ISLINGTON PARK LTD v ACE INSURANCE LTD & ORS CA828/2013 [2014] NZCA 446

ISLINGTON PARK LTD v ACE INSURANCE LTD & ORS CA828/2013 [2014] NZCA 446 [10 September 2014]IN THE COURT OF APPEAL OF NEW ZEALANDCA828/2013[2014] NZCA 446BETWEEN ISLINGTON PARK LIMITEDAppellantAND ACE INSURANCE LIMITEDFirst RespondentIAG NEW ZEALAND LIMITEDSecond RespondentQBE INSURANCE (INTERNATIONAL)LIMITEDThird RespondentTHE NEW INDIA ASSURANCE COLIMITEDFourth RespondentHearing: 3 September 2014Court: White, French and Miller JJCounsel: N R Campbell QC and C R Goode for AppellantGSA Macdonald and M K Henaghan for RespondentsJudgment: 10 September 2014 at 12.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay one set of costs on a band A basis as for a standard appeal together with usual disbursements, with provision for two counsel.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)Introduction[1] Islington Park is a complex of 31 industrial buildings in Christchurch. It was once used as a meat works, and part of it still is. The owner, Islington Park Ltd, leases other buildings in the complex to a variety of commercial tenants.[2] The defendant insurers together insured the complex against earthquake and other risks. A policy was issued on 30 November 2009 and renewed, on identical terms, a year later.[3] The policy provides indemnity cover on an "old for old" basis, meaning thatif repairs were required the insured would pay for any betterment and bear any additional compliance costs incurred to meet current building regulations, as opposed to those in force when the buildings were erected.[4] The policy also provides in a basis of settlement schedule for an agreed value of $9M on a total loss. The schedule specifies that a loss becomes a deemed totalloss where the "estimated cost of repair" exceeds 80 per cent of the agreed value; that is, $7.2M.[5] Seven of the buildings were damaged in the September 2010 and February 2011 earthquakes. Islington Park says the complex is a deemed total loss because repairs will cost more than $7.2M. The insurers say it is not, because repairs will cost substantially less.1[6] The dispute centres narrowly upon the standard of repairs applicable to a deemed total loss assessment. The insured says that the standard is that of a"compliant" repair, being a repair that meets current building regulations. If so, it appears likely that the complex is a deemed total loss, although the parties have1 We were given to understand that no issue arises regarding successive losses and policy limits.reserved their positions about that. The insured estimates the cost of repairs at $11.9M. The insurers say that the standard is that required to restore the buildings to their condition before the earthquakes; that is, old for old. If so, it appears likely that the complex is not a deemed total loss, although positions are reserved about that too. The insurers estimate the cost of repairs at $1.1M.[7] Questions were posed for the opinion of the High Court. Fogarty J found for the insurers.2 Islington Park appeals.Context[8] The first respondent, ACE Insurance Ltd, has been Islington Park's lead insurer for some time. Before 2009 it insured the complex for a sum insured of $9Mon a "functional replacement value" basis.[9] In November 2009 the policy was reviewed. An insurance valuation was obtained at the insistence of ACE. It produced an indemnity valuation of $22,477,000, a functional replacement valuation of $42,800,000 (using current building materials and techniques), and a demolition estimate of $6,759,000.[10] Islington Park elected to retain the sum insured of $9M in the policy issued on 30 November 2009, but that sum plainly bore no relationship to functional replacement value. So the basis of valuation was changed. The parties adopted $9M as an agreed value on total loss to avoid the application of average.[11] We note that these arrangements were made by Islington Park's broker, Aon New Zealand Ltd, and ACE, and an issue arises about the admissibility of some of the emails between them. We need not address that issue. The emails add nothing to the agreed facts. They show only that the parties agreed on two measures of indemnity for partial and total losses respectively, not that the two measures were to be wholly independent of one another. And as will be seen, we find the meaning of the policy clear.2 Islington Park Ltd v ACE Insurance Ltd [2013] NZHC 2983.The policy[12] The policy's operative clause provides:If during the Period of Insurance there happens loss or damageunintended and unforeseen by the Insured to the Property then the Insurers will indemnify the Insured in respect of such loss or damage as expressed in Clause 1.2 and in addition the Insurers will indemnify the Insured in the manner and to the extent separately stated herein.This liability of the Insurers shall not exceed the sums insured stated in The Schedule.[13] Clause 1.2 is the general basis of loss settlement provision in the policy. It provides in Clause 1.2.1 for cover on an indemnity basis, and in Clause 1.2.2 for cover on a reinstatement basis for specified items. Islington Park chose not to insure any items on a reinstatement basis.[14] Clause 1.2.1 provides "old for old" cover:1.2.1 IndemnityIt is the Insurers option to either reinstate or replace the property damaged or destroyed, or any part, or incur any expense insured, instead of paying the amount of the loss or damage provided that:(a) the Insurers shall not be bound to reinstate exactly or completely, but only as circumstances permit and in a reasonably sufficient manner, and in no case shall the Insurers be bound to expend more in reinstatement, and the Insured costs and expenses associated with such reinstatement, then it would have cost to reinstate such property as it was at the time of the occurrence of such loss or damage.(b) Proviso (a) does not apply to property which is subject to the provisions of Clause 1.2.2.The Insurers shall not be liable for more than the sums insured stated in the Schedule.[15] The schedule provides for a sum insured of $9M for the buildings, that being an agreed value. It contains a basis of settlement clause under which that sum is payable on a total loss, it specifies that partial losses will be settled under cl 1.2.1, and it provides for a deemed total loss in two cases: where the estimated cost ofrepair exceed $7.2M, and where the insured is prohibited by law from reinstating the property:The basis of settlement in the event of a total loss is Agreed Value. Agreed Value is the sum insured nominated by the Insured at the beginning of the period.If following loss or damage to any building the estimated cost of repair exceeds 80% of the nominated Agreed Value, or the Insured is prevented from reinstating such loss or damage through the operation of any Act of Parliament or of any Regulations under or framed in pursuance of any such Act or By-Laws or any Municipal or Local Authority of Ad Hoc Bodies, the building shall be deemed to be a total loss.Partial losses are settled in accordance with Basis of Settlement clause 1.2.1.Assumed Facts[16] The following facts were assumed for purposes of argument:(a) Additional compliance work, for example earthquake strengthening, will need to be met to carry out repairs.(b) To repair the buildings with additional compliance costs will exceed $7.2 million (80 per cent of the agreed value).(c) To repair the buildings to pre-earthquake condition, without additional compliance costs, will not exceed $7.2 million.(d) There is no property designated "R" [for replacement cover] in the discovered policy schedules for the relevant 2009/2010 and 2010/2011 policy periods to indicate reinstatement of cl 1.2.2.The questions stated[17] Two questions were stated by Kós J and answered by Fogarty J:3Question 1:In the Basis of Settlement clause in the schedules to the policies, does "cost of repair" mean:(a) Cost of repair of the buildings that complies with the requirements of building regulations and statute and the Christchurch City Council;[Insured's preference] or(b) Cost of repair of the buildings that is a functional replacement of the buildings, and that complies with the requirements of building3 At [15] and [73]–[74].regulations and statute and the Christchurch City Council;[Insured's preference] or(c) Cost of repair of the buildings to their pre-earthquake condition, excluding any additional costs to meet the requirements of buildingregulations and statute and the Christchurch City Council? [Insurers'preference]Answer:The answer to question 1 is, "cost of repair" in the Basis of Settlement clause in the schedules to the policies means the cost of repair of the buildings to their pre-earthquake conditions, excluding any additional cost to meet the requirement of building regulations and statute and the Christchurch City Council.Question 2:In the Basis of Settlement clause in the schedules to the policies, does"reinstating such loss or damage" mean:(a) Reinstating the buildings to the same condition as prior to the earthquakes; or(b) Reinstating the buildings to a condition that is in accordance with building regulations and statute and the Christchurch City Council (rather than reinstating to the same condition as prior to theearthquakes)? [Insurers' preference]Answer:The answer to question 2 is, in the Basis of Settlement clause in theSchedules to the policies, after "or", "reinstating such loss or damage"means reinstating the buildings to a condition that is in accordance with building regulations and statute and the Christchurch City Council (rather than reinstating to the same condition as prior to the earthquakes). I wouldadd here that the term "prevented" preceding this phrase means completelypreventing reinstatement of such loss or damage. The insurer is not prevented, if compliance with building regulations and statute and the Christchurch City Council can be obtained by the insurer paying the cost to reinstate the buildings as they were at the time of the earthquake, and the insured contributing the additional compliance costs over and above that amount.[18] It is common ground that the answer to question 2 is correct. It is only the answer to question 1 that is in issue on appeal.The appeal[19] Mr Campbell QC argued that the estimated cost of repair in the basis of settlement clause entails a factual inquiry into the cost of an actual repair. Theobjective is functional replacement, and of course any actual repair must comply with current building regulations. He sought support for this in cl 1.2.1 insofar as it provides that it is the insurers' option to reinstate or replace the property damaged or destroyed instead of paying the amount of the loss or damage.[20] Relying on the proposition that the specific basis of settlement clause in the schedule takes precedence over the general terms, Mr Campbell contended that the claims settlement process must begin by inquiring whether the loss is full or partial. Only if it is partial does cl 1.2.1 apply. There is, he submitted, no incompatibility between the basis of settlement clause and cl 1.2.1; the former is not dictating the basis of settlement for an actual repair, but rather establishing an economic test for a deemed total loss.[21] Mr Campbell also sought support in Fogarty J's answer to question 2. Asnoted, it is now common ground that there is a deemed total loss if through the operation of any legislation or by-law the insured is prevented from reinstating the buildings in accordance with current building regulations.Analysis[22] The primary basis of indemnity under the policy is found in cl 1.2.1. That is apparent from the operative clause. Under cl 1.2.1 the insurer indemnifies on an"old for old" basis. The insurer may commission the repair work, which must meet current building regulations, but that does not alter the indemnity; the clause specifies that the insurer need only pay on an "old for old" basis. Where repairs are commissioned, the insured must contribute to the extent of any necessary regulatory upgrade costs or betterment.[23] The policy does not insure any item on a "new for old" basis; reinstatement applies only to specified items and none were specified. But if Islington Park were correct, the policy would have the effect of providing a degree of reinstatement cover where, as in the present example, repairs are estimated to cost more than $7.2M on a"new for old" basis but less than that sum on an "old for old" basis. As Fogarty Jheld, it would be anomalous if in this one respect only the policy were to provide cover on a reinstatement basis.4[24] The buildings are a total loss when they have been so damaged that repair is not viable. We accept Mr Campbell's submission that economic considerations playa part in the viability assessment under this policy. But we do not accept that the basis of settlement clause is independent of the operative provision and cl 1.2.1. On the contrary, the clause provides pragmatically for the case in which estimated repairs approximate the sum insured; the parties have elected to treat the loss in such a case as a total loss rather than spend time and money quantifying it. Fogarty J made the point in this way:[48] The parties here were agreeing that the insured would be paid the $9million upon an artificial "total loss", without the application of average.They further agreed a practical measure of determining reaching the nominated Agreed Value. The 80% formula is practical because quantity surveyors, engineers and other professionals can quite reasonably differ by at least 10% in the costing of repairs. Thus, competing estimates of costs between 80 and 100% of the ceiling fall into a zone of reasonable disputation. Commercial certainty encourages development of a formula which eliminates that.[25] In other words, the basis of settlement clause calls for comparison between two measures of indemnity: the cost of repairs under cl 1.2.1, and the amount of a deemed total loss ($7.2M) under the schedule. The property is a total loss when the cost of repairs matches or exceeds $7.2M. Comparison of these two measures is the whole point. The cost of repairs must be estimated in the same way under the basis of settlement clause as it is under cl 1.2.1. It would make no sense to do otherwise.[26] We find no inconsistency between this analysis and the answer to question 2. Question 1 addresses the quantum of the insurer's liability where the insured may reinstate the property should it so wish. Question 2 addresses the alternative basis for a deemed total loss; where reinstatement is prohibited by law. In that context, the policy naturally triggers a deemed total loss should the insured be unable to effect actual or functional reinstatement. The distinction makes commercial sense.4 At [49].Decision[27] We agree with Fogarty J, and for substantially the same reasons. The answers he gave were correct. The appeal is dismissed.Costs[28] The respondents will have costs on a band A basis as for a standard appeal together with usual disbursements, with provision for two counsel.Solicitors:Heaney & Partners, Auckland for AppellantDLA Phillips Fox, Auckland for Respondents