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Ridgecrest owned a commercial building in Christchurch that was insured by IAG NZ. The policy provided repair / replacement cover under the following alternative provisions:
C1: 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.
C2: Where Replacement cover has been agreed by us and specified in the Schedule and following loss or damage you restore or replace the lost or damaged Business Assets this insurance will pay
- For Buildings
- 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 we shall not pay more than the cost of replacement at the Site stated in the Schedule.
The building suffered damage in each of four Canterbury earthquakes during the period of insurance and was ultimately demolished. It was repairable after the first two earthquakes on 4 September and 26 December 2010, and remedial works had begun when the third struck on 22 February 2011. The parties disagreed as to whether the building became irreparable at that point but agreed that it was beyond repair after the fourth earthquake on 11 June 2011.
Ridgecrest made separate claims after each earthquake. The issue was whether it was entitled to be paid the aggregate value of the damage caused by each earthquake (or ‘happening’). IAG NZ took the position that, once the building was irreparable, it was only required to pay the cost of replacement up to the limit of indemnity. The policy contemplated multiple claims during the period of insurance but did not specifically address what would happen when this occurred.
The High Court found in favour of IAG NZ on the basis that the policy had been “frustrated” by the destruction of the building, which rendered IAG NZ’s obligation to effect repairs impossible. The High Court implied a term that discharged IAG NZ from paying for losses arising from the earlier earthquakes. In its judgment, the High Court declined to apply the doctrine of merger – ie where there is unrepaired damage followed by total loss, the insured can only recover the total loss. The doctrine exists in marine insurance but the High Court was not convinced that it had any wider application either in this specific case or as a matter of general law.
On appeal, the Court of Appeal reached the same conclusion but by an entirely different route. It drew a distinction between C1 and C2. If the claims had been made under C1, Ridgecrest might have been entitled to payment for the estimated repair costs up to the limit of indemnity after each earthquake. Whereas, under C2, IAG NZ’s liability was limited to the cost of the uncompleted repairs actually carried out and the cost of replacing the building up to the limit of indemnity.
In the absence of a clear statement, the Court of Appeal determined that the claims were made under C2. The judgment goes to some lengths to justify this conclusion and to “shut the door” on Ridgecrest subsequently changing the basis of its claims to bring them under C1. The Court observed that the statement of claim did not reference C1 nor allege that the claims were made under C1. Further, it would have defied commercial common sense for Ridgecrest to make a claim for repairs on an old-for-old basis under C1 when new-for-old cover was available under C2. The Court also noted that after the first two earthquakes, IAG NZ assumed responsibility for arranging repairs and met the cost of these. While this was not strictly in accordance with C2, it was indicative of a claim under C2. Had the claims been made under C1, the Court would have expected Ridgecrest to demand payment of its estimated repair costs, rather than acquiescing to IAG NZ’s repair arrangements.
The Court of Appeal’s reasoning in relation to C2 is somewhat forced. For example, the pleadings appear to have been silent as to which clause applied. What is essentially a pleading point could be “corrected” if Ridgecrest was permitted to amend its statement of claim. The basis of the Court’s judgment means that the decision has limited value as a precedent: were an insured to claim under C1, the outcome may well be different.
The Court of Appeal’s conclusion meant it did not need to consider the doctrines of merger or frustration. However, it indicated in obiter that it would not have upheld the High Court’s conclusion on frustration, which was based on an implied term, as it was contrary to the express terms of the policy and was not necessary to give the policy business efficacy.
Ridgecrest has been granted leave for a further appeal to the Supreme Court. This will allow the parties to advance all previous arguments, including those on the doctrines of merger and frustration. We will provide a further update once that decision is released.
