because insurance claims are not typically paid on the same day as the loss that interest should not be paid from the date of that loss.

[80] There are reasons why different interest outcomes might serve the justice of the case based on the contract, the parties’ conduct, in making and responding to the claim, and other factors, including reference to insurance practice, and here the sheer scale and variety of claims arising from the Canterbury earthquakes. These are evidential issues for consideration, case by case.

[81] To address interest based on the “wrongful retention of money” must recognise the distinction between a breach of contract by the insurer, and otherwise

_{simply to reflect when payment should have been made. For example, there may be}

⁴⁷ _{Callaghan v Dominion Insurance [1997] 2 Lloyds Rep 541 at 544.}

⁴⁸ Jarden v Lumley [2015] NZHC 1427.

unlawful declinature or an unsupportable response to the claim, as opposed to the often difficult exercise of determining the extent of the insurer’s liability.

[82] The question in my view should first turn to when the economic loss occurred for which indemnity cover is agreed, and when it was clear a payment would have to be made, even if quantum was unknown. The Courts have found it relevant to ask when the claimant reasonably and commercially would have expected to have been paid, as in Hellenic Industrial Development Bank SA v Atkin (The Julia).⁴⁹ In a declinature case, the Court held that the insurer knew the basis of the insured’s claim before the date when it should have settled the claim, so interest was awarded from that date, rather than the date of the occurrence which triggered the insurance obligation.⁵⁰ That element of practicality influences the exercise of discretion to allow insurers reasonable time to consider the claim. That is particularly the case where catastrophic damage is caused across hundreds or thousands of properties with which an insurer must suddenly contend. The insurer says it is entitled to assess the claim before interest starts to run and a reasonable time for that is a matter of fact, but it is not an encouraging prospect for the insured if the reasonable time is measured in months and years rather than days and weeks because of the scale of loss affecting the investigation, assessment and adjustment of claim.

[83] In the New Zealand residential setting a practical factor is that the EQC position must be brought to account where relevant to the insurer’s liability. There are many other examples in New Zealand which reflect individual claim circumstances. For example, where a vehicle was stolen on 27 September 1985, interest was awarded from 30 October 1985, the date on which payment should have

been made.⁵¹ In another case, a house was destroyed by fire and interest was

awarded three months from the date of the fire.⁵² In Roumeli Food Stores, the Court refused to award statutory interest because the insurer was justified in investigating

_{the amount claimed by the insured and the amount awarded by the Court was less}

⁴⁹ _{Hellenic Industrial Development Bank SA v Atkin (The Julia) [2002] EWHC 1405 (Comm).}

⁵⁰ Merrill Lynch International Bank Limited v Winterthur Swiss Insurance Co [2007] EWHC 893 (Comm).

⁵¹ McLeod v SIMU Mutual Association (1987) 4 ANZ Insurance Cases 60-784. That was a case where the plaintiff ’s car was subject to finance so there was an actual loss associated with the interest payment.

⁵² Kerr & Kerr v The State Insurance General Manager (1987) 4 ANZ Insurance Cases 68-781.

than claimed by the plaintiff.⁵³ In another case, the High Court declined to award interest from three months after a fire, but did so from the date of the writ.⁵⁴

[84] The insurer here seems to accept that interest should run from the point at which payment should have been made but when that arises remains moot. The English Courts distinguish the right to indemnity as conceptually distinct from the right to be paid.⁵⁵ This approach turns on the unjustifiable withholding of funds and recognises that payment on the date of damage is unrealistic and ignores commercial reality. The insured agrees that the insurer is entitled to appoint a loss adjuster or

assessor and the insured must seek the insurer’s agreement before incurring any expense, and provide information required by the insurer. This approach is also consistent with the fact that under a reinstatement policy the insurer becomes liable to pay when that work is carried out. I regard this as correct, but it is not the issue which confronts the parties in this case, or in any case where the payment in dispute is an indemnity payment based on “old for old” cover.

[85] Mr Raymond also says that interest on the sum, at or near the Sum Insured, may rapidly exceed it and this result cannot have been intended by the contracting parties. However, that is to reverse the correct approach which requires determination of the date at which payment should have been made. The Sum Insured is just that. It may not be sufficient to comprehend interest in itself but that does not bar an interest award where the circumstances justify that.

[86] The discussion above demonstrates that there is no universal or even common principle which dictates that interest is payable from the date of the event which causes loss to the insured. These concluding observations are to summarise.

(a) Every case turns on the individual insurance contract and the facts.

Insurance practice will be relevant but not decisive. This is so even though the insured’s claim, as here, has commonality with many others involving the same policy provisions. The conduct of the

_{insured and the insurer will be relevant.}

⁵³ _{Roumeli Food Stores, above n 19.}

⁵⁴ _{Keefe v State Insurance General Manager (1988) 5 ANZ Insurance Cases 60-845.}

⁵⁵ Callaghan v Dominion Insurance, at n 48.

(b) Delay on the part of the insured in advising the insurer of the claim, or in providing information so it may be assessed, may influence the date from which interest runs. That delay may be adverse to the insurer when deciding how to respond to a claim. This element of discretion seems to fit with the justice of the case but not where the insured is unable to provide information through no fault of its own.

(c) Where an insurer wrongly declines cover, it is implicit that the Court’s approach to interest will reflect that breach, which may otherwise result in damages distinct from interest. That does not fix the date at which the obligation to pay arises.

(d) Interest should not in my view be available only from the date proceedings are filed. As an encouragement to premature and imprecise litigation that would be a truly remarkable principle to apply. Interest may apply from a date prior to commencement of litigation.

(e) There is a well arguable case that a reasonable time to assess the claim must be allowed before it can be said the insured is wrongly without its money, and the insurer wrongly benefiting by the use of that money. This is problematical in cases where there has been widespread damage, as suffered in the Canterbury earthquakes, as it places an almost impossible burden on insurers to respond to each individual claim in a timely way, from the insured’s perspective.

(f) An indemnity payout based on loss or damage may be payable from the date of loss or damages as the property insured may point to that, for example destruction of an aircraft which the insured needs to replace in service. The loss or damage is immediate, and although it may take time to investigate and assess, the economic effect of loss or damage is immediate. That may influence an award of interest from that date.

(g) By contrast, where the ‘loss’ is based on the plaintiffs’ economic interest in September 2010 and the cost of restoration ‘old for old’ could only be calculated after reasonable adjustment and assessment, the immediacy of a payment under that indemnity may be less compelling than in the example immediately above.

(h) If delay in paying the indemnity sum affects the efficacy and ‘buying power’ of that payment, in an inflationary setting, that may influence the date from when interest is applicable.

(i) The touchstone is that the date of loss or damage to the insured property is the starting point under an indemnity provision, but not

_{necessarily the end point for assessing interest.}

Costs

_{[87] Costs are reserved.}

............................................
_{Nicholas Davidson J}

Solicitors:

Parry Field Lawyers, Christchurch

Young Hunter, Christchurch

Copy to counsel:

R Raymond QC, Barrister, Christchurch