By: Bethany Entwistle
In Prattley Enterprises Limited v Vero Insurance NZ Limited [2016] NZSC 158 the Supreme Court unanimously confirmed that a signed settlement agreement was binding on the parties, where the insured party asserts it was operating under a mistake over its entitlement under the policy.
On appeal from the Court of Appeal, Prattley had (again) sought to set aside the settlement agreement it signed with its insurer Vero, on the basis that both it and Vero entered the settlement under a common mistake as to the correct measure of indemnity under the policy.
Prattley owned the three storey building known as Worcester Towers in Central Christchurch, which was insured by Vero on an indemnity basis.  The total building sum insured was $1,605,000.
Worcester Towers was damaged in the 4 September and 26 December 2010 earthquakes and "red-stickered".  In the major earthquake of 22 February 2011, the building was severely damaged.  In August 2011, after limited negotiations, Prattley and Vero agreed that Vero would pay Prattley $1,050,000 plus GST in "full and final settlement" of its insurance claim. The building was "subsequently demolished in September 2011".
Prattley's appeal
Prattley's case was based on section 6 of the Contractual Mistakes Act 1977, which provides relief to any party where all the parties were influenced in their respective decisions to enter into the contract by the same mistake, and the mistake resulted in a substantially unequal exchange of values.
Prattley argued that both parties had assumed the policy was a standard indemnity policy, but on the proper interpretation of the policy, the measure of loss should have been based on the costs to repair the damage for the first two earthquakes in 2010 and the reinstatement for the third (all subject to the $1,605,000 sum insured limit).  Prattley says that as a result of the common mistake for all three events, it received sufficiently less than its entitlement under the policy.  It quantified its total recoverable loss at $3,388,000 plus GST.
High Court
In the High Court, Dunningham J concluded that, relying on the Court of Appeal's decision in QBE Insurance (International) Ltd v Wild South Holdings Ltd [2014] NZCA 447, if Prattley were to recover for the unrepaired damage (caused by the first two earthquakes) it would be indemnified in respect of economic losses which it had not incurred and thus would breach the "indemnity principle".  However, as shown in the evidence, Prattley had no intention of rebuilding.  Prattley's total entitlement could only be the market value of the building, which was in the order of $520,000, based on evidence given at trial by a valuer on behalf of Vero.  Prattley's claim to set aside the settlement, because of a qualifying mistake had to fail.  Her Honour found that Prattley had already recovered more than the market value of the insured property under the settlement agreement.
Court of Appeal
The Court of Appeal adopted a different approach to indemnity.  It concluded that the primary measure of indemnity was by way of reinstatement which, in the circumstances of the case, was best assessed by reference to the depreciated replacement value of the building.  According to the Court, depreciated replacement cost had been recognised in the negotiations as a possible measure of indemnity.  There was therefore no qualifying common mistake under the Contractual Mistakes Act 1977.
The Supreme Court
The Supreme Court was also satisfied that Prattley's arguments failed.
The settlement payment was expressed to be in full and final settlement of any claims, both existing and future, whether known or unknown in the general agreement.  Whether Prattley therefore assumed the risk that it may have been mistaken as to its entitlements was ultimately left for another day, as the Supreme Court held that there was no common mistake as alleged and the settlement terms were distinctly favourable to Prattley.
Confirming the High Court's approach to calculating indemnity value, the Supreme Court held that the purpose of indemnity payment is to make good the insured's actual economic loss.  If the property has been destroyed, but was not to be reinstated, the most obvious basis for calculating indemnity is market value. The market value will represent its value to the insured, meaning that once paid, the insured will be able to replace the insured property with a similarly performing investment.
The Supreme Court also held that Prattley's reliance on Ridgecrest NZ Ltd v IAG NZ Ltd [2014] NZSC 129 was untenable.  The Court commented that the insurance arrangements in Ridgecrest were "unusual", and that Prattley's arguments were based on a "distinctly unorthodox interpretative approach".  The Court agreed on appeal that the indemnity value of the building was its reinstatement cost.  The Court found that approach would leave the insured in a better position than if it had purchased reinstatement cover, i.e. it could recover the cost of reinstating the building without actually ever reinstating it.
The Court held that it would be a clear breach of the indemnity principle for Prattley to recover more than it had relevantly lost, that is what the building was worth when the sequence of earthquakes started.
In agreement with the High Court, Prattley's loss was held to be in the order of $520,000.  On that basis, Prattley had received more than double what it was entitled to under the policy, and it had no legitimate grounds for complaint.
The Supreme Court's decision confirms that courts in New Zealand will be reluctant to reopen a settlement agreement unless there has been deception, duress, or misleading conduct during negotiations or formation of the agreement.

This decision provides welcome certainty for all parties to insurance contracts contemplating settlement of outstanding claims.  There is also some helpful guidance over the correct interpretation approach to insurance policies.  Courts will be slow to depart from the orthodox interpretation of clauses, where they are well understood by those who work in the insurance industry, in favour of an interpretation based on a "far from obvious reading of the policy as a whole" (at [32]).
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