QBE INSURANCE (INTERNATIONAL) LIMITED v WILD SOUTH HOLDINGS LIMITED AND MAXIMS FASHIONS LIMITED CA776/2013 [2014] NZCA 447

QBE INSURANCE (INTERNATIONAL) LIMITED v WILD SOUTH HOLDINGS LIMITED AND MAXIMS FASHIONS LIMITED CA776/2013 [2014] NZCA 447 [10 September 2014]IN THE COURT OF APPEAL OF NEW ZEALANDCA776/2013[2014] NZCA 447BETWEEN QBE INSURANCE (INTERNATIONAL)LIMITEDAppellantAND WILD SOUTH HOLDINGS LIMITEDAND MAXIMS FASHIONS LIMITEDRespondentsCA881/2013AND BETWEEN PETER STANLEY MARRIOTT ANDEUNICE ANN MARRIOTTAppellantsAND VERO INSURANCE NEW ZEALANDRespondentCA65/2014AND BETWEEN CRYSTAL IMPORTS LIMITEDAppellantAND CERTAIN UNDERWRITERS ATLLOYDS OF LONDONFirst RespondentsSIRIUS INTERNATIONALINSURANCE GROUP LIMITEDSecond RespondentHearing: 5, 6 and 7 August 2014Court: Wild, French and Miller JJCounsel: M R Ring QC and F W Rose for QBE Insurance (International)LtdN R Campbell QC and S P Rennie for Wild South Holdings Ltd,Maxims Fashions Ltd and P S and E A MarriottD J Goddard QC and PJH Hunt for Vero Insurance NewZealand LtdZ G Kennedy and I Rosic for Crystal Imports LtdB D Gray QC and K Pengelly for Certain Underwriters atLloyds of London and Sirius International Insurance Group LtdJudgment: 10 September 2014 at 2.00 pmJUDGMENT OF THE COURTA The appeals and cross-appeals are allowed to the extent set out at [138]–[149] of the judgment.B Costs are reserved.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)TABLE OF CONTENTSIntroduction .............................................................................................................. [1]Facts and issues ........................................................................................................ [4]QBE v Wild South and Maxims Fashions (Fogarty J) ........................................... [5]Marriotts v Vero (Dobson J)................................................................................... [9]Crystal Imports v Lloyds (Cooper J) .................................................................... [12]Issues ....................................................................................................................... [15]Interpretation ......................................................................................................... [18]Reinstatement ......................................................................................................... [19]The issue ............................................................................................................... [19]What the policies say ............................................................................................ [20]Submissions .......................................................................................................... [24]Is the insured indifferent to reinstatement of cover pending the insurer'spayment? .............................................................................................................. [35]"Loss" in the reinstatement clauses ..................................................................... [46]Notice ................................................................................................................... [49]Conclusions .......................................................................................................... [55]Reinstatement of cover in operation .................................................................... [56]The High Court judgments ................................................................................... [59]Merger ..................................................................................................................... [69]Why merger? ........................................................................................................ [72]The indemnity principle survives Ridgecrest ....................................................... [77]The indemnity principle and successive losses .................................................... [81]The insured's loss: the indemnity principle in operation ..................................... [87]Destroyed ................................................................................................................ [90]Deductible ............................................................................................................. [109]Average .................................................................................................................. [122]The Marriotts' entitlement to repair costs ......................................................... [134]Results and answers ............................................................................................. [138]Automatic reinstatement ..................................................................................... [139]Deductible .......................................................................................................... [143]Other questions in the Marriott appeal .............................................................. [145]Remaining question in the Crystal Imports appeal ............................................ [148]Costs ...................................................................................................................... [151]AppendixIntroduction[1] The Christchurch area experienced serious earthquakes on 4 September 2010, 22 February 2011 and 13 June 2011. Frequently two and sometimes all of these events happened within the annual term of an insurance policy covering a given property. Damage from one earthquake often awaited repair when the next one struck.[2] The policies at issue in these appeals all concerned commercial buildings. Each policy provided full replacement cover subject to a sum insured, and each provided for annual aggregate with automatic reinstatement of cover upon loss. One policy was renewed between earthquakes.[3] The successive losses raise two distinct questions which divide the ownersand insurers: what is the limit of an insurer's liability in these circumstances, and forwhat losses may an insured claim indemnity?Facts and issues[4] The three judgments under appeal answered preliminary questions which rested upon agreed statements of fact. The full statements of fact and preliminary questions are collected in an appendix to this judgment.QBE v Wild South and Maxims Fashions (Fogarty J)[5] This appeal concerns two substantial commercial buildings that were damaged in the September, February and June events, all of which happened within the annual terms of the policies.[6] The policies include an automatic reinstatement clause under which cover reinstated on loss unless either party gave notice to the contrary. Notice has never been given but QBE Insurance (International) Ltd says it is still not too late, for cover is not cancelled and reinstated for any given loss until the insurer has paid, and then only to the extent of payment. The insureds, Wild South Holdings Ltd and Maxims Fashions Ltd, say that cover reinstated in full immediately upon each earthquake, so that the full sum insured is available for each event, and notice cannot be given retrospectively.[7] The policies also provide for a deductible. QBE says that the deductible is to be subtracted from the sum insured, which supplies the operative limit of its liability. The insureds say that it must be deducted from their actual loss, which is much larger, meaning that they should receive the sum insured free of deductible.[8] Five questions were asked but only two are now relevant. Those questionsand Fogarty J's answers are:1Q2. What is the proper interpretation and application of the automatic reinstatement clause in the policies?A.(a) The insurer and the insureds have a reasonable period of time to give written notice to the contrary. If they do not given written notice within a reasonable period of time, it will be too late for either the insurer or the insureds to dispute automatic reinstatement.(b) Whether or not there was automatic reinstatement of cover, before the February quake and thereafter before the June quake, depends upon the knowledge and conduct of the parties to the policies after each quake. Evidence is required before a Court can judge whether the reasonable time for giving notice to the contrary has passed.Q5. What is the proper application of any excess or deductible under the policies?A. The answer in respect of Wild South, is that the deductibleapplies to the adjusted loss.Marriotts v Vero (Dobson J)[9] Peter and Eunice Marriott own two commercial buildings (actually a duplex with a common centre wall) which were damaged in the September and February events. The Marriotts say that they were also damaged in June, but Vero Insurance New Zealand Ltd says that any such damage is academic because the buildings were"destroyed" by the February event. The policy renewed on 22 May 2011.[10] The policy contains an automatic reinstatement clause. Vero gave notice on 15 October 2013, purporting to cancel reinstatement of cover with effect from the September 2010 event. It has paid what it says is the indemnity value. The policy also provides for a deductible or excess, which Vero has subtracted from the sum insured.[11] Four questions were asked. The questions and Dobson J's answers are:21 Wild South Holdings Ltd v QBE Insurance (International) Ltd [2013] NZHC 2781 at [147] and [152]. Fogarty J chose not to answer question 5 in the case of Maxims Fashions, and it is not in issue on appeal.Q1. When is the building destroyed under the policy?A. An insured building is destroyed for the purposes of the policy when the extent of damage makes it physically impracticable to repair the building to its pre-damage condition.Q2. Does the sum insured reinstate after each earthquake event?A. 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.Q3. Are the Marriotts entitled to repair costs up to the sum insured for the damage caused by each earthquake event?A. The Marriotts 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.Q4. Is the excess deducted from the amount of the loss or from the payment due under the policy?A. The excess is to be deducted from the payment due under the policy.Crystal Imports v Lloyds (Cooper J)[12] Crystal Imports Ltd owns five commercial buildings in the Christchurch area. They were insured with Lloyds3 under a single policy with a separate sum insured for each building. Each was damaged in the September and February events.4 Three of the buildings have since been demolished. It appears that the parties are in dispute about whether one of the two remaining properties, the New Brighton Mall, has been destroyed.[13] The policy includes an automatic reinstatement clause and is subject to average. The average provision is the subject of a dispute affecting the New Brighton Mall.2 Marriott v Vero Insurance New Zealand Ltd [2013] NZHC 3120 at [4] and [91].3 For convenience we will refer to Certain Underwriters at Lloyds of London and SiriusInternational Insurance Group Ltd as "Lloyds".4 Some policies define an event by reference to damage occurring within a given period of time, such as 72 hours, but the Lloyds policy defines an event as an event or series of events originating from one source or original cause. Counsel gave us to understand that Lloyds may categorise all of the earthquakes as a single event. We express no view about that. The argument before us assumed for present purposes that each of the three earthquakes was a separate event.[14] Two questions were asked. The questions and Cooper J's answers are:5Q1. What is the extent of the defendants' liability to indemnify theplaintiff for the separate damage caused to the plaintiff's insuredproperties by the September earthquake?A. The defendants' liability to indemnify the plaintiff for the separatedamage caused to the insured properties by the September earthquake is limited to the sums that had already been paid at the time of the February earthquake. Thereafter, the liability is limited to the maximum amount set out in the Schedule as the sum insured for each building. For the avoidance of doubt, that amount would be the full sum insured, without deduction for the September payments.Q2. Does the Average clause in the Policy limit the defendants'obligation to pay the plaintiff the full sum insured for the damage caused by the February earthquake to the plaintiff's New BrightonMall property?A. The value of the insured property for the purposes of the Average clause will reflect the basis of recovery elected by the plaintiff in respect of covered damage to that property. If the plaintiff elects not to reinstate the insured property, the answer to the second question is no, based on the estimates contained in paragraph 20 of the agreed statement of facts.Issues[15] Each of the answers quoted above was the subject of an appeal or cross- appeal. Counsel helpfully opted for an issue by issue rather than case by case approach. The first three issues are connected, and they lie at the heart of these appeals:(a) What do the automatic reinstatement clauses mean; in particular, is cover continuous, or does it reinstate only when depleted by aninsurer's payment? This issue arises in all the appeals.(b) Whether the marine insurance doctrine of merger applies to material damage policies. The Crystal Imports appeal formally raised this issue, but all counsel addressed it.5 Crystal Imports Ltd v Certain Underwriters at Lloyds of London [2013] NZHC 3513 at [7] and [144]–[145].(c) When a building is "destroyed" for purposes of the Vero policy.Although this issue arises in one appeal only, it is of wider significance.[16] The remaining issues are independent:(a) How the deductible is to be applied when calculating the sum payable to the insured under the QBE and Vero policies.(b) Does the average clause limit Lloyds' obligation to pay CrystalImports the full sum insured for damage that the February event caused to the New Brighton Mall.(c) Whether the answer that Dobson J gave to the third question above requires clarification.[17] The appeals were argued before the Supreme Court delivered its judgment inRidgecrest NZ Ltd v IAG New Zealand Ltd.6 That judgment disposed of the merger issue, although we must still discuss it for reasons which will become apparent. The Supreme Court did not address the other issues.Interpretation[18] Counsel agreed that no special rules apply to the interpretation of insurancecontracts; the court's ultimate objective, as in any other case, is to decide whatmeaning the parties intended their words to bear.7 Analysis begins with the words of the contract, but an apparently plain meaning can be displaced if the context shows that the parties intended their words to mean something else.8 So, for example, words which bear a special meaning in the insurance context may be interpreted in that sense.9 This last point is of some moment in the present appeals, which concern questions argued before trial. Where interpretation rests on special meanings that are6 Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 117 [Ridgecrest].7 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19].8 Vector Gas Ltd, above n 7, at [4] per Blanchard J, [24] per Tipping J and [77] per McGrath J;Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 at [33].9 Scragg v United Kingdom Temperance & General Provident Institution [1976] 2 Lloyd's Rep227 at 233.not settled, the answers must await trial. Finally, the court may employ the contra proferentem rule to resolve an ambiguity against the insurer, whose policy it is.10ReinstatementThe issue[19] The question is whether cover reinstates as soon as an event causing loss happens, as the insureds say, or when and to the extent that the insurer pays for that loss, as the insurers say. In our factual setting, the question can be framed in an alternative way: how much cover do the policies offer for event #2 where that event happens before the insurer has paid for loss from event #1?What the policies say[20] The policies all provide for full replacement limited by a sum insured and subject to annual aggregate. Claims are adjusted separately. So, for example, the Wild South policy provides:If during the Period of Insurance, physical or damage that is neither expected nor intended by the Insured is caused to any of the Property Insured by anEvent the Insurers will indemnify the Insured subject to the exclusionsand other terms of this policy.Subject to the Reinstatement of Amount [condition] of this Policy the Insurers' liability will not exceed the applicable Sum Insured .Each Event will be adjusted separately. An Event means an event or series of events arising out of the one cause or related causes during any period of 72 consecutive hours.[21] Upon loss #1, annual aggregate reduces the cover available for the balance of the term. A reinstatement clause restores the cover depleted by loss, on terms. For example, each party may have the right to cancel reinstatement of cover by notice after loss #1, and the insurer may have the right to levy an additional premium for10 D A Constable Syndicate 386 v Auckland District Law Society Inc [2010] NZCA 237, [2010] 3 NZLR 23 at [69].reinstatement.11 (We use "reinstatement of cover" because the policies also employ the term "reinstatement" when referring to repairs or rebuilding.)[22] The clauses in the policies before us provide:QBE (Wild South)In the absence of written notice by the Insurers or the Insured to the contrary, the amount of insurance cancelled by loss or damage is automatically reinstated as from the date of loss or damage. The Insured undertakes to pay such pro rata premium at the rate applicable to the item or items concerned as may be required for the reinstatement.QBE (Maxims Fashions)In the event of a loss for which a claim is payable under Part 1, and in the absence of written notice by QBE or the Insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss. The Insured undertakes to pay such pro rata premium at the rate applicable to the item(s) concerned as may be required for the reinstatement.Vero (Marriott)It 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.Lloyds (Crystal Imports)In the event of loss for which a claim is payable under this Certificate, and in the absence of written notice by the Company or the Insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss. The Insured undertakes to pay such pro rata premium at the rate applicable to the item or items concerned as may be required for the reinstatement.[23] The reinstatement provisions vary somewhat, but counsel accepted that thedifferences are not material. Each provides for reinstatement of the "amount ofinsurance cancelled by loss". Each provides for automatic reinstatement of coversubject to written notice by either party to the contrary. And each includes an undertaking by the insured to pay an additional premium.11 In this respect these appeals differ significantly from Ridgecrest, above n 6, in which the policy evidently did not provide for annual aggregate and reinstatement. It provided, unusually, for aper "happening" limit.Submissions[24] Counsel for the insurers, led on this issue by Mr Ring QC, began their analysis by contending that physical loss or damage is a necessary but not sufficient condition for cancellation and reinstatement of cover. This is true even of theMaxims Fashions clause, which begins with the words "[i]n the event of a loss forwhich a claim is payable".[25] Next, counsel argued that what cancels cover is not physical loss to the insured but payment by the insurer. Loss may be the ultimate cause of reinstatement, but not until and to the extent that the insurer pays for the loss is cover cancelled."Loss" is not assigned a temporal meaning in the policies.[26] Next, counsel submitted that "automatically reinstated" means that the suminsured is replenished on, and to the extent of, payment for loss #1, without further action by either party. If in light of event #1 either party wants to avoidreinstatement, it must give notice. The notice ensures that the insured's cover will belimited, for event #2, to whatever part of the original sum insured was not exhausted by loss from event #1.[27] Next, counsel submitted, reinstatement takes effect from the date or occurrence of the physical loss or damage; that is, cover is replenished retrospectively. On payment for event #1, the sum insured is available to meet loss from event #2.[28] Finally, it was said that notice of non-reinstatement may be given at any time before the insurer pays, for any amount of cover yet to be reinstated. For example, the insurer may give notice of non-reinstatement after event #2, should that event happen before the insurer pays for loss from event #1. The insurers say that notice may be given after the policy term expires. By way of example, Vero gave notice on 15 October 2013 of non-reinstatement of the Marriotts' cover from the 22 February2011 earthquake (the Marriotts had withdrawn their claim in respect of the 4 September 2010 earthquake), although the policy year in which those two earthquakes happened had ended on 22 May 2011.[29] In support of the argument that notice may be retrospective, Mr Goddard QC pointed out that until loss #1 has been adjusted the insurer cannot know how much of the cover requires replenishment, so cannot set a new premium. And if loss #2 happens before payment, the insurer must be able to set the premium with knowledge of the loss to which it relates. The Vero policy does not provide that the additional premium is to be calculated on a pro rata basis and contains no otherexpress mechanism for calculating it except that the premium must be "necessary".This argument is not available to QBE, whose policy does provide for a pro rata additional premium; Mr Ring argued accordingly that it would be contrary to the principle of fortuity underlying all insurance to force QBE to reinstate cover for a pro rata premium in the knowledge that event #2 had happened.[30] Mr Ring acknowledged judicial reluctance to give retrospective effect to notice. He argued that no difficulty arises here for, event #1 having happened, the insured is untroubled by the risk that event #2 will happen before the insurer pays; the insured is no worse off, having regard to the level of cover it originally selected, if cover reinstates on payment. Conversely, the insured receives an unintended benefit, in the form of increased cover, if the sum insured reinstates immediately on loss from event #1. Counsel would have it that the insureds in the cases before us are seeking, with the inestimable advantage of perfect hindsight, to capture this very benefit.[31] Developing this argument, counsel observed that automatic reinstatement is a corollary of annual aggregation. Policies typically set an aggregate limit because an insurer is otherwise liable at common law for successive damage from insured perils even if the aggregate loss exceeds the sum insured.12 It is only because the policy provides for an overall limit that reduces with each claim that the insured experiences a need for reinstatement of cover within the policy term.13[32] Counsel submitted that the need for replenishment of cover arises only where the insured spends insurance proceeds on reinstating the property after loss #1. In12 Malcolm Clarke The Law of Insurance Contracts (6th ed, Informa, London, 2009) at [28-1A]. Compare Marine Insurance Act 1908, s 77.13 Earthquake and War Damage Commission v Waitaki International Ltd [1992] 1 NZLR 513 (PC) [Waitaki (PC)] at 518.that case the amount paid for loss #1 depletes the sum insured available for a subsequent loss #2 that happens within the policy term, but because the property has been made good the insured requires the same level of cover that it enjoyed before loss #1.[33] Conversely, counsel submitted, the insured has no need for reinstatement of cover until payment for loss #1, because the entire sum insured is still available to meet losses happening during the term. Of course an unknown part of that sum will be required to meet loss #1, but pending repairs the property has been diminished by the damage and what remains of the sum insured after provision for loss #1 will ensure the property remains covered to the "same proportion of the insured value" asthe insured selected when the policy began. Mr Ring used the example of a building costing $8M to replace but insured for half that sum and damaged in event #1 to the extent of $3M. He argued that what remains of the cover, $1M, is sufficient, when added to the $3M loss from event #1, to pay for half the cost of rebuilding, being the level of cover originally selected by the insured.[34] Problems arise, counsel submitted, only where the insured chose a suminsured that was less than the property's full replacement value and later regrets thatdecision.14 If the sum insured were to reinstate immediately upon loss #1, the insured would enjoy, pending full payment for loss #1, an aggregate sum insuredrepresenting a greater proportion of the property's value than it had originallychosen. That is not the objective of an automatic reinstatement clause. In return for this benefit the insured would pay a premium that took no account of any change in risk, since the additional premium would be calculated, in QBE's case, on a pro ratabasis. Further, there would be no need for the policy to provide for depletion and replenishment if cover reinstated on loss; in that case cover would be continuous and the policy would have said so.14 We note that Fogarty J in Wild South Holdings Ltd, above n 1, at [1] stated that the insureds deliberately underinsured their buildings, but before us counsel agreed that the record does not establish that fact.Is the insured indifferent to reinstatement of cover pending the insurer's payment?[35] We begin our analysis with counsel's proposition that, event #1 havinghappened, the insured is indifferent to the risk that event #2 will happen before cover is reinstated by payment. This proposition rests on the assumption that whatever remains of the sum insured after provision for loss #1 will maintain cover for the property, in its damaged condition, to the level originally chosen by the insured. We do not think that proposition is invariably or even reliably correct, for several reasons.[36] First, it cannot be known what will be the form and measure of indemnity for either loss #1 or loss #2. Indemnity may take the form of the cost of repairs, the cost of full replacement, or the market value of what was lost. The amount of loss, which determines how much cover is available for event #2, is unknown until loss #1 has been calculated.15 These things may take some time. Even in the case of an insured who selected a sum insured that was estimated as full replacement cost from a single event, it cannot be said confidently after event #1 that whatever remains of the coverafter payment for loss #1 will suffice to cover the property's reinstatement cost, whatever that may be, if event #2 happens before reinstatement is completed. As Mr Gray QC acknowledged, the clause deals imperfectly with the adequacy of cover remaining while repairs are undertaken. Mr Ring did not suggest otherwise. He suggested rather that such an insured is in fact underinsured; it ought to have set a sum insured that exceeded full replacement value.[37] Second, as Dobson J observed in Marriott, loss #1 may alter the insured'sview of risk, increasing its concern that the remaining cover may not suffice for the damaged building.16 By way of example, one natural disaster may be followed by another, and a damaged building may be more exposed to other risks, such as fire. Mr Ring characterised the resulting desire for cover as opportunism by the insured, but that is to beg the question by presuming that immediate reinstatement alters the15 We use the term "calculated" in preference to "adjusted" because of the dispute about whatadjusted loss means. By calculated, we mean that the loss caused by the relevant event has beenquantified, without applying any policy limits or deductibles.16 Marriott, above n 2, at [45].parties' bargain.17 The policies provide for cancellation of reinstatement by notice should the insurer find the risk excessive or the additional premium inadequate.[38] Third, Mr Ring assumed that the insured will not incur the cost of repairs until the insurer adjusts the loss and pays. He characterised as unrealistic a scenario in which event #2 happens after the insured has incurred the cost of reinstatement but before payment. We are unable to see why the scenario is unrealistic. The policies leave no room for assumptions that the insurer will pay before the property is reinstated, or even that the insurer will pay immediately upon its reinstatement, or that the insurer will elect not to cancel reinstatement of cover where loss #2 happens before it has reimbursed the insured for loss #1. They are full replacement policies which envisage that the insured will, or may, commission reinstatement work and claim reimbursement from the insurer. Delay between the insured incurring expense and the insurer reimbursing it is inherent in that process, and the delay may be significant if only because the insured may begin the work at once, before the loss has been calculated. By way of example, the Wild South policy provides for an immediate indemnity payment, but specifies that the insurer will not meet theadditional cost of reinstatement until that cost has been "actually incurred". Thepolicy does not exclude indemnity for reinstatement work commissioned beforeadjustment, although such work is at the insured's risk in the limited sense that theinsurer has yet to accept liability or quantify its payment.[39] Mr Ring referred us to two authorities in support of his argument that only by payment is cover reduced. The first is the judgment of the Privy Council inEarthquake and War Damage Commission v Waitaki International Ltd, which concerned levies set for earthquake cover under the Earthquake and War Damage Act 1944.18 The levies were based on the indemnity value under the insured's policyof fire insurance. The policy concerned provided that the insurer must pay full replacement value of the insured property, subject only to a per event limit of $50M. It also provided for reinstatement of the sum insured, in terms very similar to the policies before us. As their Lordships observed, it is meaningless to speak of17 A similar view was taken of a related argument, that reinstatement results in the insuredrecovering more than the sum insured in a single policy year, in Ridgecrest, above n 6, at [14](b).18 Waitaki (PC), above n 13.reinstatement in a policy which provides for full replacement and specifies no sum insured.19 The reinstatement clause would be intelligible "if the limitation ofliability were an overall limitation so that, on each claim being met, the amount ofthe cover was pro tanto reduced".20[40] We do not accept counsel's analysis of the case. We observe that their Lordships were not called upon to decide when cover was reduced; in the policy before them, it never was. And their Lordships went on to suggest that the insurer was obliged to maintain full cover as each claim was made and reinstatement was immediate:21There is never a point in time at which the whole of Waitaki's property is not covered against loss to its replacement value . As a claim is made, so,under the contract, the insurer becomes obliged to keep the policy covered up to the prescribed limit .[41] To similar effect, this Court held in the same case that:22The object of such clauses is to readjust the insurance as losses occur so that there is always a total liability of the specified amount on the underwriters and the total insurance applicable as occasion may arise of the specified sum in favour of the assured.[42] The second case is the Full Court judgment in Re Earthquake Commission.23That case resulted from the Canterbury earthquakes. The question was whether the statutory cover under the Earthquake Commission Act 1993 reinstates when a loss happens, or when the Earthquake Commission (EQC) pays for that loss. Clause 6 of sch 3 of the Act stated that cover "shall continue" and EQC may levy an additional premium "on the payment of any amount for any natural disaster damage to any property". EQC argued that cover was not continuous. The insurers, whose top-up cover would step in if EQC cover depleted pending payment, argued that it was. The Court held that cover was continuous. It observed that:2419 At 518.20 At 518.21 At 520–521.22 Waitaki International Ltd v Earthquake and War Damage Commission [1991] 1 NZLR 450 (CA) at 457. The Court cited the judgment of Hamilton J in American Surety Co of New York v Wrightson (1910) 103 LT 663 (KB) at 667.23 Re Earthquake Commission [2011] 3 NZLR 695 (HC).24 At [31].Payment is the appropriate triggering event because until there is payment for some natural disaster damage, the amount of cover continues undiminished. There has been no payment to reduce the amount of cover available. Conversely, until the damage is repaired, there has been no addition to or improvement of the insured property such as to raise the need for additional cover.[43] Cover under the statutory regime being continuous, what payment triggersunder the regulation is not renewed cover but EQC's entitlement to an additional premium. To the extent that the Court's observations go further than that, we take adifferent view for the reasons we have just given. We observe too that before us Mr Ring abandoned an analogy between reinstatement and the capital additions clause in the Wild South policy, which extends cover to additions or improvements when risk in them passes to the insured and provides that the insurer may levy an additional premium. He accepted that the capital additions clause addresses the scope of cover; it contemplates that the assets insured have changed.[44] For these reasons we reject the insurers' argument that reinstatement of coverserves no commercial purpose, other than the present insureds' "illegitimate"objective of increasing the sum insured with hindsight. Event #1 having happened, there may be good reason for an insured to seek reinstatement of cover immediately, anticipating that it may require the sum insured to meet loss resulting from any further events during the term.[45] By contrast, on the insurers' analysis the automatic reinstatement provisionsare all but redundant, since reinstatement depends on the insurer's decision whetherand when to pay and such decisions may not be made before the policy expires. If the insurers are correct the language of automatic reinstatement is apt to mislead by encouraging the insured to think that cover will reinstate without further action immediately on event #1. We note too that some of these are full replacement policies which envisage, or appear to envisage, that the sum insured will be set at alevel fixed by valuation. On Mr Ring's argument, full replacement cover would require the insured to fix a sum insured in excess of the valuation."Loss" in the reinstatement clauses[46] We turn to the policy language, upon which Mr Campbell QC understandably focused his argument for the insureds. The policies all provide that an amount ofinsurance is cancelled "by loss" (or, in the Wild South policy, "by loss or damage").They do not provide that cancellation happens on payment or that it is conditional upon payment or, still less, the insured spending the insurance proceeds on repairs orreinstatement. We accept Mr Campbell's submission that although no payment hasbeen made it is realistic to speak of cover being cancelled by loss, since the insurer is immediately liable to indemnify the insured, only the precise amount remaining to be established, and reinstatement replenishes cover exhausted by the loss.[47] Next, the clauses all use the word "loss" more than once, and the insurersaccept that in at least one instance the term means physical loss. The Wild South, Maxims Fashions and Crystal Imports policies refer to physical loss when they speakof reinstatement "from the date of loss". (The Marriott policy speaks of reinstatement "from the date of occurrence", which means the same thing.) TheMaxims Fashions, Marriott and Crystal Imports policies also refer to physical losswhen they speak of loss "for which a claim is payable" or which is "insured" by thepolicy. So the insurers' argument is that the term bears different meanings within thesame provision. That is possible,25 but it is not very likely.[48] If reinstatement happens on loss, cover is continuous, as Mr Ring pointed out, but the language of depletion and reinstatement does not preclude continuous cover.26Notice[49] The insurers' argument also requires that notice may operate retrospectively, its effect being backdated to the date of event #1. Courts interpret a notice provision in that way reluctantly, since the recipient can respond with prospective effect only.2725 See Watson v Haggitt [1928] AC 127 (PC).26 Waitaki (PC), above n 13, at 518.27 Bank of New Zealand v Board of Management of the Bank of New Zealand Officer's ProvidentAssoc [2003] UKPC 58, [2004] 1 NZLR 577 at [26] albeit in a legislative context. See alsoKazakstan Wool Processors (Europe) Ltd v Nederlandsche Credietverzekering Maatschappij NV[2000] Lloyd's Rep IR 371 (CA).In this context, as Mr Campbell submitted, retrospectivity is incompatible with the premise that insurance protects against chance. It would allow either party to decide whether to reinstate cover from the date of event #1 with certain knowledge that in the interim an event #2 has, or has not, happened.[50] Mr Ring also invoked fortuity as noted at [29] above, arguing that unless notice is retrospective QBE may be forced to reinstate cover in exchange for a fixed premium, notwithstanding that event #2 has happened. But QBE chose at the outset to offer automatic reinstatement and to fix the rate of the additional premium. By so doing it priced in advance any risk of adverse selection, meaning the possibility that its insured stood in greater peril during the term than QBE knew. Presumably QBE thought itself adequately protected by its right to cancel reinstatement. We accept that although the rate is known, the amount of the premium cannot be fixed finally until the cover reinstated by loss has been settled, but that does not preclude earlier notice; estimates of loss should not take long.[51] Vero is in a different position. Mr Goddard argued that it might set the additional premium payable after event #1 to reflect the fact that event #2 had happened before either party gave notice of non-reinstatement. That being so, he submitted, automatic reinstatement on loss #1 would expose the insured to an unknown but potentially massive premium liability for the period following loss #1. He argued that, partly for this reason, insured and insurer both require a period after event #1 in which to reflect upon reinstatement. We record that Mr Campbell argued that the insurer would be constrained, perhaps by its contractual duty of good faith or a requirement that it must fix the new premium as at the date of event #1 since cover reinstates at that time. This controversy is not before us, and on the view we take we need not decide it. Uncertainty about the basis upon which Vero might fix anadditional premium after event #2 favours the insurers' construction, but even if Vero were correct on this point it would not alter our conclusions.[52] This is a convenient point to remark upon a certain inconsistency in theinsurers' arguments. If it were correct that until payment the insured has no need ofreinstatement, one would expect the insurers to contend that cover does not reinstate retrospectively but only for the future, with effect from payment. In that case noticeneed not operate retrospectively. Counsel for the insurers did not advance that straightforward argument, presumably because the policies provide quite plainly that reinstatement takes effect from the date of event #1. It must follow, we think, that the parties saw benefit in reinstatement of cover immediately upon event #1.[53] If cover reinstates immediately on event #1, notice poses no difficulty. It is always prospective. Liability to indemnify, on the one hand, and to pay a premium, on the other, arise at once, but either party may give notice cancelling reinstatement with prospective effect. Notice must be given before the term ends, since it can affect cover and premium for only so much of the term as remains when notice is given. It follows that if reinstatement is not to apply to event #2, notice must be given before that event happens. To say that is not, as counsel for the insurers argued, to imply a term into the policy. It is merely to remark upon what may happen if notice is not given.[54] We agree with counsel for the insurers that we need not imply any other term as to when notice may be given. We do remark that, as Mr Ring argued, notice is designed to allow the insured to make alternative arrangements, which indicates thatan insurer's notice, when given, must allow the insured a reasonable time in which todo so.28 But that is a separate question.Conclusions[55] For these reasons we prefer the insureds' construction of the policies. Thecover required to meet a given loss reinstates immediately following the happening of the insured event that caused it. The insured incurs at the same time a liability to pay any additional premium for which the policy provides. Either party may by notice cancel reinstatement, but such notice takes effect prospectively, leaving in place both cover and liability for any additional premium for the period between reinstatement and notice.28 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [4].Reinstatement of cover in operation[56] We will illustrate our reasoning with an example. Suppose that the insured building is covered to a limit of $8M, while its replacement value is $12M. The sum insured is an annual aggregate limit, but the policy contains a reinstatement clause. The insured suffers a loss of $3M in event #1, in the form of the costs of repair needed. Following event #1 cover reinstates so that $8M is immediately available for a future event #2. At that point, the limit on liability fixed by the sum insured is, for event #1, the cover cancelled by loss, and for a future event #2, the sum insured.[57] Each loss must be calculated separately, so the sums insured29 are not simply added, but subject to that point, the total limit (set by the sums insured) for event #1 and a future event #2 happening within the policy term now exceeds that for a single event; it is $11M ($3M for event #1 plus the reinstated cover of $8M for future event #2). This is not in itself controversial; the insurers in these appeals accept that such is the effect of reinstatement, when it happens.30[58] Of course the sum insured is not the only limit under the policy. Theinsurer's liability is always limited by the insured's loss. It may be limited by otherprovisions too; for example, average. These limits should not be confused with oneanother. We address the insured's loss at [81]–[86] below, when dealing with the indemnity principle as it affects successive claims.The High Court judgments[59] We need not review the High Court judgments in detail, since the conclusions we have reached are substantially the same.[60] In Wild South Holdings Ltd Fogarty J held that cover reinstates from the date of loss, subject to notice to the contrary being given within a reasonable time.31 So he contemplated that notice might be given retrospectively so as to preclude reinstatement and, by necessary inference, liability for any additional premium. He29 That is, the cover cancelled by loss for event #1 and the limit of cover for event #2.30 Contrast Ridgecrest, above n 6, in which the insurer sought to limit its liability for all claims within the policy term to the sum insured from a single event.31 Wild South Holdings Ltd, above n 1, at [147].observed that an insurer ought to be able to assess the scope of repairs very promptly, but held that it is a question of fact whether the notice given in each case was reasonable.[61] For the reasons we have given, we agree that cover reinstates upon loss, but we do not agree that notice can be given retrospectively.[62] In Marriott Dobson J had the advantage of Fogarty J's judgment and morecomprehensive argument. As in this Court, neither counsel argued for reasonable notice. The Judge agreed that cover reinstates from the date of loss and held that notice must be given prospectively.32 He did not address the insured's liability topay a premium pending notice, but did observe that reinstatement occurs in circumstances allowing Vero to review the nature of the risk.[63] We agree with Dobson J's answer, but we observe that pending notice the insured is liable to pay an additional premium. We express no view about the basis upon which that premium may be calculated.[64] In Crystal Imports Cooper J seems through some remarkable omission not to have been referred to either of the two earlier judgments.33 He nonetheless reached substantively the same conclusion, holding that cover reinstates from the date of loss. He observed that:34There would be no point in providing for such automatic reinstatement unless it was contemplated that there might be a further claim during the period of the policy. It seems clear that the intent was to ensure that in the event of such a further event causing loss the full amount of cover would beavailable .[65] Cooper J also held that notice must be given prospectively. It followed that notice must be given before event #2 if reinstatement is not to apply to that event.He did not address the insured's liability for an additional premium, but we observethat in the Lloyds policy, as in QBE's, the premium is calculated pro rata.32 Marriott, above n 2, at [91](b).33 The case was argued before Dobson J delivered his decision but delivered some weeks later.34 Crystal Imports Ltd, above n 5, at [60].[66] We agree with Cooper J's answer, with one qualification. The Judgecommenced his answer by stating that:35The defendants' liability to indemnify the plaintiff for the separate damage caused to the insured properties by the September earthquake is limited to the sums that had already been paid at the time of the February earthquake.[67] The September event having happened, the limit of liability set for that event by the sum insured is the cover cancelled by loss, being the lesser of the sum insured and the actual loss resulting from that event. That limit may exceed what had been spent when the February event happened.[68] As we go on to explain, this is not to say that the insured may recover for the September event as if the February event had never happened. In some circumstances the insured, having been indemnified for the February event, may recover for the September event only those expenses that had been incurred when theFebruary event happened, but that outcome is dictated by the insured's actual loss. We are concerned at present with the limit upon the insurer's liability set by thereinstatement clause.Merger[69] Damage from the September event was often unremedied when the February event happened, and so on for the June and later events. This led insurers to call in aid the doctrine of merger, which finds its home in marine insurance law. No previous authority holds the doctrine applicable to fire and general policies.[70] The doctrine has been examined in two High Court judgments, the Crystal Imports judgment under appeal, in which Cooper J held that the doctrine applies, andRidgecrest NZ Ltd v IAG New Zealand Ltd, in which Dobson J held that it does not.36Since the present appeals were argued, the Supreme Court has delivered its judgment in Ridgecrest. The Court did not go so far as to hold that the doctrine is strictly confined to marine insurance, but it did hold that the doctrine is a correlative of contractual practice there, under which practice a cause of action arises only when35 At [144].36 Ridgecrest NZ Ltd v IAG New Zealand Ltd [2012] NZHC 2954, (2012) 17 ANZ Insurance Cases ¶61–957 [Ridgecrest (HC)].the risk expires.37 The policies before us are not of that kind. The doctrine was further held to be flatly inconsistent with a policy in which the sum insured was reset after each happening. So we are bound to find the doctrine of merger incompatible with the policies before us.[71] Accordingly, we need not examine the doctrine. We cannot avoid mentioning it, however, if only for explanatory reasons. The doctrine has shaped the issues in these appeals. Further, counsel linked it to the indemnity principle, the application of which we must consider more closely than the Supreme Court was asked to do.Why merger?[72] The purpose for which the doctrine was invoked here is highly controversial. The insurers say that they seek only to apply the principle of indemnity which forms the core of all insurance; merger is needed to ensure that an insured does not profit by recovering the separately calculated losses from events #1 and #2 where, as is commonplace, the actual cost of reinstatement after event #2 is less than the sum of the two losses.[73] That is indeed what some insureds want, including Crystal Imports. Mr Kennedy argued that a claim accrued after each event and the insured is entitled immediately to compensation for the loss, assessed as at that time, whether or not repairs were undertaken then or are possible now. Put another way, Crystal Imports contends that it should be compensated separately for each event, as if reinstatement had been effected in reverse sequence.[74] But not all insureds share that objective. The Marriotts accept that they may recover only the cost of reinstatement after event #2, in addition of course to expenses incurred in repairs after event #1. Mr Campbell argued that this result has nothing whatever to do with merger; it is a consequence of the indemnity principle.[75] Mr Campbell attributed to the insurers the objective of merging claims so that a single sum insured applies to successive losses, thereby denying accrued claims37 Ridgecrest, above n 6, at [48].and undoing what reinstatement effected. In the High Court Cooper J understoodthat such was among the insurers' objectives,38 as Dobson J evidently also did inRidgecrest.39 We record that Mr Gray disclaimed any attempt to merge claims, suggesting that the Judges below misunderstood his argument, which rested on merger of loss. He did maintain in the High Court that a single sum insured applied to each Crystal Imports building and was exhausted by the February event, but that followed from his premise that cover reinstates only on payment.[76] The seeds of this controversy can be found in the marine insurance authorities which the Supreme Court discussed in Ridgecrest.40 That may be reason enough to confine the doctrine to its traditional setting. The term "merger" isperhaps unfortunate. In law it normally refers to the extinction of one right or estate by absorption in another, so that the lesser right or estate loses its identity.41 The marine insurance authorities use the term in a different sense, to describe what happens when a total loss succeeds a partial loss and the parties never intended that the insurer should be liable for more than a total loss during the risk.42The indemnity principle survives Ridgecrest[77] The indemnity principle was described in Castellain v Preston as the"fundamental principle" of insurance:43The contract of insurance contained in a marine or fire policy is a contract of indemnity, and indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong.38 Crystal Imports Ltd, above n 5, at [115]–[116].39 Ridgecrest (HC), above n 36, at [51].40 At [33]–[40].41 Peter Spiller New Zealand Law Dictionary (7th ed, LexisNexis NZ Ltd, Wellington, 2011) at 189.42 Willes J used "merger" in that way (during argument) in Lidgett v Secretan (1871) LR 6 CP 616 (Comm Pleas) at 620 as did Bailhache J in Wilson Shipping Co, Ltd v British and Foreign Insurance Co, Ltd [1919] 2 KB 643 as noted by the House of Lords on final appeal: British and Foreign Insurance Co, Ltd v Wilson Shipping Co, Ltd [1921] 1 AC 188 (HL) at 198.43 Castellain v Preston (1883) 11 QBD 380 (CA) at 386 per Brett LJ.[78] It appears that counsel did not focus on the indemnity principle during argument in the Supreme Court in Ridgecrest.44 In its judgment, the Courtdiscussed the principle in connection with the insurer's attempt to limit the insured'stotal recovery from successive losses to the sum insured for a single event. The attempt failed, the Court pointing to the policy wording about resetting liability limits.45[79] The important point for present purposes is that the Supreme Court assumed the indemnity principle does not rest upon the doctrine of merger but rather inheres in any contract of indemnity.46 We take the same view. By way of confirmation, we draw attention to three features of merger which confirm that it is not coextensive with the indemnity principle:(a) Merger does not apply to successive total losses.47(b) Merger applies only where a total loss succeeds a partial loss. For this reason, Mr Gray accepted that the doctrine does not affect two of the five Crystal Imports buildings; they were not destroyed. But the cost of reinstating such a building once in the aftermath of two events is likely to be less than that of notionally reinstating the damage sequentially.(c) Merger is confined to losses within the policy term. Where a policy is renewed between events #1 and #2 the doctrine would not preclude the insured from recovering both the cost of unremedied damage from event #1 and a total loss on event #2, as happened in Lidgett v Secretan.48[80] Accordingly, the insurers may invoke the indemnity principle notwithstanding that the doctrine of merger has been foreclosed.44 Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC Trans 4.45 At [61].46 At [53].47 Kastor Navigation Co Ltd v AGF MAT [2004] EWCA Civ 277, [2004] 2 Lloyd's Rep 119 (CA)at [116].48 Lidgett v Secretan, above n 42.The indemnity principle and successive losses[81] The policies before us are all contracts of indemnity. We will refer to the Crystal Imports policy to illustrate the nature of the indemnity, and we will assume for convenience that the loss for any given event takes the form of the costs of reinstatement.[82] The policy provides that Lloyds "will indemnify the Insured" for "physical loss or damage" to the insured property. It provides for full replacement but itremains a policy of indemnity, albeit one in which the indemnity extends to depreciation.49 The indemnity is discharged by progress payments upon evidence of insured loss or, where reinstatement is to occur, as the insured incurs the cost of reinstatement.[83] The indemnity may extend to the cost of reinstating the property to the policystandard, which is "new for old". For example, where a building was damaged butnot destroyed, the insurer is liable to pay the cost of restoring the damaged portion to a condition substantially the same as its condition when new. Where the building was destroyed, the insurer is liable to pay the cost of replacing it with an equivalent building.[84] The insured may recover successive losses in the same policy term. No difficulty arises where the loss from event #1 had been remedied when event #2 happened. In that case the loss or damage for which the insurer is liable must be calculated separately for each event, the insured having incurred the costs of reinstatement.[85] The position differs where the damage from event #1 was unremedied when event #2 happened, causing additional damage. In that case, no question ordinarily arises of the insured repairing in isolation the damage from each event; it is the cumulative damage after event #2 that will be repaired. Although the loss is incremental upon that from event #1, it is reasonable to suppose that the insured will achieve economies by repairing all of the damage at the same time. That being so,49 The authorities are collected in TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd [2013] NZHC 298, (2013) 17 ANZ Insurance Cases ¶61–968 at [35]–[40].the cost of repairing the combined damage is likely to be less than the notional cost of repairing the damage from each event in reverse order.50 Where that is so, the costof reinstating the property to the policy standard after event #2 is the insured's actualloss for which it may claim indemnity, in addition of course to any expenses already incurred to remedy the damage from event #1.51 Of course this approach requires that the loss from event #1 be reassessed following event #2, but should a dispute arise that is what would happen at trial; a court would recognise that subsequentevents may affect the insured's actual loss and hence the measure of its entitlementto indemnity.52 As Lord Blackburn put it in Burnand v Rodocanachi Sons and Co:53The general rule of law (and it is obvious justice) is that where there is acontract of indemnity and a loss happens, anything which reduces ordiminishes that loss reduces or diminishes the amount which the indemnifier is bound to pay.[86] It is true, as Mr Kennedy argued, that when event #1 happened the insurer became liable in contract to indemnify the insured for the resulting loss and the insured acquired a corresponding cause of action. He complained that the insurer wishes to deny the insured its right to indemnity for the unrepaired damage from event #1. This argument assumes that the policy ought to have legislated for every contingency. In fact the damage was overtaken by event #2 before it could be repaired and it is likely that the cost of repairing the accumulated damage is likely to be less than the cost of repairing each loss separately. Indeed, it may well be impossible to repair one without the other. Where that is so, the insured will never actually incur the expense of remedying the unrepaired damage from event #1. To recover expenses that the insured will not incur in addition to its actual expenses of50 Of course it always depends on the facts. We observe that in Ridgecrest, above n 6, the Supreme Court held that successive unremedied losses would not lead to over-recovery, but that was in the context of an example in which loss was assumed to take the form of depreciation in market value and the property (a wall) was assumed to have become a total loss with the final earthquake.51 We have assumed for convenience that the separately calculated loss from event #2 is less thanthe sum insured. If the loss exceeds the sum insured, the insurer's liability is likely to be fixedby the sum insured limit, but it remains true that the insured's actual combined loss is likely tobe less than the separate losses from the two events.52 Burnand v Rodocanachi Sons and Co (1877) 7 App Cas 333 (HL); The Bwllfa and Merthyr Dare Steam Collieries (1891), Ltd v The Pontypridd Waterworks Co [1903] AC 426 (HL); Golden Strait Corp v Nippon Yusen Kubishika Kaisha [2007] UKHL 12, [2007] 2 AC 353; and VACC Insurance Co Ltd v Lekkas [1999] VSCA 31, [1999] 2 VR 529.53 Burnand, above n 52, at 339.remedying the accumulated damage after event #2 is to realise a profit from the policy, a result probably not intended in a contract of indemnity.54The insured's loss: the indemnity principle in operation[87] In the example given in [56] above, we assumed that the cover cancelled by loss upon event #1 was $3M and the sum insured of $8M was available for a future event #2.[88] Now suppose that later in the policy term event #2 happens, causing additional loss of $7M, again in the form of reinstatement costs. Assume the unrepaired loss from the accumulated damage is $9M, somewhat less than would be the case if separately remedied. That sum is the insured's actual loss; it is theamount that the insured will spend to reinstate the property to the policy standard. The insured may claim that sum notwithstanding that it exceeds the sum insured of $8M, because the amount claimed results from two events the loss from each of which was less than the sum insured. The amount claimed is also less than the total replacement value of the property, $12M.[89] Suppose next that the insured had already incurred expenses of $1M for repairs when event #2 happened. In that case the insured's actual loss is $10M,comprising the cost of reinstatement after event #2 and the $1M already incurred for event #1. That too is recoverable for the reasons just given, but subject of course to any other policy limits.Destroyed[90] The question whether the Marriotts' buildings were destroyed in the February event was asked because the answer was thought to establish whether the insurer might incur any liability at all from the June event. The argument before Dobson J proceeded on the following premise, which the Judge recorded:55In 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 total54 Ridgecrest, above n 6, at [14].55 Marriott, above n 2, at [10].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.[91] However, the policy does not provide that it terminates on destruction or constructive total loss and the buildings did not cease to exist or lose all utility after the February event. They still stand and they have been tenanted throughout, generating income at a rent rebated to reflect their damaged condition. Mr Goddard, who did not appear in the High Court, conceded that the premise on which the case was argued below was wrong. We agree. He did argue that, the buildings having become a constructive total loss in February, the Marriotts could recover very little if anything for the June event, instancing emergency repairs sufficient to ensure the buildings remained tenantable. We decline to speculate upon the heads of loss that might be recoverable. Cover reinstated following the February event and the policy was renewed before the June event.56 And as we have just explained, the Marriotts may recover only their actual losses, not the notional cost of reinstating the buildings for each event in succession.[92] Although the question proceeded on a misunderstanding, it retains significance. The policy distinguishes in the reinstatement memorandum between"destroyed" and "damaged", applying a different measure of indemnity to each. The measure on destruction is the cost of rebuilding using "currently equivalent building materials and techniques". The measure otherwise is the cost of "restoration of the damaged portion of the property to a condition substantially the same as" itscondition when new. Vero wants to limit, by reference to the cost of rebuilding, the amount it is liable to pay for repairs. One might assume that repairs would cost less than replacement, but of course it depends on the extent of the damage and the characteristics of the building. Repairs must be made on a new for old basis, and rebuilding may employ modern materials and techniques, which may be more cost-effective than the old.[93] The relevant provisions are found in the policy's reinstatement memorandum.They are obscure because much of what the policy says about reinstatement for56 We understand that the Marriotts may claim that for this reason Vero is estopped from denying cover for the June event.earthquake damage is redundant; it refers to the long-repealed Earthquake and War Damage Act and assumes that the insured will receive an indemnity payment under that legislation. The current legislation confines the statutory cover to dwellings. But it is common ground that the Marriotts are entitled to the cost of reinstatement up to the sum insured, and that the following provisions apply:REINSTATEMENT/REPLACEMENT COST MEMORANDUMIn the event of the property insured under this 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.Subject to the following Special Provisions and subject also to the terms and conditions of the Policy except insofar as they may be varied therebySpecial Provisions2. The Company shall not be liable to make any payment beyond the amount which would have been payable under the Policy if this Memorandum had not been incorporated therein:(a) if the work or reinstatement is not commenced and carried out with reasonable despatch(b) until the cost of reinstatement shall have been actually incurred(c) if at the time of any destruction or damage to any property insured hereunder such property shall be covered by any other insurance effected by or on behalf of the Insured which is not upon the identical basis of this Memorandum.8. Where a building is destroyed, subject to the liability of the Company not being thereby increased reinstatement may be carried out upon another site and in any manner suitable to the requirements of the Insured.[94] Vero says that it makes no sense to classify as damaged a building which istechnically but not economically repairable, for no "sensible commercial person"would repair the building in that case. It is implicit that the sensible commercial person is spending his or her own money. Mr Goddard emphasised that given enough time, patience and money, virtually anything can be restored so long as something remains of it when the work begins. Counsel suggested that perverse consequences might follow if financial considerations play no part in the classification. By way of example, an owner whose property was technicallyrepairable could not exercise the insured's right to build elsewhere, since that right isavailable only when the property has been destroyed. Such an owner would be driven to embark upon the uneconomic task of repairing the building if it sought any payment in excess of indemnity value.[95] The Marriotts say that the policy does not provide for constructive total loss,but only actual destruction. They support the Judge's conclusion that a building is destroyed only when repair is physically impractical. Mr Campbell contended that the indemnity covers the loss to the insured and the loss is subjectively assessed, meaning that the economics of repair are irrelevant. Counsel argued that other provisions of the policy are consistent with that view; for example, a specialprovision in the replacement memorandum provides that Vero's liability for adamaged property cannot exceed its liability on destruction; he pointed out that if"destroyed" bore Vero's meaning, that provision would have no work to do. (Theprovision does not apply to reinstatement following earthquake, which is why we have not included it in the quoted provisions above, but counsel suggested that it remains relevant.) Counsel dismissed the perverse consequences identified by Mr Goddard, saying that they rest on the false assumption that an insured's loss, andhence its entitlement to indemnity, is assessed objectively.[96] We begin by observing that the question "when is the building destroyedunder the policy" cannot receive a definitive answer absent the detailed factualcontext that only a trial can supply. Dobson J recognised this. Vero invited him to endorse a set of nine criteria that would inform the decision,57 but the Judge declined the invitation and answered the question at a general level. On appeal the parties have pursued an answer at the same level. We will respond to the extent appropriate.[97] A material damage policy takes as its subject matter a particular property with all its features. It may be, as was the case in Reynolds v Phoenix Assurance Co Ltd, an historic malting house of massive brick construction.58 The policy is written to ensure the property may be reinstated by repair or replacement when damaged by an insured peril. Damage having been suffered, the insured decides under these policies whether to repair or rebuild it.59 The insurer pays, to the extent of the contractual measure of reinstatement cost.[98] Mr Campbell argued that in this context the insured's loss is subjective. We find "subjective" inapt, but it is true that, the contract being one of indemnity, therelevant loss is the loss to the insured,60 so that the measure of loss may depend onthe insured's intentions for the property and reasons for owning it.[99] So, for example, if the insured intends to use the premises in their previousstate, the insured's loss may represent the cost of repairs even where that muchexceeds the cost of a functionally equivalent new building, as in Reynolds v Phoenix. The malting house was insured for £550,000 under a replacement policy. Repairs following fire damage would cost £243,000. An equivalent modern malting house could be built for just £30,000. Forbes J found that the insureds genuinely meant to reconstruct the maltings. He rejected an argument for the insurer that the truemeasure of loss was what a commercial concern, "using its own money", would doabout reinstatement.61 It sufficed that the owners' desire to reconstruct the maltings was not eccentric or unreasonable.57 Marriott, above n 2, at [24].58 Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd's Rep 440 (QB).59 That is not always the case; see for example the policy in issue in Ridgecrest, above n 6.60 Falcon Investments Corp (NZ) Ltd v State Insurance General Manager [1975] 1 NZLR 520 (SC) at 523.61 At 453.[100] However, anything that reduces or diminishes the loss to the insured also reduces the amount that the insurer must pay.62 So, for example, the cost of a new equivalent building may be the correct measure of indemnity where the insured'sinterest in it is confined to a commercial use that can equally well be carried on in a functionally equivalent new building. In that case the higher cost of reinstating the original structure with all its features may not be the true measure, for insurancepurposes, of the insured's loss. That was the position in Exchange Theatre Ltd v Iron Trades Mutual Insurance Co Ltd, in which the loss was found to represent the cost of building a new hall, not that of rebuilding the former Victorian structure.63[101] Where the insured intended to sell the building, its loss may represent the market value, as in Leppard v Excess Insurance Co Ltd, in which the insured had intended to sell the property, a cottage, before a fire destroyed it.64[102] Falcon Investments Corp (NZ) Ltd v State Insurance General Managersupplies a good example of the indemnity principle at work.65 The insured'stenanted dwellinghouse was damaged beyond repair by fire. At the time of the fire it was habitable, though in worn condition. It had an indemnity value of $12,000. However, the plaintiff intended to redevelop the site. The house might have been letfor a further year before being knocked down. The plaintiff's loss accordinglycomprised lost rent for a year, being $2,600.[103] All of this is subject to the policy terms. As noted above, the Marriotts'policy establishes two measures of indemnity for reinstatement purposes and specifies that one applies on damage and the other on destruction. It is noteworthy that the policy in Reynolds v Phoenix also distinguished between damage and destruction; it provided that the insurer would pay if the property, or part of it, were destroyed or damaged by fire. Forbes J drew attention to this, stating that for destruction the insurers were bound to pay the value of the property, and for damage the amount of the damage.66 He recorded that the insurer did not rely upon the62 Burnand, above n 52, at 339.63 Exchange Theatre Ltd v Iron Trades Mutual Insurance Co Ltd [1983] 1 Lloyd's Rep 674 (QB).64 Leppard v Excess Insurance Co Ltd [1979] 1 WLR 512 (CA).65 Falcon, above n 60.66 At 446.distinction; because the policy envisaged that destruction might affect the entire property or any part of it, one might equally say that parts were destroyed or thewhole was damaged. The Marriotts' policy, by contrast, contemplates thatdestruction affects the whole property and damage affects part of it.[104] The policy provides that the cost of rebuilding is the measure of indemnitywhere the property is "destroyed". That is a question of fact. The language points toan objective assessment, as one would expect when the measure of indemnity depends on it. The property is not destroyed, for example, merely because the insured means to replace it. In context, the property is destroyed when the damage sustained is sufficiently extensive to adopt rebuilding cost as the appropriate measure of indemnity. That decision calls for the exercise of judgement. The question is what considerations may inform the decision.[105] Mr Campbell argued that the "economics" of repair do not enter into it, buthe based that submission on the allegedly subjective nature of the loss. For the reasons just given, we do not accept that under this policy the insured's preferencesalone determine the appropriate measure of indemnity on reinstatement. We alsoacknowledge Mr Goddard's criticism that the standard of physical feasibility would circumscribe the insured's right to reinstate elsewhere when the property has been destroyed.[106] Mr Goddard's approach was more nuanced. He accepted that the decision may be affected by the property's past and intended future uses, and argued that thequestion is what a reasonable owner would do in the circumstances. Monetary considerations must influence the answer; indeed, he argued, in a commercial setting one would expect the costs of reinstatement to assume prominence. He invited us to answer the question in this way:The building is "destroyed" under the policy if its condition is such that, in all the relevant circumstances, it is not reasonably practicable for the building to be restored by way of repair to a condition substantially the same as but not better or more extensive than its condition when new, including but not limited to the circumstances where it is not economically practicable to do so.[107] This proposed answer is so framed as to emphasise the economics of repair,and "reasonably practicable" may suggest that the standard is that of the "single owner" which is spending its own money. We do not accept Mr Goddard's answer.The single owner standard was rejected in Reynolds v Phoenix,67 and our attention has been drawn to no other insurance case in which it was adopted. Other considerations may inform the decision, and perhaps carry more weight; they includeany special character or features of the building, the insurer's promise to pay thecosts of reinstating (subject to policy limits) that particular building, and theinsured's preferences so far as they are not eccentric or unreasonable.68 To what extent, if any, these various considerations inform the decision must depend on the circumstances.69[108] For these reasons we conclude that Dobson J's answer was incorrect. Itseems likely that he was driven to that answer by the parties' mistaken assumptionthat destruction brought the policy to an end. The physical feasibility of repairs is a relevant consideration, but not the only one. The only answer that can be given in the abstract to the question whether the insured property has been destroyed is that the question is one of fact, to be answered in all the circumstances.Deductible[109] As noted earlier, this issue arises in the Wild South and Marriott appeals.[110] The QBE policy provides for a deductible of 2.5 per cent, to be deducted from the adjusted loss:Each Event will be adjusted separately. The adjusted loss will be net of salvage and other recoveries. From each adjusted loss the amount stated in Schedule A will be deducted.[111] Schedule A lists discrete sub-limits for various risks (by way of example, the sum insured for the building is $3,035,700 while that for goods in transit is $10,000),67 As noted at [99] above. The single owner can be traced to the judgment of Bramwell B inBamford v Turnley (1860) 3 B & S 62, 122 ER 25 (KB), a nuisance case.68 Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344 (HL).69 We observe, for example, that in the marine insurance context the statutory regime describes circumstances of actual total loss by reference to the language of destroyed and damaged: see Marine Insurance Act, s 57 and Venetico Marine SA v International General Insurance Co Ltd[2013] EWHC 3644 (Comm) at [398]–[406].and provides for deductibles for each such risk. It states that the sub-limits "are understood to be in excess of the relevant Deductibles". The deductible for earthquake damage arising from any one event is "2.5% of the loss with a minimum of $2,500". For most other risks the deductible is $500.[112] QBE has made payments of $1,206,500 after subtracting a deductible.[113] The Vero policy also provides for a deductible of 2.5 per cent, to be subtracted from the adjusted loss: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.[114] The policy summary states that the excess (by which is meant the deductible)is "Earthquake (2.5% of loss with a minimum of) $2,500".[115] Vero has paid the Marriotts $448,500, which it calculates as the indemnity value of $460,000 less a deductible of 2.5 per cent or $11,500.70[116] The question in each case is whether the deductible is subtracted from theinsured's actual loss or the sum payable under the policy. The former method would result in the insurer paying the sum insured without deduction where, as here, the loss exceeds the sum insured.[117] Fogarty J summarised and accepted the submission for QBE:71[139] Mr Ring QC submits that in insurance terminology and practice"adjustment" is the process of applying the relevant terms of the policy to the insured's claimed loss caused by an insured event to determine theamount that the insurer has to pay. This reflects the historic use of the term,"adjusting the policy", which is now referred to as settling the claim. In earlier times, the word "settled" was stamped on the policy, and thepercentage of the loss underwritten by a particular insurer was recorded after the stamp, which the insured then initialled. This showed how much of the cover was left. Mr Ring QC submits that it is clear the parties intended thatloss "in schedule A" and "adjusted loss" in the deductible condition wouldrefer to the same thing. This must be correct because the deductible has to70 GST has been added and certain other adjustments made, but these are immaterial for our purposes.71 Wild South Holdings Ltd, above n 1.be adjusted from "each adjusted loss". The "adjusted loss" referred to in thiscontext is the amount assessed as payable by QBE for the particularearthquake as a result of that " Event (having been) adjusted separately". This infers that the deducting the deductible is the last step in the adjustment process – that is after applying any upper limit imposed by the sum insured. This is also consistent with the strict insurance meaning of"deductible".(Emphasis omitted.)[118] He added that Schedule A tends to confirm that the deductible is subtracted from the adjusted loss, because it states that the sub-limits exceed the relevant deductibles and so contemplates that the deductibles may apply where the sub-limits determine what the insurer will pay.[119] Dobson J reached the same conclusion:72[85] The present policy quantifies Vero's liability by the deductible being deducted from the "adjusted loss". That is not a defined term. It wasimplicit in Mr Rennie's argument that the adjusted loss for any claim was the gross extent of the loss 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 into account the limit on the insurer'sliability 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 involved minute analysis of costs that would inevitably be in excess of theinsurer'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, thenI 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 a deductible 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.[120] As these passages from the judgments below demonstrate, an issue arisesabout the term "adjusted loss". Both Judges understood that adjustment includes the72 Marriott, above n 2.application of any policy limit or sum insured, so that subtraction of the deductible is the final step. The insureds do not accept that the term has any such settled meaning in insurance practice, and there is no evidence about it.[121] Counsel invited us to answer the questions nonetheless, relying on other parts of the policies and the object of a deductible, which is to create a first level of cover for which the insured is its own insurer.73 But none of their arguments is sufficientlycompelling to persuade us that the dispute about "adjusted loss" is irrelevant. Thatbeing so, interpretation must await evidence about the meaning of the term in insurance practice. The answers given will be set aside and the questions reserved for trial.Average[122] Insurers discourage underinsurance, sometimes by insisting that the insured property be valued with premiums set accordingly and sometimes by applying average to ensure the insured bears a share of any loss. An average clause treats the insured and the insurer as co-insurers by providing that they will share any loss in proportion to the risk they have respectively assumed.[123] The average clause in the Crystal Imports policy provides:Average Clause –Applicable if at inception or latest renewal of this Certificate the valuation is greater than 3 years oldb) In respect of loss by earthquake, if the sum insured is less than 90% of the value of the Insured Property at the time of any loss of damage, the Company will not pay the full amount of the loss. Instead, the amount payable will be such proportion of the loss as the sum insured bears to the value of the Insured Property. For the purpose of this clause, the basis of valuation is to be the same as would be used under this Certificate to determine the amount of loss following destruction of Insured Property.73 Robert Merkin (ed) Colinvaux's Law of Insurance (9th ed, Sweet & Maxwell, London, 2010) at[10–030].The dispute turns on the last sentence, which specifies that the basis of valuation is"the same as would be used" under the policy "to determine the amount of loss following destruction" of the property.[124] The policy provides for reinstatement on a full replacement basis, subject to a sum insured of $3,070,000. On any view the New Brighton Mall was underinsured. The agreed statement of facts provides:The parties cannot agree on the repair or replacement cost of the damage caused to New Brighton Mall by the February Earthquake. However, the following estimates have been obtained:(a) depreciated replacement cost indemnity value of New Brighton Mall, as at 21 February 2011, has been estimated at $4,580,000;(b) the cost of repairing the damage caused to New Brighton Mall by the February Earthquake has been estimated at $5.3m;(c) the replacement cost of New Brighton Mall, as at 21 February 2011, has been estimated at $9,569,320; and(d) the cost of rebuilding New Brighton Mall has been estimated at $11.4m.[125] Lloyds say that the property's value on destruction is its full replacementcost; an estimated $9,569,320. But the policy also provides expressly that the insured may elect not to reinstate, in which case it will receive no payment beyond that which would have been made had the reinstatement memorandum not been incorporated in the policy. In that case, Crystal Imports says that indemnity value (and specifically, depreciated replacement cost, that apparently being the least measure of indemnity value) is the correct basis of valuation. It says that theproperty's value on destruction is its depreciated replacement cost immediatelybefore the February event; an estimated $4,580,000.[126] The impact is material. Cooper J recorded that on Crystal Imports'calculation, it recovers (subject to the sum insured) 67.03 per cent of its loss, but onLloyds' calculation it recovers 32.08 per cent.[127] Cooper J adopted the insured's approach, reasoning that the policy languageis apt to result in either basis of valuation depending on the insured's election.74 He acknowledged that an average clause aims to ensure the premium paid is commensurate with the risk assumed, but the insurer presumably set the premium with knowledge that reinstatement might or might not follow loss.75 As noted, the answer Cooper J gave was:76The value of the insured property for the purposes of the Average clause will reflect the basis of recovery elected by the plaintiff in respect of covered damage to that property. If the plaintiff elects not to reinstate the insured property, the answer to the second question is no, based on the estimates contained in paragraph 20 of the agreed statement of facts.[128] On appeal, Mr Gray argued that reinstatement by repair or rebuilding on a"new for old" footing is both the default option and the insured's primary entitlementunder the policy. The average clause was designed to share risk ex ante, when the premium was set and the policy established, so it anticipates reinstatement by referring to the basis of valuation that would be used on destruction. Accordingly, the amount by which the insured was underinsured is the difference between the sum insured and the cost of reinstatement on destruction. The policy does not provide for an alternative measure should reinstatement not follow any given loss.[129] Mr Kennedy responded that the policy allows the insured an election and the average clause must be read accordingly. The clause would serve no purpose if the insured elected not to reinstate, since it would not be underinsured for its entitlement to indemnity value. The clause also contemplates that more than one basis of valuation may apply; if replacement cost applied in every case, it would say so. The insurer must be taken to have set the premium knowing of the insured's right to elect among entitlements. Finally, any ambiguity ought to be resolved in the insured'sfavour.[130] We begin by accepting that the average clause is designed to share any loss on a proportionate basis, where the sum insured is less than 90 per cent of the value of the property at the time of loss. Where average applies the insurer pays such74 Crystal Imports Ltd, above n 5, at [139].75 At [140].76 At [145].proportion of the loss as the sum insured bears to the value of the property. Theinsured's share is the balance. The exact proportion to be borne by each party cannot be known until the loss is suffered, because it depends on the value of the property at that time.[131] The relevant basis of valuation is that which would be used to determine theamount of loss following the property's destruction. The parties agree that reinstatement value is the proper measure where the insured elects to reinstate. But the policy does not specify reinstatement value; its language is apt to suggest rather that the basis of valuation may vary with the circumstances at the time of the loss. And an alternative basis of value on destruction is available; it is indemnity value. Either basis may result in the insured bearing a proportionate share of the loss, depending on its applicable entitlement under the policy. We agree with Cooper J that because the policy contemplated that the insured might elect not to reinstate, no inferences can or should be drawn about the basis on which the premium was set.[132] Finally, to the extent that the policy language admits ambiguity we accept Mr Kennedy's submission that the contra proferentem rule resolves it for theinsured.77[133] For these reasons we conclude that the answer given by Cooper J was correct.The Marriotts' entitlement to repair costs[134] Mr Campbell sought what amounts to clarification of Dobson J's answer toquestion 3, which we have recorded at [11] above.[135] It is common ground that the Marriotts are entitled to payment of the indemnity value of their loss for each event (subject to the sum insured and applicable deductibles) whether or not they have incurred any costs of reinstatement. Mr Campbell submitted that Dobson J omitted to make this clear.[136] However, question 3 was addressed to the Marriotts' entitlement tosomething more than indemnity value. They sought repair costs up to the sum77 DA Constable Syndicate 386, above n 10, at [69].insured for the damage caused by each event, whether or not the costs of reinstatement had been incurred. Dobson J confined his answer to their entitlement to repair costs in excess of indemnity value. That is clear from his reasons, in which he accepted that the insurer must pay the indemnity value whether or not the insured has elected to effect repairs.78[137] In the circumstances, we consider that the Judge's answer does not requireclarification.Results and answers[138] We respond to the questions stated as follows.Automatic reinstatement[139] The question asked in the Wild South and Maxim Fashions proceeding is:What is the proper interpretation and application of the automatic reinstatement clauses in the policies?The answer given by Fogarty J is substantially correct, but not as to notice.[140] The question asked in the Marriott proceeding is:Does the sum insured reinstate after each earthquake event?The answer given by Dobson J is correct, but we add that pending notice the insured is liable to pay an additional premium. We express no view on the basis upon which the premium may be calculated.[141] In the Crystal Imports proceeding the question asked is:As a matter of construction of the contract of insurance between the parties dated 20 March 2010, what is the extent of the defendant's liability to indemnify the plaintiff for the separate damage caused to the plaintiff'sinsured properties by the September earthquake?78 Marriott, above n 2, at [73].The answer given by Cooper J is substantially correct, but it requires amendment to specify the limit of the insurer's liability. For the reasons given above at [69]–[80]the doctrine of merger is foreclosed but the insurer's liability is limited by theindemnity principle.[142] Responding to all those matters, we give one answer to the three questions:The cover required to meet a given loss reinstates immediately following the happening of the insured event that caused it. The insured incurs at the same time a liability to pay any additional premium for which the policy provides. Either party may by notice cancel reinstatement, but such notice takes effect prospectively, leaving in place for the period between reinstatement and notice both cover and liability for any additional premium.Deductible[143] Two questions in the Wild South and Maxims Fashions and Marriott appeals were asked regarding the deductible. They are, respectively:What is the proper application of any excess or deductible under the policies?Is the excess deductible deducted from the amount of the loss or from the payment due under the policy?[144] We decline to answer those questions for the reasons given above at [116]–[121] and set aside the answers given by Fogarty and Dobson JJ. The questions are reserved for trial.Other questions in the Marriott appeal[145] Two additional questions arose out of the Marriott appeal:When is the building destroyed under the policy?Are the Marriotts entitled to repair costs up to the sum insured for the damage caused by each earthquake?[146] On the first of these questions, we concluded above at [108] that the answer Dobson J gave is incorrect. The physical feasibility of repairs is a relevant consideration, but it is not dispositive. We answer as follows:The question whether the insured property has been destroyed is one of fact, to be answered in all the circumstances.[147] On the second question, the answer Dobson J gave does not require clarification for the reasons given above at [136]–[137].Remaining question in the Crystal Imports appeal[148] One additional question arises out of the Crystal Imports appeal:Does the Average clause in the Policy limit the defendant's obligation to paythe plaintiff the full sum insured for the damage caused by the Februaryearthquake to the plaintiff's New Brighton Mall property?[149] The answer given by Cooper J is correct for the reasons given at [130]–[133].[150] The appeals and cross-appeals are allowed to the extent that the answers given in the judgments below are modified.Costs[151] The parties have enjoyed mixed success. Counsel should confer about costs including whether there is a possible test case aspect to these appeals. If agreement cannot be reached counsel should advise the Registrar and a timetable will be set for submissions.Solicitors:Keegan Alexander, Auckland for QBE Insurance (International) LtdRhodes & Co, Christchurch for Wild South Holdings Ltd, Maxims Fashions Ltd and P S andE A MarriottMcElroys, Auckland for Vero Insurance New Zealand LtdMinter Ellison Rudd Watts, Auckland for Crystal Imports LtdDLA Phillips Fox, Auckland for Certain Underwriters at Lloyds of London and Sirius International Group LtdAppendixQBE v Wild South and Maxims Fashions (Fogarty J)[1] The agreed statement of facts:1. WSHL and MFL (the "insureds") each own or owned a building inChristchurch as alleged in the respective statements of claim("SOC").2. Both of the buildings were damaged in the earthquakes that occurred in Christchurch as alleged in the SOC.3. Both of the insureds hold an insurance policy with QBE (the"insurer") as respectively alleged in the SOC and which each provided coverage on a replacement value basis for, inter alia, damage to its building during the policy period and alleged in thestatement of claim (the "policies").4. Both of the insureds has made claim(s) under the policies and provided the insurer with a claims package including supportingexpert's reports, costings and invoices.5. The insurer accepts coverage under the policies for damage caused by the earthquake events.6. Each of the policies contains an automatic reinstatement clause.7. To date, no party has given written notice which would preclude the operation of the automatic reinstatement clause.8. The insurer has made the payments to the insureds as alleged in the SOC.9. The insurer has deducted a deductible or, as the case may be, an excess, in calculating the above payments.10. The insurer has refused to pay any claim preparation expenses at all or, as the case may be, any claim preparation expenses in excess of an alleged sub-limit stated in the policies.[2] The preliminary questions:Q1. What is the basis and measure of indemnity under the policies and when is it payable?Q2. What is the proper interpretation and application of the automatic reinstatement clauses in the policies?Q3. What are the limitations (if any) on the insurer's liability under thepolicies imposed by:a. any stated sum insured;b. Special Conditions 3(b) and 3(c);c. any average condition; andwhat is the effect of each?Q4. Is the insurer liable for the insureds' reasonable and actual claimpreparation costs incurred and, if so, up to what is the maximum amount?Q5. What is the proper application of any excess or deductible under the policies?Marriotts v Vero (Dobson J)[3] The agreed statement of facts:1. Peter and Eunice Marriott (Insureds) own the buildings (a duplex with common centre wall) at 9 and 9A Grafton Street, Christchurch.2. The buildings were damaged in at least the earthquakes that occurred in Christchurch 4 September 2010 and 22 February 2011.3. The Insureds hold an insurance policy with Vero (Insurer) which provided coverage on a replacement value basis for, inter alia, damage to their buildings during the policy periods 22 May 2010- 22 May 2011 and 22 May 2011-22 May 2012 (Policy).4. The Insureds have made a claim under the Policy and on 20 March 2013 provided the Insurer with a claims package estimating the losses. The claims package was updated and an apportionment report issued with the losses calculated in the sum of $2,045,235.52 including GST.5. The Insurer accepts coverage under the Policy for damage caused by the earthquake events subject to the Policy's terms and limits.6. The Policy contains an automatic reinstatement clause.7. On 15 October 2013, the Insurer gave the Insureds written notice that the amount of insurance cancelled by loss was not reinstated pursuant to the automatic reinstatement clause.8. The Insurer has paid what it says is the indemnity value of $460,000 plus GST on 15 October 2013.9. The Insurer has deducted a deductible in calculating the above payment. The policy summary document in respect of the 2010/2011 policy lists the deductible as 2.5% of loss with a minimum of $2,500.[4] The preliminary questions:Q1. When is the building destroyed under the policy?Q2. Does the sum insured reinstate after each earthquake event?Q3. Are the Marriotts entitled to repair costs up to the sum insured for the damage caused by each earthquake event?Q4. Is the excess deducted from the amount of the loss or from the payment due under the policy?Crystal Imports v Lloyds (Cooper J)[5] The following is the agreed statement of facts as summarised by Cooper J:1[8] As recorded in the agreed statement of facts, the plaintiff was at all material times the owner of five properties in Christchurch (together, the"insured properties"). These were:(a) 705 Colombo Street, Christchurch (705 Colombo);(b) 217 Gloucester Street, Christchurch (217 Gloucester);(c) 15-31 Cathedral Square, Christchurch (15-31 Cathedral Square);(d) 50 Cathedral Square, Christchurch (50 Cathedral Square); and(e) 126 New Brighton Mall, New Brighton, Christchurch (New Brighton Mall).[9] The sums insured for each of the insured properties were as follows:705 Colombo $2,260,000217 Gloucester $6,190,00015-31 Cathedral Square $5,465,00050 Cathedral Square $3,670,000New Brighton Mall $3,070,000[10] The insured properties were damaged in the September and February earthquakes. Paragraphs 10 to 15 of the agreed statement of facts were as follows:1 Crystal Imports Ltd v Certain Underwriters at Lloyds of London [2013] NZHC 3513.10. The September Earthquake caused damage to the Insured Properties and is an event of loss which gave rise to a claim under the Policy.11. The February Earthquake caused further damage to the Insured Properties and is an event of loss which gave rise to a claim under the Policy.12. In October 2011, 50 Cathedral Square was demolished pursuant to a demolition notice issued by the Canterbury Earthquake Recovery Authority.13. In November 2011, 705 Colombo Street was demolished pursuant to a demolition notice issued by the Canterbury Earthquake Recovery Authority.14. In August 2012, 217 Gloucester Street was demolished.15. The Insured Properties at 50 Cathedral Square, 705 Colombo Street and 217 Gloucester Street have been demolished as a result of earthquake damage.[11] Other matters covered by the agreed statement of facts were that the plaintiff had notified the defendants about the damage giving rise to claims under the policy, and that the defendants had paid a total of $68,421.97 towards the cost of investigation and repair of the insured properties. The sums so paid varied from property to property, in a range from $1,266.69 (50 Cathedral Square) to $55,448.51 (217 Gloucester Street). Apart from the matters covered by those payments, no repairs were made to the insured properties between the September and February earthquakes.[12] Another paragraph in the agreed statement of facts stated:19. For the purposes of the Reinstatement of Sum Insured clause at page 29 of the Policy, at no time following the September Earthquake and prior to the February Earthquake was notice given by any of the parties to the Policy of an election not to automatically reinstate the Cancelled Amount.[13] Paragraph 20 of the agreed statement of facts is relevant to thesecond question that must be addressed about the "Average clause" in thepolicy. It stated:Average Clause20. The parties cannot agree on the repair or replacement cost of the damage caused to New Brighton Mall by the February Earthquake. However, the following estimates have been obtained:(a) depreciated replacement cost indemnity value of New Brighton Mall, as at 21 February 2011, has been estimated at $4,580,000;(b) the cost of repairing the damage caused to New Brighton Mall by the February Earthquake has been estimated at $5.3m;(c) the replacement cost of New Brighton Mall, as at 21 February 2011, has been estimated at $9,569,320; and(d) the cost of rebuilding New Brighton Mall has been estimated at $11.4m.[6] The preliminary questions:Q1. What is the extent of the defendants' liability to indemnify theplaintiff for the separate damage caused to the plaintiff's insuredproperties by the September earthquake?Q2. Does the Average clause in the Policy limit the defendants'obligation to pay the plaintiff the full sum insured for the damagecaused by the February earthquake to the plaintiff's New BrightonMall property?