MARRIOTT v VERO INSURANCE NEW ZEALAND LIMITED [2013] NZHC 3120

MARRIOTT v VERO INSURANCE NEW ZEALAND LIMITED [2013] NZHC 3120 [26 November 2013]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYCIV-2013-409-1310[2013] NZHC 3120BETWEEN PETER STANLEY MARRIOTT andEUNICE ANN MARRIOTTPlaintiffsAND VERO INSURANCE NEW ZEALANDLIMITEDDefendantHearing: 6-7 November 2013Counsel: S P Rennie and J E Bayley for plaintiffsM G Ring QC and P J L Hunt for defendantJudgment: 26 November 2013RESERVED JUDGMENT OF DOBSON JContentsBackground ........................................................................................................................................ [1]The policy ........................................................................................................................................... [6]Question 1: When is an insured building "destroyed" for the purposes of the policy? ............... [9]Question 2: Does the sum insured reinstate after each earthquake event? ................................ [31]The contractual context and purpose of the clause ...................................................................... [38]Application of the terms of the clause .......................................................................................... [43]Words contemplate retrospectivity? .............................................................................................. [50]Risk of notice inherent in the original bargain ............................................................................. [51]Wild South ........................................................................................................................................ [59]Question 3: Are the Marriotts entitled to repair costs up to the sum insured for the damage caused by each earthquake event? ................................................................................................. [68]Question 4: Is the excess/deductible deducted from the amount of the loss or from the payment due under the policy? ...................................................................................................................... [80]Costs and post-hearing memoranda .............................................................................................. [88]Summary .......................................................................................................................................... [91]Background[1] In this proceeding, the plaintiffs (the Marriotts) have sued the defendant (Vero) under contracts of insurance for two small commercial buildings that they own, which share a common wall. The insurance policies cover two years, from 22 May 2010 to the same date in 2011, and from that date to 22 May 2012. It is agreed that the insured properties suffered damage in the Christchurch earthquakes of 4 September 2010 and 22 February 2011. The Marriotts take the view that the buildings suffered further damage in a third earthquake on 13 June 2011, but Verotreats the buildings as having been "destroyed" for the purposes of the policy by thedamage suffered in the February 2011 earthquake.[2] Numerous differences have arisen as to the application of the policy to the claims that the Marriotts have pursued. In March 2013, the Marriotts provided the insurer with a claims package estimating the losses that the Marriotts identified as suffered by the buildings in the respective earthquakes. That claims package quantified the losses at some $2.045 million, including GST.[3] In October 2013, Vero accounted to the Marriotts for the sum of $460,000, plus GST, as the indemnity value of their claims on the basis of depreciated replacement cost. The sum paid was reduced by a deductible of 2.5 per cent applied for claims arising from earthquake damage.[4] In an endeavour to narrow or resolve the differences of interpretation of the policy as it provides for the extent of Vero's liability, the parties agreed to separate determination before trial of a number of questions of law that reflected competing interpretations of the policy. This judgment addresses those agreed questions. They are as follows:1. When is the building destroyed under the policy?2. Does the sum insured reinstate after each earthquake event?3. Are the Marriotts entitled to repair costs up to the sum insured for the damage caused by each earthquake event?4. Is the excess deducted from the amount of the loss or from the payment due under the policy?[5] The Marriotts treat the policy as obliging Vero to meet the costs of reinstating the buildings if they suffer relevant damage, and if they undertake the repairs, on a"new for old" basis. The Marriotts also treat the policy as providing for automatic reinstatement of the sum insured, as soon as there has been any insured event causing damage to the property, thereby giving rise to a claim under the policy that would foreseeably reduce the sum insured. The parties agree that the buildings covered by the policy are materially under-insured in the sense that the agreed limit on Vero's liability is less than the current cost of reinstating the buildings, in the event that they needed to be totally replaced.The policy[6] The policy wording runs to some 66 pages, and is set out in modules providing for various forms of cover which may or may not apply in a given policy. The core provisions committing Vero to insure the properties were as follows:MM20.1 PRIMESURE POLICY[]Now this Policy witnesses that in consideration of the Insured having paid or agreed to pay the premium to the Insured declared in [sic]1 the Insurer hereby agrees that if the Insured shall suffer loss or damage, to the extent and in the manner hereinafter provided during the Period of Insurance declared in the attaching Primesure Certificate and Schedule of Insurance the Insurer shall indemnify the Insured by payment, replacement, restoration, or repair, at the option of the Insurer, or to such extent and in such manner as hereinafter provided.MM21.1.1 RISKS COVERED (Insuring Clause)The Insurers will indemnify the Insured for accidental physical loss destruction or damage to the Insured Property subject to the exceptions and conditions and terms contained herein or endorsed hereon. []1 Counsel agreed that a reference to the schedule or certificate was missing at that point in the clause. The extent of the premium charged was not in fact set out in the certificate or schedule, but nothing turns on it.[7] In addition to traditional indemnity cover for the cost of damage to, or destruction of, the property being repaired to the condition it was in when damaged (old for old replacement) Vero offered the option for the Marriotts to also insure for the cost of replacing damaged property, to an "as new" standard (new for old). TheMarriotts took that option, which was provided for in the following terms:MM21.3.16 REINSTATEMENT/REPLACEMENT COSTMEMORANDUMIn the event of the property insured under the Memorandum being destroyed or damaged the amount payable is to be the cost of reinstatement which for the purposes of this Memorandum shall mean in respect of:(i) BuildingsWhere destroyed, the rebuilding of the property including the use of currently equivalent building materials and techniques and such additional costs necessary to comply with any Act of Parliament or any Regulations under or framed in pursuance of any such Act or with the By-Laws of any Municipal or Local Authority;Where damaged, the restoration of the damaged portion of the property to a condition substantially the same as but not better or more extensive than its condition when new but including such additional costs necessary to comply with any Act of Parliament or any Regulations under or framed in pursuance of any such Act or with the By-Laws of any Municipal or Local Authority.[]MM21.3.17 REINSTATEMENT OR REPLACEMENT COST (EARTHQUAKE) MEMORANDUMIn the event of property insured under this Policy suffering earthquake or volcanic eruption or hydrothermal activity damage during the currency of this Memorandum, and the Insured suffers loss in consequence of the cost of reinstatement exceeding the indemnity value, then in respect only of such loss the Company will pay the difference between the cost of reinstatement and the indemnity value subject to the following Special Provisions and subject also to the terms and conditions of the Policy except insofar as the same may be varied hereby.For the purposes of the insurance under this Memorandum, the following terms shall, unless the context otherwise requires, have the following meanings:[]E. 'reinstatement' shall have the meaning as described in MM21.3.16(i) and (ii).[8] The scope of what constituted a single event for the purposes of the policy was addressed in the following terms:MM20.3.6 THE ADJUSTMENT CLAUSEAny loss, destruction or damage of or to the insured property described in Module A and Module B2 arising during any one period of 72 consecutive hours, (caused by flood, storm, tempest, water, subsidence, collapse or earthquake) shall be deemed as a single event, and therefore to constitute one occurrence with regard to the sum insured and the excesses provided for in the Schedule. 'Occurrence'means an event, or continuous or repeated exposure to conditions which, during the policy period, causes damage to or destruction of insured property or the loss of use thereof. All such exposure to substantially the same general conditions shall be deemed one occurrence.[]Question 1: When is an insured building "destroyed" for the purposes of thepolicy?[9] The essence of the difference between the parties on this issue is that the Marriotts contend that a building would not be destroyed until the extent of damage was such that it was not able to be repaired. This reflects solely the physical state of the damaged building, and whether it can practically be repaired. On the other hand, Vero contended that a building is to be regarded as "destroyed" for the purposes ofthe policy where it is to be considered as a constructive total loss in the sense that it would be uneconomical to repair it. Vero disputed that an insured can bring a claim for the cost of repairs, even if that would cost more than the building would be worth once repaired, or perhaps even if repair costs would be more than the cost of erecting a new building.2 Module A in the policy provided for material damage special risks and Module B provided for computer cover.[10] The relevance of attributing status to a building as either "destroyed" or "damaged" in the present case arose because the structure suffered further damage within the same period of insurance. In those circumstances, if the insurer is entitled to characterise the building as destroyed after a first event on the basis that there is a constructive total loss, then the subject matter of the policy has been destroyed. Accordingly, subject to the insurer making payment of the full amount of its liability under the policy, there could be no basis for a claim for additional damage suffered in a subsequent event.[11] The Marriotts have advanced claims on the basis of an entitlement to do so in respect of three earthquakes. However, Vero contends that the building was destroyed for the purposes of the policy after the second earthquake, so that no claim could be advanced for any discrete damage suffered in the third earthquake.[12] For the Marriotts, Mr Rennie argued that the word "destroyed" ought to begiven its natural or ordinary meaning, in the absence of any indication in the policy that it was to be given some technical or special meaning for the purposes of this policy. In dictionary terms, he cited a definition of "destroyed" as being "to end theexistence of [property] by damaging or attacking it".[13] Mr Rennie also relied on relevant provisions in the policy that draw a distinction between the concepts of "destroyed" or "damaged". For instance, thereinstatement/replacement cost memorandum, clause MM21.3.16.3 In that clause, the policy distinguishes between buildings that are destroyed (requiring a rebuilding) from buildings that are damaged (involving restoration of the damaged portion).[14] On Mr Rennie's analysis, the policy wording required Vero to accept liability for the cost of restoring damaged portions of a property, where that was technically feasible. If there was to be a limit on the circumstances in which that liability would arise, then the policy ought to have stipulated the circumstances in which that was the case.3 As quoted in [7] above.[15] Despite the interpretation questions being argued purely as questions of law without any evidence, I sought an indication of the buildings' physical situation. Mr Rennie advised that the premises have continued to be occupied by tenants (whom I understood to be the same as prior to the earthquakes), subject to an abatement of rent, agreed to by the Marriotts on grounds including the uncertainty of whether the tenants might be required to move out for the contemplated repairs to be effected.[16] Mr Ring QC did not dispute that this was the factual position, but pointed out that under another risk covered by the policy, Vero has paid a relatively substantial sum for a loss of rents claim, suggesting that rent has been abated to a significant degree.[17] A further factual point that Mr Rennie raised in support of his contention that the buildings remain "damaged" rather than "destroyed", is the fact that Vero issueda further policy to the Marriotts after the February 2011 earthquake, thereby implicitly accepting that there were buildings to insure. Mr Rennie submitted it was untenable for Vero to contend the buildings were destroyed on the one hand, and still be willing to continue to insure them on the other.[18] In addition to the contrast drawn in clause MM21.3.16,4 Mr Rennie argued that other clauses consistently treat the concept of "destroyed" as depending on the physical state of the building. He cited a provision that is an endorsement applying to the material damage insurance in MM21.3.6 as follows:MM21.3.6 DESTRUCTION OF UNDAMAGED PROPERTY(Applicable to Insured Property where the Basis of Settlement is subject to the Reinstatement Cost Memorandum)The Sum Insured on buildings and plant shall respectively include the cost of destruction and subsequent replacement of undamaged property or undamaged portions of property (whether or not the undamaged property or portions of property comprises a separate building or item of plant) andfor this purpose 'undamaged' shall mean not damagedphysically and directly by a peril insured by this Policy, if4 As quoted in [7] above.such destruction is solely necessary in order to carry out repairs or reinstatement of property insured by this Policy at the premises and for which the Company has admitted liability.Provided that this Clause shall not include any work necessary to undamaged property solely to comply with any Act or By-Law of any Local or Public Authority.[19] To the extent that "undamaged" means parts of a property that are not damaged physically, consistency requires that "damaged" refers to physical damage to a property and can be contrasted with "destroyed", which connotes a level ofphysical damage beyond the point at which it could be repaired.[20] Mr Rennie also argued that the only extent to which economic considerations apply is reflected in Special Provision 3 in the reinstatement memorandum that provides:Where any property under this Memorandum is damaged the liability of the Company shall not exceed the sum which the Company could have been called upon to pay for reinstatement if such property had been destroyed.[21] Mr Rennie argued that that provision suggests the distinction between destroyed and damaged property reflects its physical state. He also suggested that that clause in the reinstatement memorandum would be unnecessary unless a building can still be deemed to be damaged rather than destroyed, in circumstances where the cost of repair exceeds the cost of its replacement.[22] For Vero, Mr Ring did not deny the potential relevance of the physical state of the insured property once it had suffered damage. However, he contended that a range of factors, including importantly the economic assessment of the most efficientrestoration of the Marriotts' pre-damage position, ought to influence any consideration on the facts of whether the property insured was to be treated as merely damaged, or destroyed.[23] Mr Ring invited analogy with the Australian decision in Morlea Professional Services Pty Ltd (Morlea).5 The insured property at issue in that case was relatively5 Morlea Professional Services Pty Ltd v The South British Insurance Co Ltd (1987) 4 ANZ Insurance Cases 60-777 at 74,729.early era computer equipment. Notwithstanding that very different factual context, Mr Ring invited an analogy with the approach the Judge had adopted to the characterisation of intermediate cases on a spectrum from entirely annihilated at one end, to minimal damage at the other, for the purpose of a policy that distinguished destroyed property from that which was merely damaged. The case involved a reinstatement provision substantially similar to the reinstatement memorandum in MM21.3.16.6 The judgment of Clarke J in the New South Wales Supreme Court analysed the considerations from the perspective of a prudent uninsured businessman. Although the Judge recognised the relevance of an economic test, in the end the impracticability of effecting repairs was determinative in treating thecomputer equipment as "destroyed":In my opinion the question that is posed in this case is - Were the goods so damaged that repair is not, as a matter of practicality, appropriate? If so the goods should be treated as destroyed. This is probably another way of asking whether the goods were destroyed in a commercial sense but is, in my view, more accurate insofar as it focuses on the practicality of repairs. If repair is technically possible but, for any number of reasons, utterly impracticable then the goods should be treated as destroyed.[24] Mr Ring submitted that the question of fact in each case could include assessment of the following circumstances:1. The nature and/or extent of any undamaged parts of the building.2. The nature and/or extent of the damaged parts of the building.3. The practicality of repairing only the damaged parts.4. Whether repairs could achieve restoration to substantially new condition.5. Whether the necessary resources are available within a reasonable time and at a reasonable cost to commence and carry out the repairs, including professionals, contractors, technology, equipment and/or materials.6. The likely duration of the reinstatement works.7. The period during which the building would be unusable.8. The estimated cost of the repairs, as compared with the estimated cost of rebuilding using currently equivalent building materials and techniques.6 As quoted in [7] above.9. The estimated cost of repairs, as compared with the estimated value of the building once the repairs were completed.[25] Applying the distinction between the concepts of destroyed and damaged for the purposes of the policy will only create difficulties where the extent of damage or unusual circumstances in relation to the completion of repairs puts the building close to the dividing line between the two concepts.[26] For the purposes of that distinction in this policy, I consider that the distinction between the two concepts of destroyed and damaged is intended to reflect the physical state of the property after the occurrence giving rise to any particular claim. The insured property will be destroyed when the extent of damage renders it impracticable to repair it in a way that restores it to its pre-occurrence condition.[27] In the present context, the definition of "destroyed" has no practical bearingon the scope of Vero's liability for any one occurrence under the primary indemnity cover. It would have a bearing on when Vero can treat the subject matter of the policy as no longer existing, so as to bring the contract to an end in return for payment of the full sum insured. For the purposes of reinstatement cover, any concern on Vero's part not to incur greater liability by virtue of the Marriotts' desire to restore their existing buildings, rather than make an economically rational decision to demolish what remains and start again, is addressed by Special Provision 3 as quoted at [20] above. That cap on its liability achieves certainty as to the scope of its risk, particularly in light of the answer to question 3 below.[28] Of the nine considerations proposed by Mr Ring, 1 to 4 are components of the assessment of the physical condition of an insured building. Considerations 5 to 9 do not necessarily reflect the extent of damage caused by the occurrence, and to a greater or lesser extent reflect the relative costs of repair or the time taken to achieve them, as contrasted with demolition and rebuilding. Again, the relevant limit on the amount that can be claimed is addressed in Special Provision 3.[29] To the extent that the approach adopted in Morlea in relation to damaged computer equipment was influenced by economic considerations, that analysis applied in so different a context from the considerations relevant to a building ownerthat I do not find it helpful as an analogy. In 1986 (as now) the speed of developments in computer technology cast real doubts on the utility of repairing any but the latest model of particular computer devices. In addition, there, the complexity of repairs and need to send the equipment out of Australia had a material bearing on the practicality of effecting repairs. Those could be seen as a combination of physical and economic considerations, and to the extent that they are economic, they do not have comparable utility in considering the prospects of restoration of a building for the purposes of deeming it either destroyed or damaged.[30] Accordingly, on question 1, I accept the interpretation contended for by the Marriotts, namely that the assessment reflects only the physical state of the property after the occurrence, and that a property is only to be considered "destroyed" rather than "damaged" where it is not reasonably practicable to restore it by way of repairto the condition it was in, prior to the occurrence giving rise to the claim.Question 2: Does the sum insured reinstate after each earthquake event?[31] Question 2 focuses on the interpretation of the provision for reinstatement of the amount of the insurance cover as addressed in clause MM20.3.5 of the policy. It provided as follows:MM20.3.5 REINSTATEMENT OF AMOUNT OF INSURANCE CLAUSEIt is understood and agreed that in the event of loss as insured by this Policy and in the absence of written notice by the Company or the Insured to the contrary, the amount of the insurance cancelled by loss is to be fully reinstated as from the date of occurrence, the Insured undertaking to pay such necessary premium as may be required for such reinstatement from that date.[][32] The effect of the clause is to stipulate the following propositions:If there is an event of loss that is covered by the policy, the amount by which the insurance cover is reduced by that loss will be reinstated as from the date of the event causing the loss.Reinstatement of the extent of cover is conditional on the insured undertaking to pay whatever premium is required by the insurer to reinstate the sum insured from the date of the event causing the loss.Reinstatement of the sum insured will not occur if either the insurer or the insured gives notice to the other, that it is not to happen.[33] The essential difference between the parties is that Vero interprets the clause as entitling it to give notice that reinstatement has not occurred from the date of an occurrence, at any time until it has paid the Marriotts the quantified extent of the loss for that prior occurrence. That entitlement to give notice that reinstatement has not occurred can, on Mr Ring's interpretation of the clause, apply retrospectively notwithstanding that there has been a second occurrence causing loss that would be covered by the policy. That would mean that after the second occurrence, Vero could give notice and reduce the amount of cover available for the second occurrence.[34] In contrast, Mr Rennie interpreted the clause as applying so that the reinstatement operates, effectively automatically, from the occurrence of a first loss and any subsequent notice that Vero is not prepared to reinstate the original sum insured could only have prospective effect from the time at which it is given.[35] Argument on this question dominated the hearing. A materially similar policy has recently been considered, in the context of similar claims, by Fogarty J in the Wild South litigation.7 In that case, a similar clause was interpreted as giving both parties to the contract a reasonable period of time to give written notice that reinstatement was not to occur. The judgment held that if neither party gave written notice within a reasonable period of time, it would be too late to dispute the automatic reinstatement. The policy in that case specified that the amount ofinsurance " will be automatically reinstated ", where the comparable words inthe present policy specify " is to be fully reinstated". The parties treated thedifference in policy wording as being immaterial.7 Wild South Holdings Ltd and Maxims Fashions Ltd v QBE Insurance (International) Ltd [2013] NZHC 2781 (Wild South).[36] Mr Ring's thorough submissions on this question included criticisms of Fogarty J's reasoning for the interpretation he applied, to support Mr Ring's urging that I not adopt the same interpretation.[37] For the Marriotts, Mr Rennie supported the approach adopted by Fogarty J in principle, but did not contend for the implication of an obligation that notice be given within a reasonable time. Rather, the interpretation urged for the Marriotts was simply that notice could only be given prospectively.The contractual context and purpose of the clause[38] Mr Ring acknowledged the position at common law that an insurer would be liable for successive damage caused by insured perils on separate occurrences, even if the aggregate of the claims exceeded the specified sum insured.8 However, as against that, he submitted that in the present context annual aggregation would occur so that the full sum insured was only available once, meaning that Vero's liabilitywould be exhausted once claims were met that totalled the sum insured. Mr Ring'spoint was that unless annual aggregation applied in that way, it was quite meaningless to include an automatic reinstatement provision in the policy. His analysis that the reinstatement clause was "quite meaningless" unless aggregation would otherwise apply adopted the expression used by the Privy Council inEarthquake and War Damage Commission v Waitaki International Ltd.9 That litigation involved the liability for earthquake levies in relation to a geographically spread portfolio of properties owned by the insured, where the policy limit wasspecified to apply to "any one loss or series of losses arising out of any one event".That stipulation in relation to the sum insured is not present here.[39] The argument about the reinstatement clause proceeded on the assumptionthat the reference in it to the amount of insurance being "cancelled by loss" would beeffective to reduce Vero's liability throughout the balance of the term of the policy, by the extent of any claim paid out to the Marriotts, in the absence of the reinstatement clause.8 Malcolm Clarke The Law of Insurance Contracts (6th ed, Informa, London, 2009) at 924, [28-1A].9 Earthquake and War Damage Commission v Waitaki International Ltd [1992] 1 NZLR 513 (PC).[40] Mr Ring characterised the purpose of the clause as being to maintain the same level of cover that the Marriotts contracted for at the outset, despite Vero meeting a claim that would otherwise have reduced the sum insured by the amount of the claim paid. Mr Ring treated the clause as being less important to fully insured property owners, but significant in those cases where an insured has elected to be only partly insured. There was no significant argument on the purpose of the clause. The difference between the parties was the manner in which it is to be effected.[41] Standing back a little from the immediate effect of the reinstatement provision, two further possible purposes for its inclusion arise. First, it explicitly addresses the potentially ambiguous position that would arise under the contract if claims are made in respect of more than one event during the term of the policy. On one hand, the classic common law position would presume that the full sum insured would continue to be available in respect of successive claims. On the other hand, the insurer could stipulate for aggregation of the amounts settled under successive claims, imposing a single limit up to the sum insured. By this clause, the latter option is the deemed starting position. The clause then proceeds to regulate the terms on which reinstatement of the sum insured is to occur, in the event of loss and in the absence of notice.[42] A second additional purpose is that the clause confirms the right of the insurer to charge an additional premium for reinstating the original level of cover. The terms of the reinstatement provision in a number of the other policies that have been considered in decisions that were cited to me constrained the insurer to charge any additional premium on the same basis as the original premium, pro rata for the extent of the top up and the remainder of the period of the policy. Vero's policy hasno such constraint. In addition, reinstatement is to occur in circumstances that enable Vero to review the nature of the risk, and to elect not to reinstate the extent of the sum originally insured. That could avail Vero if it considers that materially different risks have arisen. In those circumstances, Vero can give notice that it will not renew that portion of the insurance, without having to justify the change in its assessment of the risk it has assumed, or get agreement from the insured to do so.Application of the terms of the clause[43] Mr Ring argued that on the terms of the clause, no amount of the insurance is cancelled by recognition of a loss, until Vero pays out to the Marriotts. Accordingly, the reduction in the amount of insurance does not occur until the payment is made and at that point the extent of insurance is treated as being retrospectively reinstated back to the date of the occurrence. Because the cancellation of the extent of the loss paid out does not occur until that point, Vero has until that point to give written notice that reinstatement is not going to occur. On Mr Ring's analysis, the Marriotts'original position was maintained until Vero actually paid out on a claim, because until that point the total sum insured was still available. That achieved the purpose of the clause by affording an option for the Marriotts to apply the proceeds of the payment from Vero to effect repairs, or to keep it so that the Marriotts continue to have the extent of cover contracted for at the outset.[44] Mr Ring accepted that the interpretation he contended for meant that, in a sequence of circumstances such as arose in the Christchurch earthquakes, it would mean that Vero could elect to give notice that reinstatement had not occurred from the date of a first occurrence, after a second occurrence. The consequence would be that the Marriotts would then be covered to the lower sum left after deducting the amount paid out on the first claim.[45] The obvious concern is that Vero's interpretation left the Marriotts vulnerable to receiving notice that reinstatement had not occurred, after a period in which a further occurrence had given rise to a loss within the terms of the policy. Mr Rennie's objections to this situation included the argument that it removed the element of fortuity that is the essence of an insurance contract, by giving both parties an option not to reinstate, after an occurrence giving rise to a claim that would otherwise have been a risk covered by the policy.[46] My difficulty with Mr Ring's analysis is that to preserve the original extent of cover would require the Marriotts to hold the amount paid in settlement of the first claim as a fund to meet subsequent claims, so that the Marriotts would not be funded to pay for repairs, the cost of which determined the extent of the settlement fromVero. So far as a payment for indemnification is concerned, there is no obligation on an insured to apply the proceeds of a payment from Vero towards the cost of effecting repairs on the building. However, that is the general expectation when it is the need for such repairs that justify a claim, and the projected cost of doing so being one measure of the quantum of the sum paid out by Vero.[47] Although Mr Ring's analysis may accurately reflect the mechanics ofdealings between the parties, it is somewhat artificial in light of the overall purpose of the contract of insurance, and the on-going nature of the relationship, at least for the period of the policy. At the beginning of the contract, the insured commits topaying a premium for a year's cover to the extent specified in the contract, andsubject to having to pay an additional premium to top the cover up for the remainder of the year, in the event that a claim is made and accepted by the insurer.[48] That arrangement is subject to the contingency that if a claim is made, the insurer may thereafter give notice to the insured that reinstatement will not occur. From that point on, the insured would have to elect whether to continue with the balance of the sum insured with the original insurer and seek additional cover with another insurer, or to cancel the policy and arrange cover for the full amount procured at the beginning of the premium year, with an alternative insurer. That arrangement also works for the insurer, who will presumptively renew whatever part of the risk underwritten at the beginning of the year is deducted by the acceptance of a claim, subject to reviewing the insurer's option in the event of a claim if relevantconditions have changed to an extent that it is no longer satisfactory business for the insurer on existing terms. It cannot terminate whatever remains of its original underwriting commitment, but can, prospectively, decline to renew the component of the original commitment represented by the amount paid out in satisfaction of a first claim.[49] If the policy is seen to operate in that way, it is unnecessary, and antithetical to the maintenance of the equivalent bargain throughout the year, for the insurer to be able retrospectively to give notice that reinstatement has not occurred from an earlier point in time, including after an occurrence that would otherwise constitute a valid claim under the policy.Words contemplate retrospectivity?[50] The one aspect of the wording of the reinstatement clause that suggests aform of retrospectivity was contemplated is the use of the phrase "as from",contemplating a construct as to retrospective timing. Use of the phrase suggests the notion that reinstatement does not occur simply from the date of occurrence, whichwould be the case without the addition of the word "as", but that it occurs at somelater point and is then back-dated, when it does occur, to the date of the relevant occurrence. I am not satisfied that that aspect of the wording is sufficient to transform a provision which otherwise works prospectively in accordance with what I infer the parties to have intended at the outset of the contract, into a provision available to either party on a retrospective basis.Risk of notice inherent in the original bargain[51] Mr Ring argued that under-insured owners with a policy in these terms are on notice, as soon as a claim is made in relation to a first occurrence, that they may subsequently find themselves insured to a lower level because the insurer is entitled to give a retrospective notice that reinstatement has not occurred. It followed that under-insured owners would prudently canvass for additional cover against that contingency. There was no evidence on the prospect of that, although I have some sympathy for Mr Rennie's suggestion that cover on those terms is simply notavailable, or at least not readily identified and marketed.[52] In characterising the disadvantages of such an election to be under-insured, Mr Ring argued that the same dilemma would never arise for an owner who was fully insured. The commercial reality is that Mr Ring's proposition may well becorrect. However, conceptually at least, prejudice could also arise for owners who are fully insured, such as in an example Mr Rennie provided in his reply. Assume a building is fully insured for $8 million, and is damaged in the first earthquake to an extent of $2 million. The insured makes a claim for that amount and, after receiving an in principle indication from the insurer that the claim would be accepted, commits its own resources to effecting the repairs so as to minimise the losses flowing from the damage caused in the first earthquake. Having expended $2 million on repairs, the building is subsequently damaged more seriously in a second earthquake, thecost of such repairs being assessed at $7 million. Thereafter, the insurer pays the insured $2 million in settlement of the claim for the first earthquake and contemporaneously gives notice that reinstatement is not to occur after the occurrence of the first, $2 million, loss. In that circumstance, a supposedly fully insured property owner would be faced with a limit of cover of $6 million in relation to the second occurrence, when the building had been damaged to an extent costing $1 million more than that.[53] Even if there was no realistic prospect of a retrospective notice by the insurer prejudicing the interests of a fully insured property owner, I would not accept that the prejudice it would expose under-insured owners to could be justified on the structure of the policy, its terms and overall purpose. The better view is that the parties would recognise at the outset that the policy was to apply in a way that does not expose an under-insured owner to the contingent risk of learning that reinstatement is not being granted, after a second occurrence giving rise to a claim under the policy.[54] Mr Ring also submitted that contingencies of this type were a natural incident of entering into a contract, the continuation of which was subject to a provision forthe giving of notice that would change the parties' obligations. He invited analogy with the consideration by the Supreme Court of the application of notice provisions in Paper Reclaim Ltd v Aotearoa International Ltd.10 One point Mr Ring drew from that case was that entry into a contract on terms entitling the giving of notice that would change the bargain meant that the insured assumed the risk it might be disadvantaged in the event that notice was given. Mr Ring also cited the case for recognition of the point that a notice provision is likely to be agreed at the outset of a contract so that both parties can cushion themselves against sudden change, giving themselves time to make alternative arrangements of a sort similar to those which are then being terminated.11[55] The Supreme Court's analysis in Paper Reclaim cannot assist Vero in contending for a contractual entitlement to give retrospective notice that10 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169.11 At [8] and [4].reinstatement had not occurred. In Paper Reclaim, the issue was over the length of a period of prospective notice of termination that could be implied in a long-standing oral contract. It was to be measured in light of the circumstances existing when the contract was made, and was treated as a fact-specific assessment of what would be reasonable. The entire analysis is premised on any such notice being prospective, in the context of which an assessment is required as to how long would be reasonably sufficient for the party receiving the notice. In contrast, Vero's interpretation would give an insured receiving notice that the sum insured had not been reinstated absolutely no time to make alternative arrangements, after receipt of the notice. The damage for which cover was being sought would have directly occurred, and Vero'scontention would deprive the insured of an opportunity to seek cover for that damage, in advance.[56] In interpreting the notice provision in the reinstatement clause, the fact that the Marriotts entered into a contract that permitted the giving of notice does not, of itself, add anything to the argument that they should be taken to have assumed the risk that it could be given retrospectively by Vero.[57] Therefore, the reinstatement clause is to be interpreted so that the event of loss (that is, the date of occurrence) operates as a trigger for a claim against the policy, leading to a reduction in the extent of the insurance available to the insured. The proposition that reinstatement will occur from that point does not need to await the finite quantification of the amount by which the original sum will be reduced, once the prospect of that arises, and the parties will relatively soon know, in approximate or proportionate terms, the extent to which the original sum insured will be reduced.[58] The practical constraint on giving notice is simply that it must be given prospectively. The rationale for that limit in giving business efficacy to the contract is that the bargain struck between the parties contemplated that, from the time of an event giving rise to a claim, the policy was to be treated as being reinstated to the full sum insured, subject to the insurer notifying that reinstatement would not occur. This alternative course must occur before the insured's reasonable reliance on reinstatement estops the insurer from denying that it had occurred. From theinsured's perspective, once it has notice of the additional premium payable, it would have to give notice before the insurer relied on the undertaking specified in theclause that the premium would be paid. It would be to the insurer's detriment if itheld the insured covered when the insured was not prepared to pay for reinstating the original level of cover.Wild South[59] Mr Ring's criticism of Fogarty J's requirement for notice to be given byeither party within a reasonable time of a claim being made for a first occurrence included arguments that that interpretation involved the implication of a term, which did not pass muster on the five established criteria for doing so.12 In Dovey, the longer list of conditions for implication of a contractual term was essentially reduced by Tipping J to two, possibly because of their relevance to the contractual analysis in issue. It was expressed in these terms:13Leaving aside subsidiary points, these cases demonstrate that two things must be shown before a term can be implied into a contract. First, the term must be necessary to make the contract work. Second, the term must be so obvious that it goes without saying – that being why the parties have not said it. The obviousness requirement means that the term must be capable of clear and uncontroversial exposition.[60] In challenging Fogarty J's implication of a requirement that such notice begiven within a reasonable time of a claim being made, Mr Ring submitted that, on the present policy, it was not reasonable or equitable to require Vero to give notice before having all the relevant information. Further, that it was not necessary to imply any such term to give business efficacy to the contract. Mr Ring argued that the contract can work with a period of notice until settlement of the earlier claim, even if that occurs after a second occurrence, and that the qualification that notice must be given within a reasonable time was unnecessary. For the reasons set out above, I do not accept that the contract does have business efficacy in the context in which it was entered into, if the clause is interpreted to permit notice to be given after a second occurrence.12 Dovey v Bank of New Zealand [2000] 3 NZLR 641 (CA).13 At [40].[61] On the basis of the analysis I have undertaken, with great respect I do not consider that the clause requires the implication of a term that any notice that reinstatement is not going to occur must be given within a reasonable time of the first claim being made. That is not definitive, nor does it necessarily recognise the different contexts in which Vero and the Marriotts respectively would come to reconsider their original bargain in light of the circumstances of a first claim under it.[62] I do not treat the interpretation of the notice provision in clause MM20.3.5, that such notice is to be given prospectively, as requiring any implied term. It simply reflects what the parties meant by the words used. However, if I was wrong in treating the requirement for prospectivity as naturally arising, then to give business efficacy to the contract, I would interpret clause MM20.3.5 as impliedly requiring that any such notice to be given only prospectively.[63] The interpretation as to how notice might be given under the clause necessarily being given prospectively does not afford the Marriotts any period of time in which to adjust to the consequences of the alteration in their position. Vero could give notice one morning, and before the Marriotts had been able to make arrangements for substitute cover, a further occurrence that would otherwise have been covered by the policy could happen that afternoon. Equally, the requirement inWild South that any notice that reinstatement is not to occur had to be given within a reasonable time after the first claim does not require such notice to take effect only from some time after it is conveyed. The consequence is that the insured does not have an opportunity to reinstate the full extent of their cover elsewhere, without some gap in the extent of their cover.[64] The point may be important to an insured, and the absence of a period of warning before the reinstatement does not apply may, for example, cause the insured to be in breach of obligations to a mortgagee to maintain a certain level of insurance cover over the property.[65] Notwithstanding the commercial common sense from the perspective of an insured that they be given a period of notice before the absence of reinstatement will take effect, I am not persuaded that such an additional obligation on the insurer canarise simply as a matter of interpretation of the notice provision in the relevant clause.[66] Its absence means that an insured would prudently move promptly to arrange alternative insurance from that point on, the risk being an entirely unpredictable fortuity that may or may not arise in the hours, days, weeks or months after notice is given.[67] Mr Rennie did not contend for such an additional obligation on insurers, and it would require the implication of an additional term on reasoning similar to that adopted by Fogarty J in Wild South. This specific issue was not tested in argument, and I do not consider an implied term to achieve that outcome is warranted in this case. The upshot is that the Marriotts would have less insurance than they originally contracted for, between being given notice that reinstatement was not occurring, and making alternative arrangements.Question 3: Are the Marriotts entitled to repair costs up to the sum insured for the damage caused by each earthquake event?[68] The parties are likely to have had different reasons for agreeing to the inclusion of this question prior to receiving the decision in Wild South, and may also perceive its relevance differently depending on the answers to the prior questions.[69] In Wild South, Fogarty J doubted any sufficient utility in answering a substantially similar question in the absence of evidence on the application of the automatic reinstatement clause in the policies in those cases, to the particular facts.14Mr Ring submitted that I ought similarly to decline to answer it as an abstract issue of interpretation of the policy.[70] For the Marriotts, Mr Rennie submitted that the question was capable of argument as a matter of interpretation, and that the answer (at least as he contended for it) was useful to a resolution of the dispute. The Marriotts did not invite me to attempt any quantification of the repair costs.14 Wild South at [148].[71] Certainly, the question is not capable of a simple yes or no answer, and the contingencies on which the answer depends may be sufficiently uncertain, or depend on a factual analysis, to an extent that removes, or at least lessens, the utility of the answer in abstract.[72] The Marriotts accepted the analysis of the insurer's obligations in thejudgment of Miller J in TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd, which determined questions of the interpretation of insurance cover for Clarendon Tower, a substantial office building in central Christchurch.15 Miller J considered the nature of the obligations on an insurer where, in addition to indemnity cover for a commercial building, the parties have also contracted for reinstatement cover. An essential difference between the two is that because reinstatement covers the insured for depreciation of the property, in providing for the cost of replacement with as new assets (that is, more than the cost of old for old, and instead the cost of new for old). The reinstatement component provides for a cost the insured may elect to incur, that is not a consequence of the occurrence giving rise to the claim. As Miller J observed:16On recovering depreciation the insured finds itself in a better position than it was when the insured event happened, which both alters the central concept of indemnity that underlies fire insurance and increases moral hazard.[73] In TJK, the analysis confirmed the obligation of the insurer to pay the indemnity component of its obligation promptly after receiving a claim for damage to the insured property. That obligation arises irrespective of whether the insured has elected to effect repairs. The additional liability on the insurer that is contracted for under a reinstatement clause only arises after the insured has committed to reinstatement, and incurred the expense of doing so.[74] The policy in that case did not define indemnity value, but Miller J observed:17 but in a contract of indemnity the term normally means the actual amount of pecuniary loss that the insured suffered when an insured event happened.15 TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd [2013] NZHC 298.16 At [38].17 At [33].Lost market value, which happens to be the least measure of indemnity value here, is not a cost that the insured will incur while repairing or replacing the property.[75] Mr Rennie accepted that the Marriotts could not claim for repair costs not actually incurred. It follows that even if plans had been made to effect repairs after a first earthquake, but they were not undertaken because of the occurrence of a second earthquake, then the claim for such proposed costs does not survive. In most cases, the form and scope of repair work would thereafter be affected by the additional damage inflicted on the building in the second earthquake. Accordingly, assessing the reinstatement claim thereafter would reflect the work that would be done to effect all the repairs to the property, as required after the second earthquake.[76] Vero's primary obligation to indemnify after each occurrence for the extent ofthe loss incurred by the Marriotts does not necessarily require Vero to meet repair costs up to the sum insured. In materially similar terms to the policy considered inTJK, Vero's obligation here was expressed in these terms:18 The Insurer shall indemnify the Insured by payment, replacement, restoration or repair at the option of the Insurer or to such extent and in such manner as hereinafter provided.[77] Accordingly, on the primary obligation to indemnify, the insurer has options as to how the indemnity is to be quantified. Very recently, Vero has calculated the payment of indemnity value on the basis of a depreciated replacement cost, and made payment accordingly. I do not understand the Marriotts to dispute Vero'sentitlement to elect for that option. It certainly did not form part of the argument and so long as the Marriotts effect reinstatement, the mode of calculating indemnity value adopted by Vero will not affect the extent of their ultimate entitlement.[78] It follows that the Marriotts are not entitled to repair costs up to the sum insured for the damage caused by each earthquake under the primary indemnity obligation assumed by Vero.[79] To the extent that reasonable costs of reinstatement were actually incurred by the Marriotts, they would be entitled to an additional payment under the18 Policy Acknowledgement, MM20.1.reinstatement memorandum up to the policy limit, to the extent that such costs exceed the indemnity payment. That additional entitlement is also conditional on the special provisions in the policy relating to reinstatement/replacement cost being complied with.Question 4: Is the excess/deductible deducted from the amount of the loss or from the payment due under the policy?[80] The first of the policy exclusions applying to Module A (for material damage risks) was in the following terms:MM21.4.1 The Insurer shall not be liable for the deductible declared in the Primesure Certificate of Insurance and which amount shall be deducted from the adjusted loss in respect of each and every claim from any one event.[81] The certificate did not, in fact, stipulate any "deductibles" but did have asection specifying certain excesses. It is common ground, at least for presentpurposes, that a "deductible" and an "excess" had the same meaning. In relation toearthquake risk, there was an excess of 2.5 per cent of loss, with a minimum of $2,500.[82] This issue was argued in Wild South, where Fogarty J decided that deducting the deductible is the last step in the adjustment process.19 He observed:20It does not make any commercial common sense for there to be a limit on the sum insured agreed by the insurer, but with the deductible coming off a much larger sum which was never going to be payable by the insurer.[83] Mr Rennie argued that the approach in Wild South should not be followed, and he submitted on the basis of Australian authority that the deductible was to be subtracted from the amount of the loss suffered by the insured. Mr Rennie cited a decision of the Court of Appeal of New South Wales in Australian Consolidated Press Holdings Pty Ltd v Royal Insurance (Global).21 That case involved a claim by the owner of gold bullion against its insurers for loss subsequent to theft from a storeroom of a quantity of bullion. The policy limit for bullion was $5 million and19 Wild South, above n 7, at [139].20 At [142].21 Australian Consolidated Press Holdings Pty Ltd v Royal Insurance (Global) (1997) 9 ANZ Insurance Cases 61-351 at 76,897.the policy stipulated a deductible of $1 million for each 12 month insurance period. It was agreed that the bullion stolen had a value in excess of $5 million. The New South Wales Court of Appeal accepted argument for the insured that the insurer'sliability was to be calculated by determining the value of the property lost, whichwas the amount of the insured's claim, deduct from that sum any deductibles, andthereafter apply the monetary cap provision. Therefore presuming the bullion was worth more than $6 million, the claim was made for that amount notwithstanding the policy limit at $5 million, the $1 million deductible was subtracted from the gross value of the bullion stolen, and the insurer remained liable for the policy limit.[84] That approach depended on treating the primary obligation clause for the insurer as obliging them to pay the value of the goods lost. I do not treat the current policy as being structured on that basis.[85] The present policy quantifies Vero's liability by the deductible beingdeducted from the "adjusted loss". That is not a defined term. It was implicit inMr Rennie's argument that the adjusted loss for any claim was the gross extent of theloss as determined by an adjuster appointed to assess it. There was no evidence as to the practice of loss adjusters assessing the extent of loss pursuant to a claim. I put to Mr Rennie my understanding that the practice for loss adjusters is to take intoaccount the limit on the insurer's liability under a policy when quantifying an adjusted loss. Mr Rennie accepted that if the definition of an adjusted loss for the purposes of this policy reflected the practice as I understand it, then his argument could not succeed. Particularly in under-insured situations, it will be illogical for the costs of settling a claim to be increased by a loss adjustment process that involvedminute analysis of costs that would inevitably be in excess of the insurer's liability.On that basis, the adjusted loss will reflect the policy limit, and it is only after that point in the quantification of a claim has been reached that the deductible would be subtracted.[86] If I am wrong in my understanding of loss adjustment practice, then I would nonetheless adopt Fogarty J's reasoning from Wild South to reach the same conclusion. The process for settling claims ought to apply consistently as between fully insured and under-insured property owners. The rationale for having adeductible is that it represents a portion of any loss caused by a particular form of risk, for which the insurer does not assume liability. To effect that outcome in the case of a claim by a fully insured property owner, the deductible is the last amount subtracted before the insurer makes payment. There is no justification on the wording of the policy to suggest that the sequence of the calculation ought to be any different in the position of an under-insured.[87] Accordingly, in terms of the question, the excess is to be deducted from the payment otherwise due under the policy.Costs and post-hearing memoranda[88] Both parties have had a measure of success in terms of their respective contentions as to the answers for the questions posed. The second question loomed significantly larger than the others in terms of its apparent importance, although I had no reliable indication of the financial consequences of each of the questions, either within the confines of this claim, or more generally. I have, in effect, upheldthe Marriotts' position on that question. I have upheld Vero's stance on the manner of applying the deductible. In the circumstances, my provisional view would be to award costs in favour of the insured at two thirds of the scale costs on a 2B basis. If the parties cannot agree the matter of costs in light of that indication, then I invite memoranda, first on behalf of Vero within 35 days of delivery of this judgment, and then a memorandum in response on behalf of the Marriotts within 14 days thereafter.[89] Subsequent to the hearing, counsel for the Marriotts filed a memorandum dated 18 November 2013, seeking directions in relation to the progress in other aspects of the proceedings, and the setting of a trial date, with timetable orders working back from that date. Counsel for Vero filed a response to that dated 20 November 2013. That resisted the allocation of a trial date, at least pending consideration by the parties of the terms of this judgment and the impact of any appeal on the utility of proceeding to trial.[90] I direct that the parties are to confer in light of the content of this judgment, and provide either a joint memorandum or separate memoranda within 21 days of its delivery, setting out either an agreed course for progress with the proceedings, oralternatively the competing contentions as to what are the appropriate further steps in the proceedings.Summary[91] Returning to the questions posed at [4] above, I conclude that:(a) An insured building is destroyed for the purposes of this policy when the extent of damage makes it physically impracticable to repair the building to its pre-damage condition.(b) The sum insured reinstates after each earthquake event that causes loss, and does not need to await finite quantification of the extent of loss. Notice that reinstatement is not going to occur can only be given prospectively .(c) The Marriots are not entitled to the costs of repairs up to the sum insured for the damage caused by each earthquake event, if such repairs were not effected so that the expenses were not incurred.(d) The excess is to be deducted from the payment due under the policy.Dobson JSolicitors:Rhodes & Co, Christchurch for plaintiffsMcElroys, Auckland for defendant