The ongoing debate concerning automatic reinstatement memoranda in material damage covers

Crystal Imports v Certain Underwriters at Lloyds & Sirius International Insurance (Ak Hc, Cooper J, 19/12/13)

A further decision was released by the Auckland High Court late last year (Cooper J) regarding the effect of automatic reinstatement of the sum insured clauses in material damage (MD) policy wordings in the context of Christchurch earthquake claims. The decision addressed similar issues to those previously considered by the High Court in Wild South Holdings v QBE Insurance and the Court of Appeal in Ridgecrest v IAG.

Cooper J's decision in Crystal Imports v Lloyds & Sirius International Group Ltd was a determination of two preliminary points prior to trial. These were firstly, the defendants' (underwriters') liability under MD covers for the separate damage caused to the plaintiff's (Crystal Imports) five commercial properties caused by the September 2010 and February 2011 Christchurch earthquakes. This involved substantive consideration by Cooper J of the automatic reinstatement memoranda in the MD wording. The second point concerned the application of the average clause in the MD wording as far as the damage caused by the February earthquake to one of Crystal Imports' properties in New Brighton. 
    
Crystal Imports owned five Christchurch properties that were damaged initially in the September 2010 earthquake, and then experienced more damage in the February 2011 earthquake. Three properties were subsequently demolished as a consequence of earthquake damage. Crystal argued that the September 2010 and February 2011 earthquakes gave rise to two separate claims in respect to of each insured property. Further, that the effect of the reinstatement of the sum insured clause meant that separate sums were available for each event that caused earthquake damage.

The underwriters' position was that the full sum insured was recoverable with respect to the three buildings demolished as a result of the February earthquake. But there was no liability with respect to the unspent cost of repairing the September 2010 earthquake damage. Further, that the proper construction of the automatic reinstatement clause required both a covered loss and secondly, that there must not be notice to the effect that there should not be reinstatement. The underwriters also argued that the doctrine of merger was applicable.

Cooper J found that the effect of the automatic reinstatement of the sum insured clause was to reinstate the sum insured in respect of the amounts paid. Cooper J did not agree with the reservations expressed by the Court of Appeal in Ridgecrest with respect to the application of the doctrine of merger outside the field of marine insurance. The Court found that the underwriters' liability to indemnify Crystal for the separate damage caused by the September earthquake was limited to sums paid at the time of the February earthquake. Thereafter, liability was limited to the maximum amount set out as the sum insured for each building (the full sum insured without deduction for the September payments).

On the second question, if the average clause limited the underwriters' obligation to pay the full sum insured for damage caused by the February earthquake to Crystal Import's retain property in New Brighton, Cooper J held that the value of the insured property for the purposes of the average clause will reflect the basis of recovery elected by the plaintiff in respect of covered damage to that property (if Crystal elects not to reinstate the property then the answer would be no). 

The postcript is that the debate about the application of reinstatement memoranda remains ongoing. We understand that this issue is to be re-considered by the Court of Appeal in a combined appeal concerning Crystal Imports (along with Wild South and Marriott) scheduled for hearing later this year. Further, it is reasonably likely that at some point the Supreme Court will also be asked to consider the effect of reinstatement memoranda in MD policies where multiple claim events have occurred. So, watch this space!