The Court of Appeal has held that Earthquake Commission payments were to be deducted from the sum insured payable for damage to apartment buildings under an insurance policy
The Salisbury Park Apartments complex was badly damaged in the 22 February 2011 Canterbury earthquake, with one of the buildings being demolished and the other regarded by the Body Corporate as a constructive total loss. Reinstatement would cost approximately $25 million. Zurich Australian Insurance Ltd (Zurich) had insured the complex under a material damage policy which capped replacement cover at a sum insured of $12.95 million. That sum was an estimate, given by a valuer commissioned by the Body Corporate’s agent, of the complex’s full replacement. As dwellings, the apartments were also covered under the Earthquake Commission Act 1993. The Earthquake Commission paid the Body Corporate $6.8 million, representing the maximum statutory cover of $100,000 for each of the 68 apartments.
Zurich argued that the Earthquake Commission payments must be deducted from the sum insured, meaning that the Body Corporate would receive a total of $12.95 million, with Zurich paying $6.1 million. Firm PI 1 Ltd, the broker which arranged the policy, said that Zurich must pay the sum insured in addition to the payment received from the commission, meaning that the Body Corporate would receive a total of $19.75 million from all sources.
The dispute turned on clause MD15 in the Zurich policy, which provided that when statutory cover applied “the Insurer’s liability will be limited to the amount of loss in excess of” the statutory cover.
The Body Corporate sued Zurich and the broker. A separate question was stated, asking whether the sum insured for buildings was inclusive or exclusive of all amounts payable to the plaintiff from the Earthquake Commission.
The High Court answered the question in the Body Corporate’s favour, holding that the sum insured excluded all sums payable by the Earthquake Commission to the Body Corporate.
Zurich appealed to the Court of Appeal. Zurich argued that clause MD15 plainly modified the insurer’s liability of $12.95 million under the policy, setting a limit within a limit. The word “loss” in this setting accordingly meant “insured loss”. The Body Corporate submitted that the High Court’s reasoning had been correct, with the Court following the leading authority of Vector Gas Ltd v Bay of Plenty Energy Ltd  NZSC 5. It further argued that no market practice informed construction of clause MD15 and there was no convention about what the clause meant.
The Court of Appeal’s reasons were given by Justice Miller on behalf of himself and Justices Ellen France and White. His Honour said at  that the Court of Appeal saw no error of principle in the High Court’s approach to construction.
The High Court had correctly recognised that context, background and circumstances were always relevant when interpreting a contract and it had paid close attention to those matters.
However, Justice Miller said that Zurich’s real complaint was that the High Court had erred on the merits. His Honour said at  that it was not in dispute that clause MD15 was an “other insurance” clause which triggered section 30(2) of the Earthquake Commission Act. The significance of that was that the statutory cover responded first and Zurich’s cover responded to loss in excess of the statutory cover.
Section 30 deals with the relationship between the statutory cover for natural disaster damage and a private insurance policy covering the same subject matter and risk.
Section 30(1) provides that, where both covers respond to natural disaster damage, 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(2) states that subsection (1) shall not apply 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.”
Justice Miller at  noted that section 30(2) spoke of “cover” rather than “loss” and said nothing about limits to the cover whose priority it ordered. His Honour at  noted that clause MD15 provided that Zurich’s “liability would be limited” to the “amount of loss” in excess of statutory cover.
“This language indicates that the clause set a limit which differed from the sum insured that would otherwise cap Zurich’s liability. If so, that limit can only have been the difference between the sum insured and the statutory cover.”
The Court of Appeal differed from the High Court in the conclusion it drew from the fact that clause MD15 did not use the defined term “Loss or Damage,” meaning “physical loss or damage” to the insured property.
“We agree that the drafter’s decision not to use the defined term matters; it suggests that the drafter meant “loss” to have a different meaning. But we do not think that the drafter can have intended the ordinary or dictionary meaning, for that adds nothing of relevance: the policy defines loss as loss, qualifying it only by insisting that the loss be physical in nature. Further, as the High Court acknowledged, the drafter cannot have intended that Zurich’s liability would be quantified using the Body Corporate’s actual loss, which is $25 [million]” (at ).
Justice Miller said that the Court of Appeal accordingly disagreed with the High Court’s view that clause MD15 plainly did no more than postpone Zurich’s cover until the statutory cover had been exhausted.
“We do not find that a plain and unambiguous meaning of the sort from which a court will only depart on strong evidence. In particular, we do not agree that the words “liability will be limited to” served only to emphasise that this was top-up cover” (at ).
His Honour said at  that the commercial context established that the parties intended to limit Zurich’s liability for natural disaster cover to a net sum comprising the difference between the statutory cover and the Body Corporate’s estimate of full replacement value. Clause MD15 limited Zurich’s liability for natural disaster damage from a single event to the difference between the maximum statutory cover of $6.8 million and the sum insured of $12.95 million.
The appeal was allowed.
Article by: Catriona MacLennon