INSURANCE BROKERS ASSOCIATION OF NEW ZEALAND INCORPORATED V NEW ZEALAND FIRE SERVICE COMMISSION HC AK CIV 2011-404-3468

INSURANCE BROKERS ASSOCIATION OF NEW ZEALAND INCORPORATED V NEW ZEALAND FIRE SERVICE COMMISSION HC AK CIV 2011-404-3468 [17 December 2012]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2011-404-3468[2012] NZHC 3437BETWEEN INSURANCE BROKERS ASSOCIATIONOF NEW ZEALAND INCORPORATEDFirst PlaintiffAND VERO INSURANCE NEW ZEALANDLIMITEDSecond PlaintiffAND NEW ZEALAND FIRE SERVICECOMMISSIONDefendantHearing: 10 and 11 September 2012Counsel: R G Simpson and S P H Elliott for PlaintiffsC M Stevens and A L Holloway for DefendantJudgment: 17 December 2012JUDGMENT OF HEATH JThis judgment was delivered by me on 17 December 2012 at 10.30am pursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:Bell Gully, PO Box 1800, AucklandDLA Phillips Fox, PO Box 2791, WellingtonContentsIntroduction [1]The statutory scheme [6]The claims [14]Analysis(a) The legislative history [26](b) Interpreting s 48(6) and (7) [32](c) Application to split-tier policies [44](d) The Collective's policy(i) What is a "composite" policy? [53](ii) The terms of the policy [56](iii) Application to the Collective's policy [57]Result [66]Introduction[1] The New Zealand Fire Service was established by the Fire Service Act 1975 (the Act). Under the control of the New Zealand Fire Service Commission (the Commission), it is made up of both paid employees and members of volunteer fire brigades.1 The Commission is required "to take an active and co-ordinating role inthe promotion of fire safety in New Zealand". It must also be aware of the need to"reduce continually incidents of fire and the attendant risk to life and property" and "to achieve unity and completeness of fire safety law and practice".2 The Long Title to the Act reflects those aims.[2] A political decision was made to fund the Commission out of levies struck on private contracts for fire insurance. Section 47(1) of the Act provides that, in eachfinancial year, "there must be paid to the Commission such income from the proceeds of the levy3 ... as is required to meet the actual net expenditure of theCommission".[3] For a number of years, there have been festering concerns (on both sides) about the mode of calculation of the levies. Insurance Brokers Association of New Zealand Inc (IBANZ) decided to bring a declaratory judgment proceeding to1 Fire Service Act 1975, s 3(1).2 Ibid, s 20.3 Other than the portion of the proceeds required for the Rural Fire Fighting Fund.determine the correct method of calculation. That was done to minimise the risk of insurance companies unnecessarily incurring interest costs and penalties.4[4] Vero Insurance NZ Ltd (Vero) was joined as a plaintiff because one aspect ofthe claim relates to a "composite" policy of insurance. Vero is the lead insurer for that policy. It has put it in evidence to provide a basis on which this aspect of the claim can be considered. The Commission was not prepared to have that issue resolved in a vacuum.[5] Although the Commission initially submitted that this was not an appropriate case for a declaratory judgment, its narrow view of the circumstances in which such relief may be appropriate was rejected by the Supreme Court in Mandic v Cornwall Park Trust Board.5 In my view, the questions of statutory interpretation that arise in this case are suitable for declaratory relief. Resolution of the legal questions around the calculation of the levy will be of undoubted benefit to all industry participants.The statutory scheme[6] Any legislative provision must be interpreted by reference to its text, read in light of the purpose of the statute under consideration.6 The statute endeavours to establish a fair method by which private insurers are required to meet the cost of running the Fire Service. A predictable approach to the calculation of levies is required, so that insurers are not exposed to the possibility of penalties as a result of misunderstandings about the appropriate calculation methodology. The actual rate payable is reviewed at a political level and fixed by Order in Council.7[7] The Act does not contain any anti-avoidance provisions to respond to specific arrangements devised by insurers to minimise the amount of the levy payable. It is not part of this Court's function to impose an anti-avoidance mechanism through the interpretation process. If deliberate behaviour of that ilk were to emerge, Parliament4 Fire Service Act 1975, ss 53 and 53A.5 Mandic v Cornwall Park Trust Board [2011] NZSC 135, [2012] 2 NZLR 194 at paras [5]–[9],per Elias CJ, with whom, on this point (at para [82]), Blanchard, Tipping, McGrath and WilliamYoung JJ agreed.6 Interpretation Act 1999, s 5(1).7 See para [10] below and (presently) cl 2(b) of the Fire Service Levy Order 1993.has the ability to close any perceived loophole promptly, to ensure the statutory objectives are not undermined. Action of that sort would have the consequence of protecting the revenue source.[8] Section 48 of the Act provides that "every insurance company with which any property is insured against fire under any contract of fire insurance" made after 1 July 1986 must pay a levy to the Commission. The term "contract of fire insurance" is defined as "an agreement whereby any property is insured against loss or damage from fire, whether the agreement includes other risks or not".8 While the levy is payable by the insurer, a statutory right of indemnity also exists, whereby an insurer may sue an insured to recover the amount levied.9[9] Section 48(2)(b) deals with the calculation of the rate of the levy. It provides:48 Levy(2) The Governor-General may from time to time, by Order in Council, prescribe—...(b) The rate of the levy that shall be computed on all other property on—(i) The amount for which the property is insured for the period of the contract of fire insurance; and(ii) The period of the contract of fire insurance:Provided that where the period of the contract is in respect of any period other than a complete year, the levy shall be calculated as a pro rata proportion of the levy for a complete year.....[10] The rate of the levy is reviewed annually by the Minister of Internal Affairs.10The factors that he or she must take into account in reviewing the rate are set out in s 48(4):8 Fire Service Act 1975, s 2(1), definition of "contract of fire insurance". The definition expresslyexcludes contracts of marine insurance or reinsurance.9 Ibid, s 48(1) and (9). The Commission also has power to release an insurer from the obligationto pay the levy, if satisfied that the amount owed is irrecoverable by the insurer against theinsured: s 48(10).10 Fire Service Act 1975, s 48(3).48 Levy...(4) In reviewing the rate of the levy the Minister shall have regard to—(a) The total amount for which all properties in respect of which the levy is payable are insured at the latest available date, and the likelihood of any increase or decrease in that total amount:(b) The necessity of ensuring that the amounts received by the Commission in respect of the levy in that financial year are sufficient to meet—(i) The requirements of the Rural Fire Fighting Fund; and(ii) The actual net expenditure that, in the case of the Commission, is required to be met by way of the proceeds of levy in terms of section 47:(c) The desirability of ensuring, as far as is reasonably practicable, that any increases or decreases in the rate of the levy are designed to maintain the overall level of stability of the levy in the long term.....[11] The "amount for which the property is insured"11 is defined by s 48(6):48 Levy...(6) For the purposes of subsection (2)(b) of this section, the amount for which the property is insured for the contract of fire insurance shall be—(a) In the case of residential [building] as defined in section 2(1) of the Earthquake Commission Act 1993, the amount for which that [building] is insured pursuant to section 18 of that Act:(b) In the case of personal property as defined in section 2(1) of the Earthquake Commission Act 1993, the amount for which that property is insured pursuant to section 20 of that Act:(c) In the case of other property, where the contract of fire insurance provides for the settlement of any claim for damage to or destruction of the property upon any basis more favourable to the insured person than its indemnity value or where there is no sum insured in the contract, be11 Ibid, s 48(2)(b), set out at para [9] above.computed on the basis of the indemnity value of the property as stated by either of the following:(i) A declaration signed by the owner to the effect that the indemnity value declared by the owner for the purposes of the levy is a fair and reasonable indemnity value in relation to the replacement value of the property:(ii) A valuation certificate—(A) Given by a registered architect, a valuer registered under the Valuers Act 1948, an engineer with qualifications suitable for the purposes of this Act, or a quantity surveyor possessing qualifications and experience suitable for the purposes of this Act, or a plant and machinery valuer possessing qualifications and experience suitable for the purposes of this Act, being in any case a person who is competent to give such a valuation; and(B) Establishing clearly the indemnity value of the property for the purposes of the levy:(d) In any case where the indemnity value cannot be established under paragraph (c) of this subsection, be computed—(i) Where the contract specifies the sum insured, on that sum:(ii) Where the contract does not specify the sum insured, in the manner determined by the Fire Service Commission..... (emphasis added)[12] Section 48(7) places a limitation on the contracts of fire insurance to which s 48 applies:48 Levy...(7) This section shall not apply to any contract of fire insurance that is limited to an excess over the indemnity value of the property or to any portion thereof which is in excess of the indemnity value.....[13] The issues that separate the parties arise out of s 48(6)(c) and (7).12 They are:12 Set out at paras [11] and [12] above.(a) What is meant by the term "indemnity value" as it is used in s 48(6)(c)?13(b) How should the "indemnity value" be assessed, by reference to specific types of fire insurance policies?(c) What is the scope of the s 48(7) exception?The claims[14] In the first cause of action, IBANZ and Vero seek declarations to determine the correct basis on which levies should be quantified on "split-tier"14 contracts of insurance.15 They contend that the levy should only be calculated on the indemnity sum agreed, and should not include any value attributable to replacement cover.[15] In general terms,16 in split-tier contracts, the insurer and the insured agree on different layers of insurance cover to respond to a particular risk. In (what has been termed) a two-tier programme, the contract may provide material damage insurance cover for all perils (including fire) up to the indemnity value of the insured property, together with an agreed excess over the indemnity value.17 A variation on that theme could involve a fire insurance contract for each of the indemnity and excess indemnity values, coupled with agreed cover to respond to other perils. Although such contracts come within the definition of a "contract of fire insurance,"18 IBANZ and Vero submit that the only part of such contracts on which levies can be calculated is the indemnity sum specified in the fire insurance component.[16] In the second cause of action, IBANZ and Vero seek a declaration that effectively treats an insurance policy relating to eight port companies19 as a single13 While the term is not defined by the Act, see para [29] below.14 See para [15] below.15 The final form of which were fashioned during the course of the hearing: see para [23](a) below.16 The nature of the specific contracts in issue are explained in more detail at paras [44]–[47]below.17 As discussed in Farmers Mutual Insurance Co Ltd v Bay Milk Products Ltd [1989] 3 NZLR 647(CA) at 652–653 and AMP Fire and General Insurance Co (NZ) Ltd v The Earthquake and WarDamage Commission (1983) 2 ANZ Insurance Cases 78,016 (CA). See paras [27]–[29] above.18 Fire Service Act 1975, s 2(1), definition of "contract of fire insurance". See also para [8] above.19 Established under the Port Companies Act 1988.contract of insurance in respect of which only one levy is payable. They contend that the levy must be calculated by reference to the indemnity sum for which the contract provides. The parties to the sample policy are Vero (as lead insurer) and an unincorporated association known as the "New Zealand Ports Collective" (theCollective), acting on behalf of the eight companies.20 The issue is whether this policy should be treated as (what is known as) a composite policy of insurance, as opposed to eight separate contracts.21[17] This Collective's policy, as one would expect from any contract to which substantial commercial entities were party, contains advantages to all concerned.From the insurer's point of view, the amount of the levy was reduced as a result of its calculation based on a single sum insured. That approach can be distinguished from the payment of eight separate levies, based on the sums insured in respect of property owned by each of the individual port companies.22 The port companies gained the benefit of reduced insurance premiums. Each port company paid part of the fixed premium, based on an apportionment of the value of their respective insured property. By doing this, the port companies gained commercial benefits by saving a significant amount on the cost of purchasing new insurance. Those discounts were available only because of the use of a single policy.[18] There are four operative parts of the policy. Section 1 provides indemnity cover for material damage by fire. Section 2 provides for excess of indemnity cover for material damage by fire. Section 3 deals with material damage other than fire. Section 4 is business interruption insurance.[19] The sum insured, in respect of the indemnity cover for such damage by fire, is stated to be an aggregate amount of $250 million. The remaining three types of cover have a sum insured of $500 million, per event. Vero has paid a levy to theCommission calculated on the sum of $250 million. The Commission's position is20 South Port New Zealand Ltd, Eastland Port Ltd, Lyttleton Port Co Ltd, Port of Napier Ltd, Portof Nelson Ltd, Port of Marlborough New Zealand Ltd, CentrePort Ltd and Ports of AucklandLtd.21 The notion of a "composite" policy is discussed in Federation Insurance Ltd v Wasson (1987) 4ANZ Insurance Cases 74,853 (HCA) at 74,860 (Mason CJ, Wilson, Dawson and Toohey JJ) and74,863 (Gaudron J). See also paras [53]–[55] below.22 See further, paras [21] and [22] below.that a separate levy is payable in respect of the cover provided to each of the companies that comprise the Collective.[20] The policy contains indicia of both separate and composite contracts of insurance. It is clear that some members of the Collective were able to negotiate individualised terms to minimise their own costs of insurance. An example is the differing deductibles. That reflects the differing risk profiles of each of the eight companies and specific contractual terms that each has negotiated for itself.[21] The indemnity sum represents a single amount to which the policy will respond. Based on the available indemnity sum of $250 million, if (for example) Ports of Auckland made a claim for $50 million, on payment of that sum a total of $200 million would remain as available indemnity cover for all eight companies within the Collective.[22] On that basis, members of the Collective take two significant risks:(a) The first is that other members of the Collective might extinguish or deplete the sum insured by a single event.(b) The second is the possibility that additional cover may need to be purchased if that did occur.[23] IBANZ and Vero seek the following declarations:(a) On the first cause of action, relating to the split-tiered policies:1. If a contract of fire insurance provides for the settlement of any claim for damage to or the destruction of the property upon a basis no more favourable to the insured person than its indemnity value, and specifies a sum insured for all claims during the period of the contract of fire insurance that is lower than its indemnity value, the fire service levy payable under section 48(1) of the Act is to be computed on the sum insured.2. If a contract of fire insurance, or any portion thereof, provides for the settlement of any claim for damage to or the destruction of any item of insured property that is limited to that part of its value in excess of its indemnity value, thenpursuant to section 48(7) of the Act, no fire service levy is payable on that contract or portion thereof.3. For a policy that:(a) provides cover for the indemnity value of the property; and(b) contains a capped sum insured,The maximum levy is that computed on the sum insured. However, if the sum insured exceeds the indemnity value of the property, and the insured provides compliant declarations or valuations under s 48(6)(c), the levy is payable on the indemnity value.4. To be exempt under s 48(7) it is not necessary that the insured hold a policy that insures all or any part of the indemnity value of the property. It is sufficient if the excess of indemnity policy only insures the difference between the'as new" replacement value and the indemnity value of the property.(b) On the second cause of action: the "composite" policy:A declaration that only one fire service levy is payable in respect of the New Zealand Ports Collective Policy, which levy is to be quantified on the Sum Insured in Section 1 of the New Zealand Ports Collective Policy.[24] In response, the Commission submits that the following declaration ought to be made on the first cause of action:Section 48(7) does not apply to:(i) Any contract of the fire insurance that is limited to an excess over the indemnity value of all of the property which is the subject of that contract; or(ii) Any portion of any contract of fire insurance which is in excess of the indemnity value of all of the property which is the subject of that contract; or[25] The Commission contends that no declaration should be made on the second cause of action.Analysis(a) The legislative history[26] The requirement to pay a fire levy has been part of New Zealand law since the enactment of the Earthquake and War Damage Act 1944 (the 1944 Act). Section 48 of the Act reflects the underlying purposes of the original version of s 14 of the 1944 Act. At that time, private contracts of fire insurance were coupled with compulsory public cover for earthquake and war damage. The 1944 Act applied to both residential and commercial properties.[27] Amendments made in 1951 to the 1944 Act were designed to address a change within the insurance industry.23 Around this time, insurers began to offer replacement, as well as indemnity, cover. Replacement cover is known as "excess of indemnity" insurance.24 The purpose of the amendments was explained by Richardson J, for the Court of Appeal, in Farmers Mutual Insurance Co Ltd v Bay Milk Products Ltd.25The 1944 Act was the first statutory provision with respect to the insurance of property against earthquake damage. Only those property owners with fire insurance policies are covered. A premium calculated on indemnity value is paid by the holder of a fire policy and the insurer is responsible for passing the statutory premium on to the Commission. Initially the statutory cover reflected the practice of the insurance industry to cover a property for indemnity value only. The development of replacement risk insurance led to amending legislation in 1951 allowing for the provision by private insurers of a replacement cover in excess of the Commission's statutory liability.[28] In AMP Fire and General Insurance Co (NZ) Ltd v The Earthquake and War Damage Commission,26 the Court of Appeal considered the situation in which a contract for fire insurance provided indemnity insurance (on the one hand) and replacement insurance over and above that (on the other). The Commission had23 Earthquake and War Damage Amendment Act 1951.24 It is indemnity insurance to which s 48(6)(c)of the Act refers and replacement insurance towhich s 48(7) refers: see paras [11] and [12] above. See also Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA) at 145.25 Farmers Mutual Insurance Co Ltd v Bay Milk Products Ltd [1989] 3 NZLR 647 (CA) at 652–653.26 AMP Fire and General Insurance Co (NZ) Ltd v The Earthquake and War Damage Commission(1983) 2 ANZ Insurance Cases 78,016 (CA).taken the view that an earthquake and war damage premium was "chargeable on thefull amount of the insurance (ie indemnity and excess of indemnity) under thesepolicies". Delivering the judgment of the Court of Appeal, Cooke J said:27... the basic purpose of the amendments made in 1951 was clearly to ensure that the automatic statutory cover would be limited to indemnity insurance and that premiums for it would be calculated accordingly. Provided that this purpose is achieved, it cannot matter in administering the legislation whether a policy holder who has taken out against fire both indemnity insurance and replacement insurance with an insurance company has done so under one contract or two. In most cases where there is a single composite policy there is probably only one contract, the total premium payable to the company being higher on account of the replacement cover. Nevertheless, when an indemnity sum is named and there is provision in certain circumstances for extra replacement insurance above that, there is not likely to be any difficulty in treating the provision for that extra cover as an identifiable and distinct part of the policy, although no doubt usually including many terms common to it and the indemnity part.[29] While the words "indemnity value" appear no less than six times in s 48(6)(c) and (d) of the Act, the term is not defined by statute. In AMP, in the context of considering a submission from counsel for the insurer on its meaning, Cooke J said:28... the expression means the value of the loss for which indemnity is provided by the contract. ... It produces a workable result in accord with the purposes of the legislation and the general law of insurance.That result is that in the case of a fire insurance policy giving indemnity up to a named sum, that sum will be the upper limit of the indemnity value and will correspondingly be the amount up to which the property will be automatically insured against earthquake and war damage under sect 14(1). The earthquake and war damage premium will accordingly fall to be computed on that amount at the rate prescribed by regulations made under sec 26(2)(e); ... Any contract or part of a contract limited to an excess over that amount will be altogether outside the scope of sec 14, by virtue of sec 14(2B). ...[30] The Court of Appeal also considered a submission by counsel for that Commission to the effect that cases could arise in which a property was under-insured. Counsel was postulating a situation in which the indemnity "sum" was expressed at a level that was less than the indemnity "value", but where separate27 Ibid, at 78,020.28 Ibid, at 78,022.replacement policies covered the difference between the "indemnity sum" and "replacement cost". Cooke J said:29The reasons pointing to this interpretation are further strengthened by the following considerations. If the interpretation suggested and feared by counsel for the Commission were correct, there could be cases where property is under-insured in an indemnity policy – that is to say, in hissuggested terminology, the indemnity "sum" would be less than the indemnity "value" – but where separate replacement policies cover the difference between the indemnity "sum" and replacement cost. On the same interpretation the replacement policies would not be limited to an excess over the indemnity value so they would not be excluded from section, by s 14(2B). It seems unlikely that Parliament would have intended this complication. It also seems unlikely that there would at all commonly be issued a separate replacement policy leaving the insured to bear the difference between the limit in his indemnity policy and the actual value of the property destroyed or damaged. The kind of contract which Parliament meant to take altogether out of the scope of the section, by s 14(2B), is much more likely to have been simply a contract purporting to give cover in excess of the amount of indemnity insurance.[31] When the Act came into force on 1 April 1976, it de-coupled the levy regime from the 1944 Act regime.30 Amendments made in 1982, 1983, 1986 and 1993 left s 48 in its present form. The 1993 amendments were made to reflect the repeal of the 1944 Act and its replacement by the Earthquake Commission Act 1993, a statute that limited public natural disaster cover to residential properties.(b) Interpreting s 48(6) and (7)[32] Section 48(1) requires every insurance company with which any property is insured against fire to pay a levy to the Commission. That requirement only appliesto insurance effected under "any contract of fire insurance" and is subject to expressprovisions to the contrary in the Act.[33] The term "contract of fire insurance" is defined by s 2(1) of the Act to mean"an agreement whereby any property is insured against loss or damage from fire,whether the agreement includes other risks or not; but does not include any contractof marine insurance or any contract of reinsurance".29 Ibid, at 78,022. Section 14(2B) was the equivalent of what is now s 48(7). It stated: "Thissection shall not apply with respect to any contract of insurance that is limited to an excess overthe indemnity value of the property".30 See para [26] above.[34] The method by which the levy is calculated is set out in s 48(2).31 Leaving to one side the provision dealing with rates fixed in respect of motor vehicles insured under contracts of fire insurance32 (with which this case is not concerned), the sub- section requires the rate to be computed on all other property by reference to the"amount for which the property is insured for the period of the contract of fire insurance" and the "period of" that contract.33[35] The "amount for which the property is insured", for the purposes ofs 48(2)(b)(i), is defined in s 48(6). In this case, s 48(6)(c) applies.34 The startingpoint is the "indemnity value", to be calculated by reference to the methodologies setout in s 48(6)(c)(i) and (ii) or, if incapable of ascertainment under those provisions, on the amount specified as the "sum insured" in the contract.35 If the contract doesnot specify a "sum insured", the "indemnity value" is to be fixed in a mannerdetermined by the Commission.36[36] Section 48(7) is directed to a situation in which a contract of fire insurance islimited to "an excess over the indemnity value of the property" or to any portion that is "in excess of the indemnity value".37[37] In summary, the position appears to be:(a) The "indemnity value" relates to the property insured against fire damage. The formulae contained in s 48(6)(c) and (d)38 apply only if the policy were to provide for a settlement on terms more favourable to the insured than the indemnity value of the property.3931 Set out at para [9] above.32 Fire Service Act 1975, s 48(2)(a).33 Ibid, s 48(2)(b). Where the contract is for a term of less than one year the levy is calculated on apro rata basis: see the proviso to s 48(2)(b).34 Set out at para [11] above.35 Fire Service Act 1975, s 48(6)(d)(i).36 Ibid, s 48(6)(d)(ii).37 See above, at para [12].38 Section 48(6) is set out at para [11] above.39 This is consistent with the declarations proposed by IBANZ and Vero: see para [23] above, at (a)1.(b) The term "indemnity value" means the value of the loss for which indemnity is provided by the contract. Ordinarily, that will be the stated sum insured. The amount of the indemnity sum set out in the contract will be regarded as the upper limit of the "indemnity value".40(c) The insured has cover for the maximum sum insured and any replacement value identified in the policy. While, conceptually, the replacement value can be viewed as part of the risk of loss for which the insured has taken cover, s 48(7) operates to exclude that amountfrom the "indemnity value" to which s 48(6) refers. The additional replacement insurance falls within s 48(7) because it provides cover inrespect of "an excess over the indemnity value of the property".41[38] I was referred to a number of authorities in which the levy calculation methodology was considered. In chronological sequence, they are Earthquake and War Damage Commission v Waitaki International Ltd,42 New Zealand Fire Service Commission v Terrace Insurances Ltd43 and Earthquake Commission v Cigna Insurance New Zealand Ltd.44 I now consider whether there is anything in those cases that suggests any different approach to the interpretation question.[39] In Waitaki, the Privy Council considered the method of computation of premiums payable by an insured to the Commission in respect of insurance against earthquake and war damage. The question turned on the interpretation to be given to s 14(2A) of the 1944 Act. It stated:4540 AMP Fire and General Insurance Co (NZ) Ltd v The Earthquake and War Damage Commission(1983) 2 ANZ Insurance Cases 78,016 (CA) at 78,022. The relevant passage from the judgmentis set out at para [29] above.41 Fire Service Act 1975, s 48(7). See also AMP Fire and General Insurance Co (NZ) Ltd v TheEarthquake and War Damage Commission (1983) 2 ANZ Insurance Cases 78,016 (CA) at78,020 and Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA) at 145.42 Earthquake and War Damage Commission v Waitaki International Ltd [1992] 1 NZLR 513 (PC).43 New Zealand Fire Service Commission v Terrace Insurances Ltd HC Auckland CL 43/94, 25February 1997 (Tompkins J).44 Earthquake Commission v Cigna Insurance New Zealand Ltd HC Auckland CP460/94, 15October 1998 (Giles J).45 Section 48(7) of the Act replicates s 14B of the 1944 Act.14. Property insured against fire deemed to be insured against earthquake and war damage...(2A) Where the contract of fire insurance provides for settlement of any claim for damage to or destruction of the property upon a basis more favourable to the insured person than its indemnity value, —(a) The property shall be deemed to be insured under this section to the amount of the indemnity value only:(b) The earthquake and war damage premium in respect of each period of the insurance shall be computed on the amount of the indemnity value of the property as approved by the Commission after being certified at the commencement of that period by a valuer approved by the Commission . . .Provided that if no such certificate is approved by the Commission in respect of any period the premium shall be computed on the amount to which the property is insured under the contract.. . .[40] Delivering the advice of the Privy Council, Lord Oliver of Aylmerton said:46. . . What the proviso to s 14(2A)(b) directs attention to is "the amount to which the property is insured under the contract" (emphasis added). "The contract" in this case is one which provides for the replacement on destruction of the whole of Waitaki's property even on the hypothesis for which Waitaki argue. There is never a point of time during the period of the contract at which the whole of Waitaki's property is not covered against loss to its replacement value, subject only to the limitation on each individual loss. As a claim is made, so, under the contract, the insurer becomes obliged to keep the property covered up to the prescribed limit and to provide the full replacement value except only that, if the damage claimed is attributable to one event only, it is entitled to avail itself of the cut-off point in relation to that claim. Each one of the nine plants remains covered under the contract even though, on the making of a claim, a further premium becomes exigible. The obligation to cover and the obligation to pay a further premium, unless Waitaki elects not to, both arise under the single contract and it is, in their Lordships' view, impermissible to regard cl 10 as giving rise to a chain of contingent new contracts. The contract which "provides for settlement of any claim for damage' as prescribed by s 14(2A) is the contract in which cl 10 is contained and it is to the amount of the insurance cover in that contract that reference has to be made in the calculation of the statutory premium under the Act. ...[41] In that passage, Lord Oliver was at pains to focus on the specific terms ofWaitaki's policy which provided for the replacement, on destruction, of the whole of46 Earthquake and War Damage Commission v Waitaki International Ltd [1992] 1 NZLR 513 (PC)at 520–521.its property. Under the terms of the specific policy, the cover (however expressed) reflected the indemnity value of the property, for the purposes of s 14(2A) of the 1944 Act.[42] In Terrace Insurances Ltd, this Court considered the calculation issue in the context of s 48 of the Act. The particular contract in issue limited liability for fire loss to $250 million and fixed a reinstatement value at $2,016,701.80, by reference to a particular invoice.47 After considering the Privy Council's advice in Waitaki, Tompkins J decided the point on a "plain reading" of the policy. He said:48On a plain reading of the policy the liability of Terrace shall not exceed $250,000,000. At any one time that is the amount for which Fletcher's property was insured. Save in respect of changes necessary because there was more than one insurer, the FCL policy current at 30 June 1991 contained the same operative clause, although of course the sum insured was $1,212,574,000. I do not consider that my conclusion that the amount for which the property was insured was $250 million is affected by the reinstatement clause. Its only effect is that the amount for which the property is insured, which in the absence of the reinstatement clause would fall below $250 million in the event of a claim, does not do so. It is maintained at that figure as a result of the amount of the insurance being automatically reinstated from the date of the loss. But at no time does the amount for which the property is insured under the contract exceed the stated sum insured.The Waitaki contract was different. What was stated there to be the sum insured was not the total sum insured under the policy. It was simply the maximum liability of the insurance company in respect of any one claim.The conclusion I have expressed accords with the statutory purpose and the scheme of the Act. The levy is to be computed on the amount for which the property is insured, not the value of the property. If an insured elects to insure for less than value, whether indemnity or reinstatement, the levy is still computed on the amount for which the property is insured, not the value.That is what FCL elected to do here. It took the deliberate decision to insure its property for less than its reinstatement - or for that matter, its indemnity - value. The Act requires it to pay a levy computed only on that lesser amount.(emphasis added)[43] In Cigna, this Court was asked to resolve a difference in view on the calculation of levies payable under a fire insurance contract. Section 48 of the Act was the controlling legislation. The Judge considered both Waitaki and Terrace47 New Zealand Fire Service Commission v Terrace Insurances Ltd HC Auckland CL 43/94, 25February 1997 at 19.48 Ibid, 24–25.Insurances in reaching his decision. Dealing with the distinctions drawn between the indemnity value and replacement value of property, he approved the approach taken in Terrace Insurances. Giles J observed:49In my opinion, the approach adopted by Tompkins J and urged by Mr Simpson [for Cigna] is correct. The Privy Council itself recognised, on several occasions in the course of its advice in Waitaki, the difference between a total sum insured but with a limit in respect of the amount payableon any one loss and a fixed contractual limit of liability. Mr Asher QC'scarefully constructed argument notwithstanding, the fact of the matter is that, under this contract of insurance, Cavalier had cover in respect of fire for all of its property only up to the aggregate sum of $50,000,000. Theinsurance contract expressly distinguishes between "replacement value/all property/all risks" and "sum insured/all property/fire risks". In contrast,Waitaki was not concerned with an aggregate limit on the sum insured. The Privy Council was focusing upon a reinstatement policy with a limit on anyone loss. But as I read their Lordships' advice, they expressly recognisedthat a policy which imposed such a limit might well need a different approach. Tompkins J confronted that in Terrace and I concur with the view that learned Judge applied.(emphasis added)(c) Application to split-tier policies[44] There are no insurance policies before the Court to which a declaration can refer. Therefore, it is necessary to explain in more detail the type of contracts of insurance on which IBANZ and Vero seek their declarations.[45] A two-tier programme is described as one which provides material damage insurance cover for all perils for the indemnity value of the insured property, subject to a limit on the sum insured for all claims in the aggregate, during the period of insurance. It also provides material damage insurance cover for those perils for the excess over the indemnity value, with or without a limit on the sum insured, for all claims in the aggregate during the period of insurance.[46] A three-tier programme is one that contains a contract of fire insurance that provides material damage insurance cover for the peril of fire for the indemnity value of the insured property, subject to a limit on the sum insured for all claims in49 Earthquake Commission v Cigna Insurance New Zealand Ltd HC Auckland CP460/94, 15October 1998 (Giles J) at 20–21.the aggregate during the period of insurance. It will also provide material damage insurance cover for the same peril for the excess over the indemnity value, with or without a limit for all claims in the aggregate. The third component will be a policy that deals with all perils, other than fire.[47] A "composite programme" is described as a single contract of insurance that is subdivided into a number of parts but which has a substantially similar effect to the two-tier and three-tier programmes. The difference is that it is comprised in a single contract of insurance.[48] For the last 15 years or so, when accounting to the Commission for levies on split-tier insurance contracts, insurers have quantified and paid levies on the following basis:50(a) In relation to the two-tier programme:(i) a levy quantified on the sum insured in the Indemnity policy (or the equivalent part of a Composite Programme) pursuant to subsections 48(1), (2) and (6)(d) of the act and clause 2(b) of the Fire Service Levy Order; and(ii) no levy on the Excess of Indemnity policy (or the equivalent part of a Composite Programme) in reliance on section 48(7) of the Act.(b) In relation to the Three-Tier programme:(i) a levy quantified on the sum insured in the Fire Indemnity Policy (or the equivalent part of a Composite Programme) pursuant to sections 48(1), (2) and (6)(d) of the Act and clause 2(b) of the Fire Service levy Order; and(ii) no levy on the Fire Excess of Indemnity policy (or the equivalent part of a Composite Programme) in reliance on section 48(7) of the Act; and(iii) no levy on the Non-Fire Policy (or the equivalent part of a Composite Programme) on the ground that it is not a Contract of Fire Insurance as that term is defined in section 2(1) of the Act.(c) In relation to the Composite Programme, a levy quantified on the same basis as the Two-Tier or Three-Tier Programmes, as applicable.50 The extract that follows is taken from para 11 of the plaintiffs' synopsis of submissions dated 20August 2012. The reference to the Fire Service Levy Order 1993 is to the current statutoryinstrument that fixes the levy payable. Clause 2(b) of the Order sets the rates payable for allproperty, except motor vehicles.That is, a levy quantified on the sum insured in the Indemnity or Fire Indemnity component of the policy, as applicable.[49] In contrast, the Commission's position is that only the excess of indemnitycover is exempted by s 48(7). The subtle difference between the two approaches is that while IBANZ and Vero assert that any insurance cover in excess of the indemnity value of the property is exempted under s 48(7), the Commission takes the view that only the type of excess over indemnity value cover to which the Court of Appeal has expressly referred in earlier decisions is exempted.51[50] In my view, the position for which IBANZ and Vero contend is correct. Section 48(7), is designed to exempt from the scope of the value on which the levy is calculated any amount that is in excess of the "indemnity value" to which s 48(6)(c) refers.52 In short, where an insured has more cover than the indemnity value theadditional part is "excess", for the purposes of s 48(7).[51] As Cooke J suggested in AMP, the kind of contract which Parliamentintended to take out of the scope of the levy calculation section was "much morelikely to have been simply a contract purporting to give cover in excess of theamount of indemnity insurance".53 Any type of cover, at whatever level, that is more than the stated insured sum gives "cover in excess of the amount of the indemnity insurance". In my judgment, the words contained in s 48(7) are wide enough to encompass any type of insurance cover for damage by fire that is in excess of the stated "indemnity value", as defined in AMP.54[52] On that view, I am satisfied that the declarations sought on the first cause of action should be made.51 See Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA), Farmers MutualInsurance Co Ltd v Bay Milk Products Ltd [1989] 3 NZLR 647 (CA) and AMP Fire and GeneralInsurance Co (NZ) Ltd v The Earthquake and War Damage Commission (1983) 2 ANZInsurance Cases 78,016 (CA).52 Set out at para [12] above.53 AMP Fire and General Insurance Co (NZ) Ltd v The Earthquake and War Damage Commission(1983) 2 ANZ Insurance Cases 78,016 (CA) at 78,022; set out at para [30] above.54 Ibid; see also para [29] above.(d) The Collective's policy(i) What is a "composite" policy?[53] A composite policy, by its nature, is a contract between an insurer and two or more insured by which the insurer assumes obligations to each insured. InFederation Insurance Ltd v Wasson,55 such a contract was described, in a joint judgment of Mason CJ, Wilson, Dawson and Toohey JJ as "a contract by which aninsurer undertakes separate and distinct obligations to the various insured".56 In the same case, Gaudron J said:57A transaction may involve entirely separate obligations owed to and by different persons. Such a transaction involves several different contracts, notwithstanding that transaction is embodied in one document and, in the absence of an express or implied term to the contrary, the different parties will be entitled to exercise their rights independently of each other. However, as is pointed out by Glanville Williams (at p 44), "it is . . . possiblefor some promises to be joint and other promises in the same contract to bepurely several". In such circumstances there is but one contract. In thepresent case, it is clear that the obligation by the insured to pay the specified premium was a joint obligation: the premium was specified as a total sum without specification of proportions referable to the interests of the insured parties; it was payable by all or any of the parties, in the sense that payment by one constituted performance by all. The joint obligation as to payment of the premium constituted the policy a single contract although it effectedseparate insurances, and in that sense constituted a "composite policy" or "composite contract" as explained in the judgment of Mason CJ, Wilson,Dawson and Toohey JJ.[54] A "composite" contract is different from a "joint" policy. A "joint" contractis one entered into by persons having a common interest in the insured property so that the promise to indemnify is in respect of a joint loss which both insured suffer.That contrasts with the nature of the "composite" policy in which a single document55 Federation Insurance Ltd v Wasson (1987) 4 ANZ Insurance Cases 74,853 (HCA) at 74,860.56 Their Honours stated that the concept of a "composite" insurance contract had been acceptedand applied in United States and Canada, citing Weing v Glens Falls Indemnity Co (1945) 61 NE2d 442 at 445, Morgan v Greater New York Taxpayers Mutual Insurance Association (1953) 112NE 2d 273 at 275–276 and Rankin v North Waterloo Farmers Mutual Insurance Co (1979) 25OR (2d) 102.57 Federation Insurance Ltd v Wasson (1987) 4 ANZ Insurance Cases 74,853 (HCA) at 74,862–74,863.combines the provision of insurance to a number of persons having different interests in the subject matter of the insured property.58[55] The use of composite policies has been accepted in New Zealand. The authorities suggest that, to come within that category, there is a need for one insured to have some direct or indirect interest in maintaining the value of all of the insured property. Examples are relationships in the nature of bailor and bailee, mortgagor and mortgagee, builder and owner of a property and husband and wife.59(ii) The terms of the policy[56] Before July 2008, members of the Collective purchased material damage insurance over their respective properties individually. The evidence indicates that there were five reasons behind the formation of the Collective:(a) By combining their insurance purchasing power, the Collective was able to negotiate lower premiums than would be paid by individual companies if only their own property were insured.(b) Coverage became possible for perils for which insurance had not previously been available: eg terrorism, infectious human disease and port blockages.(c) There was an ability to obtain higher limits on the extensions to the policy than could have been secured if each company had entered into its own individual insurance arrangements.(d) Some port companies were able to secure lower deductibles for the risk of earthquake damage.58 See General Accident Fire and Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2KB 388 (CA) at 404–405 (per Sir Wilfred Greene MR, delivering the principal judgment onbehalf of himself, Scott and Goddard LJJ).59 Laws NZ, Insurance at para 563. For example, see W A McLaren and Co Ltd v New ZealandInsurance Co Ltd [1930] NZLR 437 (SC) (bailor and bailee), Challenge Finance Ltd v StateInsurance General Manager [1982] 1 NZLR 762 (CA) (mortgagor and mortgagee), CommercialUnion Assurance Co of NZ Ltd v Murphy [1989] 1 NZLR 687 (CA) (builder and owner) andMaulder v National Insurance Co of NZ Ltd [1993] 2 NZLR 351 (HC) (husband and wife).(e) The Collective was able to purchase less insurance cover for the indemnity value of their insured property against the peril of fire, thereby reducing the cost of the Fire Service levies.(iii) Application to the Collective's policy[57] The Commission's argument is that the Collective's policy creates anartificial environment and, in effect, operates to avoid payment of appropriate levies. The Commission submits that the policy should be interpreted as one involving multiple separate contracts of insurance so that a levy can be made to reflect the real cost of insuring the property of the individual members of the Collective. It wassubmitted that "substance trumps form" and "just as multiple documents do notnecessarily create separate contracts, nor does one policy necessarily imply a singlecontract".[58] Since AMP,60 it has not mattered whether fire indemnity insurance has been taken out under one or two contracts. In each case it is necessary to determine the"indemnity value" for which the insured has the benefit of cover from the peril of fire.61 The Commission takes the view that no declaration can be made in respect of this cause of action because it is necessary to separate out the indemnity value of the property for each of the port companies individually, and there is no evidence of that before me.[59] I do not accept that the Collective's policy can properly be characterised asartificial in nature. In my view, it can properly be classified as a composite policy of the type discussed in Federation Insurance Ltd v Wasson.62 The policy had commercial benefits to each of the companies that went well beyond reduction of the amount payable for the fire levy.63 In addition, each of the port companies took on business risks.64 One significant risk is the possibility of terrorist sabotage, by a group attempting to undermine the operations of a number of ports through60 AMP Fire and General Insurance Co (NZ) Ltd v The Earthquake and War Damage Commission(1983) 2 ANZ Insurance Cases 78,016 (CA).61 Ibid, at 78,020; set out at para [28] above.62 See para [53] above.63 See para [56] above.64 See paras [20] and [21] above.simultaneous attacks. In that situation, the insurance cover is unlikely to be sufficient and, whether collectively or individually, each of the port companies would be required to acquire additional cover for which there would be an indemnity value on which the levy could be struck.[60] The term "composite" contract is not a term of art. While there may be fine arguments over the nature of a composite insurance contract, as opposed to a joint one, unless there is an artificiality involved or the policy is being taken out to provide insurance cover to someone who has no interest in any of the insured property, a pragmatic commercial approach is required. The sense of that approach is reflected in the English Court of Appeal's decision in General Accident, Fire and Life Assurance Corporation Ltd v Midland Bank Ltd.65[61] In that case, General Accident agreed to insure to the value of the property or the amount of the damage, in the case of destruction or damage by fire. The policy covered the interests of three different entities in the stock and plant of Plant Brothers Ltd, which was housed in a building from which its business was carried on. Scoffin and Wilmott Ltd, Plant Brothers' parent company, owned the building. Midland Bank held a floating charge over Plant Brothers' undertaking.[62] Delivering the principal judgment of the Court of Appeal, Sir Wilfrid Greene MR, after rejecting an argument that the contract was a joint policy, said:66... There is no joint risk. There is no joint interest. The measure of loss suffered by those two parties will be different, calling for a different measure of indemnity, and, accordingly, it seems to me that there is no joint element about the thing at all. Such a policy, in my judgment, may be more accurately described as a composite policy, because, for reasons of obvious convenience, it comprises in one piece of paper the interests of a number of persons whose connection with the subject-matter of the insurance makes it natural and reasonable that the whole matter should be dealt with in one policy. I make those observations, although they are not strictly necessary, having regard to the view which I have formed of the true meaning of the policy. Even if it were possible to have a joint policy in favour of those three persons—using that phrase in the sense in which counsel for the appellants used it—in my opinion, this document is not such a policy, on its true construction. The description of the insured by name, followed by the words"for their respective rights and interests," read in its natural sense, indicates65 General Accident, Fire and Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 3 AllER 252 (CA).66 Scott and Goddard LJJ agreed with the views expressed by Sir Wilfrid Greene MR.that these three persons, having interests which it is not material to investigate for the purpose of the document, are minded to combine in one policy, and each of them shall obtain cover from the underwriters in respect of his right or interest, whatever it may be, and, of course, it may vary from time to time. ....[63] His Lordship added:67The printed words "the insured" must be construed and qualified, in my opinion, by the words "for their respective rights and interests," and thoseprinted words must be given a construction which will fit in with the essential nature of the contract which is being undertaken. Accordingly, I am of opinion that the provisions as to payment must be construed as being an undertaking to pay to that one, or those two, or those three, of the named insured that indemnity to which each is entitled, having regard to the loss which he has suffered. If the loss is a loss which only one has suffered, this undertaking to pay, in my judgment, must be construed as an undertaking to pay him, and to pay him the sum which will indemnify him against his loss. Thus, in the case of Scoffin and Willmott Ltd as freeholders, and Plant Brothers Ltd as tenants at will, each of them is entitled to claim from the company, and to receive such a sum as, having regard to its individual interest in the premises, will indemnify it for the loss which it has sustained.[64] While each of the port companies do not have an interest in the same property, they do each have common interests in lowering the cost of their individual insurance and extending the scope of it. Those are legitimate commercial aims. Each of the port companies takes the risk that a claim by another might cause additional loss to it, as a result of a depletion of the available insurance moneys, but that is a commercial risk each has been prepared to take to obtain advantages that it could not otherwise secure.[65] In my view, the composite policy must be interpreted as a single policy of insurance. The aggregate sum for indemnity cover against the peril of fire disclosedin the policy ($250 million) is to be regarded as the "indemnity value" for thepurposes of s 48(6)(c). The same reasons that I have given for holding that any insurance cover in excess of the indemnity sum comes within s 48(7) in respect of the split-tier contracts, apply equally to the composite policy.68 I am prepared to make the declaration sought by IBANZ and Vero.67 Ibid, at 260. See also, Holmes v GRE Insurance Ltd (1989) 5 ANZ Insurance Cases 60,894 (SC,Tasmania) at 60,894.68 See paras [50]–[52] above.Result[66] For those reasons, I make the declarations set out at para [23](a) and (b) above.[67] While I did not hear specifically from counsel on questions of costs, my provisional view is that the proceeding should be treated as one in the nature of a test case and that no order as to costs should be made.[68] Unless any of the parties files a memorandum on or before 25 January 2013 indicating that costs are sought, judgment may be sealed on the basis that costs lie where they fall.[69] If costs are sought, the Registrar shall set the proceeding down for a telephone conference before me at 9am on the first available date after 18 February 2013 so that I can fix a timetable for the exchange of memoranda on costs or allocate a short oral hearing for that purpose.[70] I thank counsel for their considerable assistance.______________________________P R Heath JDelivered at 10.30am on 17 December 2012