Wynn Williams - Article | Another Look at Destruction, Automatic Reinstatement and Deductibles | Emily Walton

Hot on the tail of the recent decision in Wild South Holdings¹ the High Court has had another post-quake opportunity to analyse a commercial material damage insurance policy, this time one of Vero's. In Marriott v Vero² Justice Dobson was asked to answer a number of questions:

When is an insured building "destroyed" for the purposes of the policy?
Does the sum insured reinstate after each earthquake event?
Are the policyholders entitled to repair costs up to the sum insured for the damage caused by each earthquake event?
Is the excess/deductible deducted from the amount of the loss or from the payment due under the policy?

The Marriotts' two small commercial buildings, which shared a common wall, were damaged in the 4 September 2010 and 22 February 2011 earthquakes. Vero says the buildings were destroyed for the purposes of the policy in the February 2011 earthquake. The Marriotts maintain that the building suffered further damage in the 13 June 2011 earthquake (post-renewal).

When is an insured building destroyed for the purposes of the policy?

The Marriotts argued that the buildings were not destroyed until the extent of the damage was such that they were not able to be repaired. They said this depends on the physical state of the buildings and the practicalities of repair. Vero argued that when a building becomes uneconomic to repair, it is deemed "destroyed". The relevance of the question is that, if Vero is right and, after the first event the building is uneconomic to repair, the subject matter of the policy is destroyed so there is nothing left to insure for the second event. There can only be one claim. Justice Dobson accepted that the assessment is a physical one and found that an insured building is destroyed for the purposes of this policy when the extent of damage makes it physically impractical to repair the building to its pre-damage condition.

Does the sum insured reinstate after each earthquake event?

Similar to most Reinstatement of Sum Insured clauses, the Marriotts' policy provided that, in the absence of written notice by Vero or the insured to the contrary, the amount of insurance cancelled by a loss is to be fully reinstated as from the date of the occurrence. Justice Dobson found that the event of loss operates as a trigger for a claim, leading to a reduction in the insurance available to the insured³. The sum insured reinstates after every event and does not need to await finite qualification of the extent of loss.⁴ The practical constraint on giving notice is that it must be given prospectively⁵ and the notice must occur before the insured's reasonable reliance on reinstatement of the sum insured estops the insurer from denying it had occurred⁶. So if, Vero had not notified the Marriotts the sum insured had not reinstated before the second event, it is taken to have reinstated.

Justice Dobson did note that, while the notice must be given prospectively, there is no period of warning before reinstatement does not apply. This may catch some insureds by surprise, as that notice will take effect immediately. The insured then bears the risk of having reduced cover from the date of that notice until it can find alternate cover. This may put them in breach of their lease or mortgage conditions. His Honour suggests that a prudent insured would move promptly to arrange alternative insurance from that point on. One wonders whether such cover would ever be available however.

Are the Marriotts entitled to repair costs up to the sum insured for the damage caused by each earthquake event?

Vero's primary obligation is to indemnify after each occurrence. It is not required to meet repair costs until those costs are incurred. Therefore, the Marriotts are entitled to be indemnified (in that case quantified on the basis of depreciated replacement cost) for the earlier event and the reinstatement up to the policy limit for the February event.

Is the excess as deductible deducted from the amount of the loss or from the payment due under the policy?

Justice Dobson confirmed Justice Fogarty's finding in Wild South, that the excess is to be deducted from the payment otherwise due under the policy, not from the gross value of the loss, which may exceed the sum insured and mean no deductible is payable.

It will be interesting to see whether an appeal will be lodged.

¹Wild South Holdings Ltd and Maxims Fashions Ltd v QBE Insurance (International) Ltd [2013] NZHC 2781 (Wild South).
² Marriott v Vero Insurance New Zealand Limited [2013] NZHC 3120 [26 November 2013].
³ Marriott v Vero at [57].

⁴Marriott v Vero at [91].

⁵ Marriott v Vero at [58].
⁶ At [58].

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