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Recent Developments in Insurance Law

Duncan Laing

Simpson Grierson

www.simpsongrierson.comTopics to be covered:

• Nominated Sum policies – current issues

• Asset Schedules – individual caps as opposed to global sum insured

• Reinstatement Clauses

• Earthquake Prone Buildings – upgrading issues

• Review of recent case law

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Nominated Sum Policies – current issues

• The general problem of assessing replacement value in the case of nominated sum policies is common to all classes of risk.

• But local government asset insurance raises some specific issues.

• Below ground and many above ground assets are regarded as “special purpose" assets.

• The assessment of replacement value / maximum specified loss can be particularly complex

• Expert valuation/quantity surveying assistance required

www.simpsongrierson.comAsset Schedules in Policies

• Claims following the Canterbury Earthquakes have led to disputes about the extent of cover where policies have a nominated sum for each asset and a total specified maximum sum for all assets insured under the policy.

• It is important to review the proposed policy wordings before going on risk.

• Is the policy on its true construction a policy limiting cover to the amount specified for each asset? OR

• Is it intended that a claim can be made for the full value of a specified asset (up to maximum total insured sum) notwithstanding that the individual asset has a specified value in the asset schedule?

• You need to review the policy as a whole including margin clauses

www.simpsongrierson.comReinstatement Clauses

• Policies have typically provided for full reinstatement of the level of cover for different events causing loss.

• In Christchurch, damage from the September 2010 earthquake had not been repaired prior to the Boxing Day aftershock or the February 2011 major earthquake, or in many cases the June earthquake.

• In these circumstances, disputes have arisen as to when cover reinstates – on the occurrence of the event causing loss, or on the insurer paying out on a claim.

www.simpsongrierson.comReinstatement clauses

• Following the Canterbury earthquakes, insurers have tried to include reinstatement clauses which provide for reinstatement on the "making good of the loss". 

• This was not the market-standard prior to the earthquakes.

• On this approach, if two separate events causing loss happen, and nothing is done to make good the loss from the first event before the second event happens, then the policy doesn't reinstate.  Any limits in the policy apply across both events.

• Will later discuss the recent case law in this area.

www.simpsongrierson.comEarthquake Prone Buildings

• In terms of the Building Act (BA) an earthquake prone building is one that is less than ⅓ of new building standard (NBS) for structural performance in earthquakes.

• The Court of Appeal held in University of Canterbury v Insurance Council that a local authority cannot require under the BA that an earthquake prone building must be upgraded to be more than ⅓ of NBS. Provisions in an earthquake prone policy referring to a higher standard were accordingly invalid.

• The University appealed to the Supreme Court. A decision is awaited.

www.simpsongrierson.comEarthquake Prone Buildings cont’d

• On the basis of the Court of Appeal decision, an insurer of an earthquake damaged building is (depending on the precise policy wording) only responsible for upgrading works to bring the building to ⅓ of NBS.

• It is important to review a policy wording to ensure you have at least this level of protection.

• Some insurers are asserting that the regulatory compliance provision in policies does not apply if the upgrade work is not required as part of the building consent process for remedial works to an earthquake damaged building.

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Islington Park Limited v ACE Insurance Limited (CA)

• Industrial building complex damaged during Chch earthquakes.

• Issue was whether "total loss" should be assessed based on repairs to an “old for old” or “new for old” standard.

• Indemnity cover was offered on “old for old” basis for partial losses under indemnity clause. However, total loss clause was silent on repair standard.

• Court held it would be anomalous to assess total loss based on "new for old" basis, given "old for old" was the basis for assessing the required standard of repair otherwise.

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QBE Insurance v Wild South Holdings (CA)

• 3 separate cases heard together because they raised similar/overlapping issues.

• Cases all related to commercial buildings that had been damaged by more than one earthquake.

• Issues raised related to extent of cover given that separate events had caused cumulative damage, including:

– interpretation of automatic reinstatement clauses;

– effect of doctrine of indemnity on amount payable; and

– when a building is “destroyed”.

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QBE Insurance v Wild South Holdings (CA)

• Reinstatement clauses: Cover for loss reinstates immediately following the event that caused the loss, unless contrary notice is given prospectively.

• Indemnity doctrine: limits insured from claiming more than their actual loss.

• Whether a building is “destroyed”: is a question of fact to be answered in all the circumstances.

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Firm PI 1 Limited v Zurich (SC)

• Two-building residential complex severely damaged by February 2011 earthquake.

• EQC had paid out full amount payable under EQC Act.

• Issue was whether the sum insured under a separate insurance policy was inclusive or exclusive of EQC payment.

• Majority held that sum insured included the EQC payment.

• Amount payable by insurer was therefore the difference between the sum insured and the EQC payment.

www.simpsongrierson.comGalbraith v Alderson (HC)

• Employee of tenant damaged premises to extent that they were untenantable. Tenant vacated and ceased paying rent and outgoings.

• 13 month gap between 12 month period in which insurance cover for lost rental and outgoings was available and the premises being repaired. Landlord argued that tenant should cover its lost rental and outgoings for that 13 month period.

• Court held that the Landlord could not require the tenant to indemnify them for the lost rent and outgoings, as:

– Landlord had insurance for this kind of loss; and

– the lease fell short of the clear terms required to contract out of the PLA.

LAPA CONFERENCE 2014

INSURANCE The Winners and Losers6 November 2014

Insurance

•How and why is LG Insuring?

• Learning’s from recent events?

• Is there a Better Way?

• Assets for provision of essential services, e.g. water, wastewater, storm-water, waste, transport infrastructure

• Community/wellbeing assets, e.g. libraries, parks, halls, galleries, theatres, housing

• Guardians of Community Assets, Councils have traditionally made decisions based on public expectation

LG’s diverse range of Assets

• Above Ground Assets, generally Replacement basis

• Below Ground Assets, selectively insured, or not insured in traditional sense, e.g. reliance on s26 NCDEMP and/or mutual fund schemes

• Land & Roading Assets, commonly not insured in traditional sense, e.g. NZTA funding/grants

• Observation; infrastructural Assets are NOT insured in traditional sense; reliance is on alternative funding methods

How are Councils Insuring?

• Assets Critical to Services• Community Expectation • “It’s always been done this way”• Insurance emphasis is on Above Ground

Assets, Factually traditional insurance is not commonly used for below ground assets, roading assets, and similar

Why are Councils Insuring?

• Insurance is more than ‘just about premium cost’

• Cover is sometimes not what you thought

• Know how your Policies will respond when you need them

Learning’s -Recent Events

• Develop an Insurance Strategy• Considered Approach• Linkages and Alignment to

– Statutory obligations,– Compliance regimes, – Stakeholder recognition– Annual/Term Plans

Is there a Better Way?

• Outcomes– What is Insurable– What to Insure– Why Insure– How Much Insurance – What type of Insurance– What Level of Self Retention– Audit Trail

Insurance Strategy

• Criticality of Assets• Why are the Assets Critical

– Essential to Service Deliverables– Community Expectation

• Risk exposure of the Assets to Physical Damage

What to Insure/is Insurable

• Is Affordable Insurance available• Can the risk(s) be retained• What is the Plan for the Asset, renewal,

redundant

• Basis of Insurance, replacement cost or other

• Perils to be Insured, full perils including catastrophe perils

Why Insure?

• Actuarial Modelling, impact of natural events on Assets using recognised insurance industry modelling tools

• Loss Modelling, models likely cost of future losses based on historic losses

• Risk Retention Modelling, financial capability to absorb uninsured loss

• Insurable Risk Profiling, risks covered, risks excluded, cover limitations

How Much Insurance

• Validated Decisions• Best use of Self Funding Capability• Insurance you Need and can Afford• Considered & Best Practice Approach

It is a Better Way

Insurance Strategy Benefits

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