Insurers
have been held to the strict wording of the policy in a claim by a substantial
commercial property owner in Christchurch who owns five commercial properties
insured for a total of $20.6 million.
New Brighton Mall and
buildings in central Christchurch owned by Crystal Imports Ltd were badly
damaged by a succession of severe earthquakes in 2010 and 2011. Three buildings have since been demolished
and there is a dispute as to whether or not New Brighton Mall should be treated
as a total loss. Partial repairs had
been undertaken on some buildings before they were written off after the second
major earthquake.
High Court rulings
were needed to settle preliminary questions about the extent of the insurers’
liability.
First, the insurers
argued the cost of preliminary repairs merged into the payout for a total loss
for those buildings eventually written off.
This would leave Crystal Imports having to bear the cost of the wasted
preliminary repairs.
Justice Cooper ruled
that the merger rule did apply to property insurance, unless the insurance
policy provided otherwise. In this case,
the insurance policy contained a reinstatement clause. The amount of insurance, it said, “will be
automatically reinstated from the date of the [first] loss”. This had the effect of creating fresh
insurance cover for the full amount from the date of the first earthquake. Crystal Imports was entitled to recover both
the cost of preliminary repairs after the first earthquake and the full insured
value of the property after the second quake.
Secondly, the High
Court was asked to determine how an “average clause” was to apply in respect of
damage to the New Brighton Mall. Average
clauses are common in insurance: if property is insured for less than its full
value, the insurer pays only a proportion of the loss. If a property is insured for 50% of its
value, the insurance company need pay only 50% of any loss.
With New Brighton
Mall, there was an argument over the extent of any underinsurance. Crystal Imports insured the Mall for $3.07
million. Full replacement cost of the
Mall at the date of the February 2011 earthquake was estimated at $9.5
million. The insurers argued this was an
underinsurance of some six million dollars and Crystal Imports would have to
carry 68% of the loss. Justice Cooper
ruled that the correct “value” of the Mall at the date of the earthquake was
its depreciated replacement cost: $4.5 million.
This left Crystal Imports having to carry 33% of the loss.
Crystal
Imports Ltd v. Lloyds of London – High Court (19.12.13)
14.006