Judge Gendall 8 May 2015
This recent earthquake judgment looks at whether the insurer or the insured has the right to elect how settlement is reached under the policy, and also whether the insurer has made an election. It also indicates that the courts are concerned at the length of time being taken to settle the earthquake claims by insurers.
The Facts : Domenico Trustees Ltd (Domenico) owned a 100m2 house in Aranui which was rented to third parties, and insured for replacement value by Tower Insurance Limited under a “provider House Policy Maxi Protection” policy. Tower admitted liability as the house was a total loss as a result of the Christchurch earthquakes. However Domenico and Tower were unable to agree on an amount payable under the policy.
Domenico wanted a cash settlement i.e. to be paid cash for the value of a rebuild without incurring the costs of a rebuild and maintained that Tower had agreed to this proposal. Tower recorded that the right in the policy for a cash payout was for indemnity value only, but that Tower was currently offering cash settlement on the basis of the full rebuild cost. Domenico states that Tower failed to settle in accordance with its election to pay cash for the value of the rebuild. The quantum of the rebuild moved considerably over time and Domenico moved its position from $842,392.45 to $370,000 for the purposes of trial, 44% of the initial quantum requested.
The question becomes: Who has the right to elect?
Tower’s policy provided that they would pay:
- the full replacement value of the house on the current site;
- the full replacement value of the house on another site, providing the cost is no more than rebuilding on the current site;
- the cost of buying another house, providing the cost is no more than rebuilding on the current site; or
- cash settlement based the present day value.
Tower later stated that it is now offering the ability for the clients to take a cash settlement on the basis of the ‘full rebuild cost’ opposed to the ‘market value’ and if it transpires that you incur greater costs when you rebuild than are provided for under a cash settlement, we will reimburse you for the additional costs provided the insured meet a number of Tower’s criteria.
Tower maintained that it was faced with a grossly inflated claim and so intimated a decision to reinstate the property as this is how it protects itself from exaggerated cash claims. They maintained that it did not make a ‘take or leave it’ offer.
Does Tower have the right to reinstate rather than pay cash?
Justice Gendall affirmed the decisions in Skyward Aviation 2008 Ltd v Tower Insurance Ltd  NZHC 1856 and Rout v Southern Response Earthquake Services Ltd  NZHC 3262, noting that the “express terms of the policy provide for reinstatement as an option, and vest that option in Tower’s discretion”. He said that “I therefore accept as beyond contention that, under the policy, Tower has, amongst other things, the right to reinstate or make a cash payment, and the choice between those options rests in its hands.”
Has there been a formal election?
The primary issue in the judgment is whether Tower has elected to settle by cash payment for full replacement, and cannot then change its mind and go on to decide to reinstate the house.
As Gendall J said of election “Its fundamental premise is that where a party has an option as between two or more inconsistent rights, when he or she selects one of them, that decision is irrevocable and there can be no resiling, as the other options irretrievably disappear from the moment the election is made… Before the Court will infer the existence of an election however, there must be clear evidence, which permits of little equivocation on behalf of the party in whose favour the power is vested.”
Justice Gendall reiterated what he said in Skyward Aviation, where the offer to the insured, was also not one of the options strictly made under the policy: “a party purporting to make an election under a policy can only make a choice between the suite of options available to it under that contract. The offer made by Tower here, as I see it, was not the choice of a direct option under the policy and, as such, simply could not have constituted an election.”
He went on to quote from Insurance Law: Doctrines and Principles “If the policy provides that the insurer has the option to either pay insurance moneys to the insured or require him to reinstate or repair, the insurer must make an election. The election must be made within the period fixed by the policy, or if none is stipulated, within a reasonable time of the claim. The insurer must communicate its election to the insured in unequivocal terms; and once an election is made, it is irrevocable. Merely making an offer to settle by way of payment may be viewed as a mere negotiation step and will not necessarily pre-empt the insurer from subsequently making an election should the offer be rejected by the insured. In practice the election is communicated by the insurer informing the insured of its intention to reinstate or, conversely, of its intention to pay insurance money.”
In this case, discussions between Tower and Domenico always made it clear that a decision had not been made. While it was intimated that Tower had a desire and an interest in settling the claim by making a cash payment, it was also prepared to arrange for reinstatement of the house. In any event, the settlement discussions had always been in respect of a cash payout of more than indemnity value, and therefore not one of the options in the policy. There had therefore been no unequivocal election.
Election and waiver
Justice Gendall noted that he believed that Tower did not by words or conduct make the election to make payment or reinstate but rather that Tower had not made a decision and was ready and willing to settle by other means under the policy. But that they “had a desire, and apparently a general interest, in settling this dispute by a payment in cash …”. The Judge was satisfied that Tower had made it clear that it stood willing to settle the reinstatement of the house. Election must be of a choice between one of the available options, and not an option not provided for in the relevant policy. However, he said that: “There seems to be, however, nothing objectionable in principle for the doctrine of waiver to run alongside election to achieve, in combination, what each alone cannot. For example, there could be an election to reinstate, coupled with a waiver of the requirement that actual rebuild or repair costs are incurred. This method would permit of full recovery of the rebuild sum in a money payment. But, in the present case, waiver is not pleaded by Domenico.”
Whether this argument would be successful in another case in which both election and waiver are pleaded is yet to be tested. However the statement suggests that there would be merit in such a contention, if the facts support it.
Election through delay
After deciding that there had been no express election made by Tower, Gendall J then went on to consider whether there had been election through delay. He said that: “To me it is trite that insurers should proceed with all due expedition to effect settlement or ultimate resolution upon acceptance of a claim. It is also obvious that settlement cannot occur in a case such as the present until the insurer elects the method of settlement……… Tower cannot let the position remain in limbo indefinitely.”
Justice Gendall said that it was an “unsatisfactory state of affairs” that claims made in 2010 and 2011 have still not been settled, and no election made. He decided that: “I do not consider it competent for Tower to make no final decision under the policy for such a substantial period of time while simultaneously pleading it has made no election – a ball it not only recognizes, but actively asserts, is solely in its court. I therefore consider, by a reasonably fine margin that, as a result of effluxion of time, Tower has made an election to settle this claim by cash payment of indemnity value (present day value under the policy) as a base position.”
Tower is therefore deemed to have elected to settle the policy by making a cash payment based on indemnity value (i.e. present day value) as a base position, unless and until Domenico rebuilds or purchases another house. In these instances Tower’s liability will increase to cover those additional costs.
The end result
As Gendall J stated “there has been no true victor in this proceeding”. Tower has resisted the claim by Domenico, but has been found to have elected to make a cash payout of the indemnity value of the house. There was no evidence for that amount before the court. Justice Gendall has left this to the parties to see if it can be resolved, given that a cost of rebuilding the house was agreed by all parties at the hearing.
- Kelly & Ball, Principles of Insurance Law
- Lowry, Rawlings and Merkin, Insurance Law: Doctrines and Priciples (3rd ed)
- MacGillivray on Insurance Law: Centenary Edition and Colinvaux’s Law of Insurance and The Law of Insurance Contracts (6th ed, Informa, London 2009).
- Skyward Aviation 2008 Ltd v Tower Insurance Ltd  NZHC
- Skyward Aviation 2008 Ltd v Tower Insurance Ltd  NZCA 76,  2 NZLR 713
- Scarf v Jardine (1882) 7 App Cas 345 (HL)
- Victori v Sutton HCA 56, (1998) 156 ALR 579
- Agricultural & Rural Finance PTY Ltd v Gardiner (2008) 238 CLR 570
- Sutherland v Sun Fire Office (1852) 14 D (2d) 775 (IH(1Div)).
- Scottish Amicable Heritable Securities Association v Northern Assurance Co (1883) 11 R 287 (IH (2 Div)).
- Lake V Hartford Fire Insurance Co  WAR 161 (WASC).
- General Accident Insurance Asia Ltd v Sakr  NSWCA 402, (2001) 11 ANZ Insurance Cases 61-508.
- QBE Insurance (Australia) Ltd v Cape Yourk Airlines Pty Ltd  QCA 60,  Qd R 158.
- Bowes v National Dire ad Marine INsurance Insurance Co of New Zelealand (1888) 7 NZLR 27 (SC).
- Robson v New Zealand Insurance Co Ltd  NZLR 35.
- Mannai Ltd v Eagle Star assurance Co ltd  AC 749.