TOOMEY, SIMPSON and CANTERBURY TRUSTEES (2016) LTD as trustees of the TOOSIM FAMILY TRUST v IAG NEW ZEALAND LTD [2019] NZHC 2882

TOOMEY, SIMPSON and CANTERBURY TRUSTEES (2016) LTD as trustees of the TOOSIM FAMILYTRUST v IAG NEW ZEALAND LTD [2019] NZHC 2882 [6 November 2019]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2017-409-000659[2019] NZHC 2882BETWEEN JEROME ANTHONY TOOMEY and JOSIELOUISE SIMPSON and CANTERBURYTRUSTEES (2016) LIMITED as trustees ofthe TOOSIM FAMILY TRUSTPlaintiffsAND IAG NEW ZEALAND LIMITEDDefendantHearing: 11 October 2019Appearances: C Johnstone and B Burke for PlaintiffsM Ring QC and R Hargreaves for DefendantJudgment: 6 November 2019JUDGMENT OF ASSOCIATE JUDGE PAULSENThis judgment was delivered by me at 10.00 am on 6 November 2019pursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors:Harmans LawyersDuncan Cotterill, AucklandIntroduction[1] The trustees of the Short Family Trust (Short) owned a property at 11 JacobStreet, Christchurch (Jacob Street) that suffered earthquake damage in theChristchurch earthquakes. Jacob Street was insured with IAG under a policy thatprovided claims would be settled by IAG meeting reinstatement costs in the eventShort elected to restore the home (the reinstatement benefit), or, otherwise by anindemnity value payment.[2] Short made claims to the Earthquake Commission and IAG in respect of theearthquake damage and the claims were settled and repairs were carried out.[3] The trustees of the Toosim Family Trust (Toosim) purchased Jacob Street fromShort and took an assignment of any residual rights that Short had in respect of anyinsurance claim made, or that might arise, from the Christchurch earthquakes. Toosimlater discovered that Jacob Street had suffered undiagnosed earthquake damage (theUnderfoot damage).[4] Toosim's claim is to be paid the reinstatement benefit to repair the Underfootdamage. IAG applies to strike out the statement of claim or, alternatively, summaryjudgment against Toosim. In reliance upon the Supreme Court decision in Xu v IAGNew Zealand Ltd,1 IAG argues that Toosim has no reasonably arguable cause of actionbecause, as at the date of the assignment, Short had not incurred the cost of restoringthe home to repair the Underfoot damage so as to satisfy the condition of thereinstatement benefit, nor did Short have any accrued right to any payment from IAGpursuant to the reinstatement benefit in respect of the damage.[5] IAG also contends that Toosim has no alternative claim to an indemnitypayment under the policy as Short did not suffer any indemnity value loss whichToosim, as assignee, can recover from IAG.1 Xu v IAG New Zealand Ltd [2019] NZSC 68.The facts[6] Short acquired Jacob Street on 23 October 2009. Jacob Street was insured withIAG under a BNZ PremiumCare insurance policy. There was a change to the policywording from 27 November 2010 (BNZ 2010 policy). It is agreed that for presentpurposes the change is immaterial.[7] The BNZ 2010 policy wording reads:Part One – cover for your homeWhat you are covered for:You are covered for sudden and accidental loss to the home during the periodof insurance.What you are not covered for:Earthquake CommissionYou are not covered for loss to the extent it is covered by the EarthquakeCommission Act or that would have been covered but for:1. the deduction of the Earthquake Commission's excess, or2. the Earthquake Commission exercising its power to decline a claim forthat loss.Where the Earthquake Commission agrees to cover it, but your loss exceedsthe Earthquake Commission payment, the most we will pay is the differencebetween what the Earthquake Commission pays, or would have covered, andyour maximum entitlement under this Section 1 – Home Insurance.What we will pay:Repair or rebuilding costsIf you repair or rebuild the home, following a loss covered by this Section 1– Home Insurance, we will pay either:1. the repair cost for the damaged part of the home, using current materialsand methods, where in our opinion it is able to be economicallyrepaired, or2. the rebuilding cost, using current materials and methods, to a conditionas similar as possible to when it was new, where in our opinion thehome cannot be repaired.If you do not repair or rebuild the home, we will pay the value of the loss,based on the present value of the home.[8] Jacob Street was damaged by earthquakes on 4 September 2010 and22 February 2011. At that time, Short notified claims to the Earthquake Commission.In 2013, Fletcher EQR carried out repairs. A description of the works was given toIAG.[9] Short also notified claims to IAG in November 2011 and December 2012 inrespect of damage to a concrete patio, a driveway and pathways. IAG cash settledthese claims and Short paid its own contractor to do the repairs. IAG also paidtemporary accommodation and pet-care costs to Short and costs of loss adjusters andproject managers.[10] By an agreement dated 22 May 2016, Toosim purchased Jacob Street at auctionwith settlement and possession occurring on 25 July 2016. The purchase price was$985,000. The agreement recorded that Short had no outstanding claims with EQCfor damage resulting from the Christchurch earthquakes and that the earthquake-repairs had been completed. Short agreed to assign "any residual entitlement underthe claims" to Toosim on settlement.[11] On settlement, Short executed a deed of assignment. The recitals record thatboth EQC and insurance claims made in respect of earthquake-damage had beensettled. It stated (cl 1) that Short "assigns absolutely" to Toosim: all of [Short's] residual right, interest and title to the EQC Claim andInsurance Claim, and any other claims that may arise under the policy inrelation to the earthquakes, and the resulting proceeds [12] In June 2017, Toosim received a report from Underfoot Services Ltdidentifying that Jacob Street had suffered previously undiagnosed earthquake-damage,including to its foundations, piles, bearers and floor levels (the Underfoot damage).[13] In March 2018, EQC accepted the 2013 works were scoped inadequately andwere defective and cash settled its liability for this newly discovered damage, subjectto statutory limits.[14] Toosim also gave notice to IAG of the Underfoot damage, but IAG denies thatit is liable to pay any of the costs of repair.IAG's applications[15] There are two applications before the Court. The first application is for strikeout of the statement of claim under r 15.1 High Court Rules. Rule 15.1 of the HighCourt Rules 2016 provides:The court may strike out all or part of a pleading if it –(a) discloses no reasonably arguable cause of action, defence, or caseappropriate to the nature of the pleading[16] The principles that apply to strike out applications are not in dispute. Thepleaded facts, whether admitted or not (except those that are entirely speculative andwithout foundation), are assumed to be true. The applicant must show that the pleadedcause of action is plainly untenable and cannot succeed.2 The discretion to strike outshould be used sparingly and only in a clear case where the court is satisfied that it hasthe requisite material and the necessary assistance from the parties to reach a definiteand certain conclusion.3[17] In the alternative, IAG seeks summary judgment. IAG needs leave to pursuethat application out of time but the granting of leave is not opposed and is granted. Toobtain summary judgment, IAG must show that on the undisputed and/or undisputablematerial facts, Toosim will not, and cannot, succeed.[18] At this juncture, I will deal with one area of difference between counsel as tothe appropriate scope of the arguments on these applications. Mr Ring argued thatToosim's claim must necessarily fail whether the relief sought is for reinstatementcosts or the costs of repairs up to the level of indemnity. Mr Johnstone objected onthe basis that a challenge to Toosim's right to an indemnity value payment had notbeen raised in the applications. I do not accept Mr Johnstone's submission. Thestatement of claim does not plead any claim for an indemnity value loss. It alleges anentitlement to the reinstatement costs. In making his submission, Mr Ring wasresponding to a draft amended statement of claim presented with Mr Johnstone'ssubmissions that seeks, in the alternative, an indemnity value payment. Mr Ring's2 Attorney General v Prince [1998] 1 NZLR 262.3 Couch v Attorney General [2008] NZSC 45; [2008] 3 NZLR 725 at [33].point was that regardless of how it presents its case, the deficiencies in Toosim'sstatement of claim cannot be remedied by amendment. That is a point he was clearlyentitled to advance.The issue[19] The issue is whether Toosim could ever succeed at trial in proving that it isentitled to a payment from IAG pursuant to the reinstatement benefit, if it proceeds toincur the cost of repairing the Underfoot damage. IAG argues that this issue has beenauthoritatively determined in Xu, upholding the Court of Appeal's judgment in Bryantv Primary Industries Insurance Co Ltd.4[20] The facts of Xu were that the Barlows were the owners of a house inChristchurch that was damaged in the Christchurch earthquakes. They held insuranceagainst loss caused by such damage under a policy underwritten by IAG. The policyprovided claims would be settled based on either an indemnity payment or by IAGmeeting reinstatement costs in the event the insured elected to restore the home. TheBarlows made a claim under the policy but then sold the property before the claim wassettled. They assigned to the purchasers their rights in respect of their claim under thepolicy. At issue was whether the reinstatement benefits were assignable to entitle thepurchasers to reinstate and be reimbursed.5 It was common ground that as at the dateof the assignment the Barlows "had not restored, and did not intend to restore, theirhome and had not incurred, and would not incur, any actual costs of reinstatement oftheir home."6[21] A majority of the Supreme Court held that under the terms of the policy theentitlement to the reinstatement benefits was conditional on reinstatement by theBarlows. It followed that when the Barlows sold the property without personallyincurring the cost of repairs, it did not matter what rights in respect of the reinstatementbenefit they purported to assign because the purchasers could not recover costs4 Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA).5 Xu v IAG New Zealand Ltd, above, n 1, at [4].6 At [4].personally incurred to repair the home, only the costs of repair incurred by theBarlows.[22] The minority considered that whilst the reinstatement benefit was conditionalupon reinstatement being effected, the right to payment for the loss arose at the timeof the earthquakes and could be assigned, even though the basis for calculation of thepayment depended on whether the property was reinstated or not. On this basis, it didnot matter whether reinstatement was undertaken by the Barlows or the purchasers.[23] The majority rejected the minority view, holding that the "right" of the Barlowsto reinstatement benefits was "highly contingent (as subject to a condition which mightnever be satisfied)." It was therefore not apt to describe this as an "already accruedright."7Toosim's argument[24] Toosim accepts that the BNZ 2010 policy wording is "caught" by the SupremeCourt's ruling in Xu. This is clearly correct as the key provisions required to engageXu are:(a) The insured's entitlement to the reinstatement benefit is conditional uponreinstatement by the insured; and(b) If the insured does not reinstate the property, indemnity cover isavailable.[25] Toosim also accepts that under the BNZ 2010 policy wording the reinstatementbenefit cannot be assigned in the absence of reinstatement by Short. However, it says,Short satisfied the condition and triggered the reinstatement benefit by acting toreinstate the property in 2013 or 2014, or both. Toosim argues that once thereinstatement benefit was triggered, it did not then matter whether the reinstatementcosts were incurred by Short or Toosim. The matter to be decided, Toosim says, is7 At [45]-[46].how the conditional requirement for the payment of the reinstatement benefit can besatisfied and whether that contingency has been met in this case.[26] Xu, Toosim argues, does not deal with a case of partial or incompletereinstatement, as occurred in this case, and it was central to the court's reasoning thatno building work of any kind had been undertaken to repair damage. Toosim reliesupon [45] of the majority's judgment, where it was said: we think Bryant is still correct to the extent that it stands for the propositionthat the entitlement to replacement benefit conditional upon reinstatement bythe insured cannot be assigned where no such reinstatement has occurred.[27] The phrase "no such reinstatement" can only mean, Toosim argues, that nobuilding work of any type, whether to rebuild or repair, has been undertaken, and thisis consistent with the decision in Bryant, where the vendor had done no work toreinstate fire damage prior to the sale of the property.[28] Toosim also argues that IAG was aware of Short's election to reinstate and thatthe repairs that IAG paid for to the patio, paths, and driveway constitute reinstatementunder the policy. As IAG cash-settled Short's claims for the actual cost of repair itcannot now deny the reinstatement benefit was triggered.[29] Mr Johnstone submitted that it was relevant that there was no policy stipulationthat all damage must be repaired before IAG will make payment of the reinstatementbenefit nor is there a requirement that the build costs be paid in full by the policy-holder. He referred to earthquake-list case law in Medical Assurance Society v East8and Parkin v Vero Insurance New Zealand Ltd,9 which does not require building worksto have been completed, invoiced and paid by the policy-holder before reimbursement.[30] In any case, Toosim argues, if it has no entitlement to the reinstatement benefitit has a claim for indemnity based on present value and that alternative level of covercannot be dismissed as untenable.8 Medical Assurance Society v East [2015] NZCA 250.9 Parkin v Vero Insurance New Zealand Ltd [2015] NZHC 1675.Application of Xu[31] I consider the facts of this case are indistinguishable in any relevant respectfrom the facts in Xu. The essential facts in both cases involve:• A home insured for replacement value where payment of the reinstatementbenefit was payable when restoration costs were incurred by the insured,otherwise indemnity cover was available;• The home was damaged by an insured peril;• The home was sold with an assignment of the right to the proceeds of claimsmade, or entitled to be made, on the insurer;• The insured did not and will not incur the costs to reinstate the damage existingas at the date of the assignment; and• The assignee had made a claim on the insurer under the reinstatement benefitfor payment of reinstatement costs to repair the home if and when they (andnot the insured) personally incurs them to repair the home.[32] As in Xu, the policy wording in this case provides that the insured loss forwhich the reinstatement benefit is payable is the cost of repairing or rebuilding (to itswhen-new condition) the home if, and when, personally incurred by the insured.Unless and until Short incurred this cost, the insured loss is not an "already accruedright", but "highly contingent," being subject to a condition "which might never besatisfied."10[33] The assignment of the reinstatement benefit entitled Toosim to receive fromIAG any payment due to Short to the extent that Short had incurred reinstatement costsbut did not entitle Toosim to be reimbursed or indemnified by IAG for costs that itincurred.10 Xu v IAG New Zealand Ltd, above n 1, at [46].[34] This has nothing to do with whether the damage being repaired was known orunknown when Short sold Jacob Street and granted the assignment to Toosim. It hasnothing to do with whether there had been a partial or incomplete reinstatement. WhenJacob Street was sold by Short to Toosim without incurring the cost of restoring thehome, it did not matter what rights in respect of the reinstatement benefit Shortpurported to assign to Toosim. By selling Jacob Street, Short irrevocably "put an endto the possibility of invoking the excess of indemnity insurance."11 As an assignee ofShort's rights, Toosim could be in no better position than Short.12[35] The issue that arises in this case can be simply resolved by asking whetherToosim is claiming for reinstatement costs that were incurred by Short. It plainly isnot. Mr Johnstone made the submission that had the Underfoot damage been knownprior to the sale to Toosim, Short would have been entitled to payment for the costs ofrepairing the damage. The answer to that is, if Short had made such a claim to IAG itwould not have been paid unless Short had elected to reinstate and had incurred thecosts of doing so. None of that happened. Short never incurred liability to repair theUnderfoot damage and will not do so. Mr Johnstone's submission highlights that whatToosim is seeking are costs that it will incur, which is not a financial loss covered bythe policy.[36] I do not consider that the Supreme Court's judgment in Xu, at [45], supportsToosim's position that the reinstatement benefit will be triggered when any repairworks are done by the insured. The words "no such reinstatement has occurred" arereferring to works for which the insured has not incurred a cost entitling it to paymentunder the policy. This is plain when one considers the court's view, at [10](b), thatBryant was decided on the basis that the entitlement to "be reimbursed" was personalto the insured.[37] Mr Johnstone relied on recent earthquake list cases, but these do not supportToosim's position. In Medical Assurance Society of New Zealand Ltd v East, theEasts' home had suffered earthquake damage and they were in dispute with their11 Bryant v Primary Industries Insurance Co Ltd, above n 4.12 Robert Merkin, Ian Enright Sutton on Insurance Law (4th ed, LawBook Co (Thomson Reuters)Sydney, 2015) vol 1 at [11.740].insurer.13 One of the issues was whether the insurer was obliged to pay the costs ofrebuilding or restoring the dwelling irrespective of whether liability to incur thosecosts had been, or would ever be, incurred. The policy wording provided that, "if youelect not to rebuild or restore the building" the insurer would make a cash settlementnot exceeding indemnity value.[38] At first instance, Whata J held that the policy did not require that the cost ofrebuilding or restoring the dwelling had to be incurred, or about to be incurred, beforethe insurer was liable to pay the replacement value. The Court of Appeal overturnedthis finding and held:14What is plain is that [the insurer's] reinstatement clause reflects an insurer'sorthodox obligation to indemnify against a liability where the insured partyelects to rebuild, not to pay out money where the insured has not incurred andmay never incur a liability to meet the cost of restoration. It agrees to coverthe cost, not an estimate of it, and the cost is not and will not be known until,at least, liability to pay for the work is incurred.[39] And at [29] the Court said:We should add that, contrary to the Judge's conclusion, we are not satisfiedthat [the insurer's] approach – that its liability to cover the cost only ariseswhen those costs are actually or about to be incurred – "place[s ] a strictand cumbersome fetter on the prima facie right to replacement valuecompensation". The Easts' right to settlement on that basis is absolute oncethey incur a contractual obligation for the purpose of restoring the building: ithas no bearing upon the timing of and basis for liability.[40] In Parkin v Vero Insurance New Zealand Ltd, the insured argued that theinsurer was obliged to pay him the cost to rebuild his house in accordance with theassessment of damage and scope of works provided by his experts.15 Mander J foundthat the policy required the insured to incur the costs of remediating his property beforethe insurer's obligation to pay the replacement sum was triggered.[41] After referring to the Court of Appeal's decision in Medical Assurance Societyv East, Mander J said:1613 Medical Assurance Society of New Zealand Ltd v East, above n 8.14 At [21].15 Parkin v Vero Insurance New Zealand Ltd, above n 9.16 At [46].While Mr Parkin must actually incur costs, that does not equate to arequirement that he expend his own money. Rather, a legal obligation to payon his part is required to have been created. The incurring of costs does notcap the insurance company's liability. As Vero itself acknowledged, shouldfurther damage be uncovered in the course of repairs covered by the policy,Vero's contractual obligations continue to oblige it to meet the costs necessaryto repair that damage.[42] These cases stand as authority that, subject to words of the policy, areinstatement benefit will become payable only once the insured has incurred at leasta contractual obligation to pay the costs of undertaking the rebuild or repairs. In thepresent case, at the time of the sale to Toosim, Short had no knowledge of, and hadnot incurred any liability to undertake, any of the repairs in respect of the Underfootdamage.17[43] This Court is bound by Xu and, as noted above, I consider there is no properbasis to distinguish it. To do so, I would need, at least, to be satisfied that such anapproach was not inconsistent with the principles that underpin Xu. Those principlesare set out in [18]-[21] of the majority's judgment and are, first, the indemnityprinciple (albeit the court expressed reservations about this) and, second, the moralhazard that replacement insurance creates. Those principles are equally engaged inthis case as they were in Xu.[44] For these reasons, I find that Toosim does not have an arguable entitlement toreinstatement benefits under the policy.Indemnity value claim[45] I turn now to consider whether Toosim has an arguable claim that Shortsuffered an indemnity value loss that was assigned to it and which it may recover inthis proceeding. I again note that this issue was raised in the context of whether, ifToosim has no arguable entitlement to reinstatement benefits, it might nevertheless bepossible to remedy deficiencies in its statement of claim.17 See also Brkich & Brkich Enterprises Ltd v American Home Assurance Co (1995) 8 BCLR (3d).[46] The Supreme Court in Xu recognised that rights under an insurance policy topayments calculated on an indemnity basis are assignable, since such rights are in thenature of an existing debt.18[47] Under the 2010 BNZ policy wording, if Short did not repair or rebuild thehome IAG agreed to pay "the value of the loss, based on the present value of thehome." The term "present value" was defined in the policy as, "the market value ofthe situation shown in the schedule less the value of the land."[48] IAG accepts, for present purposes, that Short qualified for an indemnity valuebenefit as an insured who "do(es) not repair or rebuild the home." It argues, however,that Short suffered no financial loss arising from the fact of the Underfoot damage andthat any claim by Toosim to recover an indemnity payment is precluded by theapplication of the following essential controlling principles of insurance law.[49] First, under the indemnity principle, in the case of a loss against which thepolicy has been made, an insured is to be fully indemnified but, "shall never be morethan fully indemnified" for its loss.19[50] Second, when an insured assigns his or her right to be indemnified for a pastevent, what is assigned is the insured's accrued right to payment from the insurerindemnifying the insured for his or her personal insured loss – i.e. payment by theinsurer of an existing debt owing to the insured.[51] Third, as an assignment can only be in respect of existing rights of the insured,the insurer may, as against an assignee, rely on any defences which would, at the timeof the assignment have been available against the insured.20[52] It follows from these principles, IAG argues, that if, after an earthquakecausing damage against which the owner is insured, a property (including a home indamaged condition) is sold in an arms-length transaction, the insured's financial loss18 Xu v IAG New Zealand Ltd, above n 1, at [13].19 Castellain v Preston (1883) 11 QBD 380 (CA) at 386.20 AW Welford & WW Otter-Barry The Law Relating to Fire Insurance, (4th ed, Butterworth & Co,London, 1948) at 234.caused by the earthquake will be the difference between the pre-earthquake market-value of the property and the actual post-earthquake selling price obtained.21 If,however, the insured sells the property in an arms-length transaction not knowing thatit has suffered damage and for market-value, the insured has suffered no financialloss.22[53] Mr Ring drew support from Invercargill City Council v Hamlin whichconcerned a local authority's liability for a building inspector's negligence and whenthe homeowner had suffered loss.23 In the course of its judgment, the Privy Councilsaid:24Once it is appreciated that the loss in respect of which the plaintiff in thepresent case is suing is loss to his pocket, and not for physical damage to thehouse or foundations, then most, if not all the difficulties surrounding thelimitation question fall away. The plaintiff's loss occurs when the marketvalue of the house is depreciated by reason of the defective foundations, andnot before. If he resells the house at full value before the defect is discovered,he has suffered no loss. [54] Applied to this case, IAG submits that Short no longer owns Jacob Street and,at the time of sale to Toosim, was unaware of the Underfoot damage. The house wassold at auction in an arms-length transaction without any reduction in price because ofthe Underfoot damage (that is, at full-value before the damage was discovered), and itfollows that Short has not and could not have suffered any loss because of theUnderfoot damage. There was nothing for Short to assign to Toosim, and,accordingly, nothing that Toosim can recover from IAG.[55] Turning to the evidence, in his affidavit Mr Toomey, one of Toosim's trustees,confirms that in entering into the agreement to purchase Jacob Street, Short andToosim shared a mutual understanding the earthquake repairs to the property had beencompleted and there was nothing to suggest that the repair work was inadequate. Ihave noted earlier the terms of the agreement for sale and purchase and the assignment,which are consistent with this. While Short purported to assign any residual rights itmay have had under any insurance claim to Toosim, Toosim did not make any claim21 Bryant v Primary Industries Insurance Co Ltd, above n 4.22 Castellain v Preston, above, n 19.23 Invercargill City Council v Hamlin [1996] 1 NZLR 513.24 At 526.for any loss until the discovery of the Underfoot damage, reflecting the fact that itunderstood all repairs were complete and all claims were settled.[56] Mr Johnstone argued that the court does not have before it all the informationthat it needs to make a finding that Short suffered no loss. He argues that the courtcannot equate the sale price to the measure of present value under the policy. I do notagree. Where the sale has occurred at auction and is at arms-length, and where theparties share a common belief that the earthquake repairs have been completed withall claims in respect of them settled, it is an unavoidable conclusion that the sale pricewas at full market-value. Short suffered no loss arising from the fact of the Underfootdamage.Result[57] IAG has satisfied me that Toosim's statement of claim discloses no arguablecause of action. I am satisfied that the deficiencies in Toosim's statement of claimcannot be remedied by allowing it to amend its pleadings. Accordingly, Toosim'sclaim is struck out.[58] If any party seeks costs, I will receive submissions by memorandum within 14days, with any reply to be filed 14 days thereafter._______________________O G PaulsenAssociate Judge