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An insurer's obligation to pay indemnity value does not depend on an insured's election after an insured loss, the High Court has recently and unsurprisingly confirmed.
In TJK (NZ) Limited v Mitsui Sumitomo Insurance Company Limited1
the insured building suffered earthquake damage on 4 September 2010, and further earthquake damage on 22 February 2011. In between, repairs to the value of $2.4 million had been partially completed. The material damage policy renewed in October 2010, between the two main loss events, with an increased reinstatement sum insured.
Both parties agreed that the policy indemnity, assessed at lost market value, was less than the cost of repairs to the building, and therefore represented the minimum the insurer would be required to pay. TJK argued that it was entitled to be paid the indemnity value on proof of loss. Mitsui argued it was only liable to pay the indemnity amount if TJK elected not to reinstate the building. Actual repairs were no longer possible, as CERA had determined the building was dangerous and commenced demolition under s38(4) of the CER Act.
The policy provided that the insured would be "indemnified by payment or, at our
[the insurer's] option, by repair or by replacement of the lost or damaged property
". Cover for earthquake damage was excluded but written back under an extension, which provided that the insurer would pay the cost of reinstatement for property damaged by an earthquake, unless the insured elected not to reinstate, in which case the insurer would only pay the indemnity value.
The extension also contained a special provision which listed the circumstances in which the insurer would not pay more than
the indemnity value. The Court held that this meant the insurer's obligation to pay the reinstatement cost would arise only when the insured actually reinstated. However, that did not affect the insurer's obligation to pay the indemnity value.
The Court found that there was an assumption in the earthquake extension that reinstatement value would never be less than indemnity value. Therefore, either by applying the primary general indemnity provision, or reading an implicit obligation into the earthquake extension, the policy provided for payment of the indemnity value and a top-up for the cost of reinstatement, if effected.
The Court neatly summarised its decision:
"Earthquakes damaged Clarendon Tower so as to cause substantial loss for which Mitsui had promised to indemnify TJK. On those agreed facts, and subject to proof of loss, Mitsui must pay TJK not less than the indemnity value of the building.2"
The remaining issues between the parties are set for trial in August 2013. That hearing should provide further guidance on whether an insured is entitled to recover the cost of repairing damage suffered during the first insurance period on top of 'total loss' damage to the same insured property after a renewal, when the initial repairs cannot be carried out.
The High Court recently found3
that where a policy is drafted in terms of a limit of liability per occurrence
or event, that limit of liability is available for every relevant loss during the insurance period.
We await with interest further consideration of the doctrine of merger, which Dobson J did not apply to Ridgecrest's claims.
1  NZHC 298
2 At paragraph 
3 Ridgecrest NZ Limited v IAG New Zealand Limited  NZHC 2954 (currently on appeal)