PETER STANLEY MARRIOTT AND EUNICE ANN MARRIOTT Appellants. Appellant. CERTAIN UNDERWRITERS AT LLOYDS OF LONDON First Respondents

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1 IN THE COURT OF APPEAL OF NEW ZEALAND CA776/2013 [2014] NZCA 447 BETWEEN AND QBE INSURANCE (INTERNATIONAL) LIMITED Appellant WILD SOUTH HOLDINGS LIMITED AND MAXIMS FASHIONS LIMITED Respondents CA881/2013 AND BETWEEN AND PETER STANLEY MARRIOTT AND EUNICE ANN MARRIOTT Appellants VERO INSURANCE NEW ZEALAND Respondent CA65/2014 AND BETWEEN AND CRYSTAL IMPORTS LIMITED Appellant CERTAIN UNDERWRITERS AT LLOYDS OF LONDON First Respondents Hearing: 5, 6 and 7 August 2014 SIRIUS INTERNATIONAL INSURANCE GROUP LIMITED Second Respondent Court: Counsel: Wild, French and Miller JJ M R Ring QC and F W Rose for QBE Insurance (International) Ltd N R Campbell QC and S P Rennie for Wild South Holdings Ltd, Maxims Fashions Ltd and P S and E A Marriott D J Goddard QC and PJH Hunt for Vero Insurance New Zealand Ltd QBE INSURANCE (INTERNATIONAL) LIMITED v WILD SOUTH HOLDINGS LIMITED AND MAXIMS FASHIONS LIMITED CA776/2013 [2014] NZCA 447 [10 September 2014]

2 Z G Kennedy and I Rosic for Crystal Imports Ltd B D Gray QC and K Pengelly for Certain Underwriters at Lloyds of London and Sirius International Insurance Group Ltd Judgment: 10 September 2014 at 2.00 pm JUDGMENT OF THE COURT A 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)

3 TABLE OF CONTENTS Introduction... [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 s payment?... [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] Appendix Introduction [1] The Christchurch area experienced serious earthquakes on 4 September 2010, 22 February 2011 and 13 June 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.

4 [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 owners and insurers: what is the limit of an insurer s liability in these circumstances, and for what 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.

5 [8] Five questions were asked but only two are now relevant. Those questions and Fogarty J s answers are: 1 Q2. What is the proper interpretation and application of the automatic reinstatement clause in the policies? A. (a) (b) 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. 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 deductible applies 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 [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: 2 1 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.

6 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 Lloyds 3 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 Marriott v Vero Insurance New Zealand Ltd [2013] NZHC 3120 at [4] and [91]. For convenience we will refer to Certain Underwriters at Lloyds of London and Sirius International Insurance Group Ltd as Lloyds. 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.

7 [14] Two questions were asked. The questions and Cooper J s answers are: 5 Q1. What is the extent of the defendants liability to indemnify the plaintiff for the separate damage caused to the plaintiff s insured properties by the September earthquake? A. The 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. 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 Brighton Mall 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 crossappeal. 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 an insurer 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].

8 (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 Crystal Imports 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 in Ridgecrest 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 insurance contracts; the court s ultimate objective, as in any other case, is to decide what meaning 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 are Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 117 [Ridgecrest]. Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19]. 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]. Scragg v United Kingdom Temperance & General Provident Institution [1976] 2 Lloyd s Rep 227 at 233.

9 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. 10 Reinstatement The 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 an Event the Insurers will indemnify the Insured subject to the exclusions and 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 for 10 D A Constable Syndicate 386 v Auckland District Law Society Inc [2010] NZCA 237, [2010] 3 NZLR 23 at [69].

10 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 the differences are not material. Each provides for reinstatement of the amount of insurance cancelled by loss. Each provides for automatic reinstatement of cover subject 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 a per happening limit.

11 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 the Maxims Fashions clause, which begins with the words [i]n the event of a loss for which 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 sum insured 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 avoid reinstatement, it must give notice. The notice ensures that the insured s cover will be limited, 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 February 2011 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.

12 [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 other express 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. In Malcolm Clarke The Law of Insurance Contracts (6th ed, Informa, London, 2009) at [28-1A]. Compare Marine Insurance Act 1908, s 77. Earthquake and War Damage Commission v Waitaki International Ltd [1992] 1 NZLR 513 (PC) [Waitaki (PC)] at 518.

13 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 as the 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 sum insured that was less than the property s full replacement value and later regrets that decision. 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 insured representing a greater proportion of the property s value than it had originally chosen. 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 rata basis. 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.

14 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 having happened, 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 cover after 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 s view 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 the We use the term calculated in preference to adjusted because of the dispute about what adjusted loss means. By calculated, we mean that the loss caused by the relevant event has been quantified, without applying any policy limits or deductibles. Marriott, above n 2, at [45].

15 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 the additional cost of reinstatement until that cost has been actually incurred. The policy does not exclude indemnity for reinstatement work commissioned before adjustment, although such work is at the insured s risk in the limited sense that the insurer 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 in Earthquake and War Damage Commission v Waitaki International Ltd, which concerned levies set for earthquake cover under the Earthquake and War Damage Act The levies were based on the indemnity value under the insured s policy of 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 of A similar view was taken of a related argument, that reinstatement results in the insured recovering more than the sum insured in a single policy year, in Ridgecrest, above n 6, at [14](b). Waitaki (PC), above n 13.

16 reinstatement in a policy which provides for full replacement and specifies no sum insured. 19 The reinstatement clause would be intelligible if the limitation of liability were an overall limitation so that, on each claim being met, the amount of the 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: 21 There 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: 22 The 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. 23 That 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: At 518. At 518. At 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. Re Earthquake Commission [2011] 3 NZLR 695 (HC). At [31].

17 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 triggers under 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 a different 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 cover serves 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 provisions are all but redundant, since reinstatement depends on the insurer s decision whether and 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 a level 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.

18 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 of insurance 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 or reinstatement. We accept Mr Campbell s submission that although no payment has been 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 insurers accept 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 speak of reinstatement from the date of loss. (The Marriott policy speaks of reinstatement from the date of occurrence, which means the same thing.) The Maxims Fashions, Marriott and Crystal Imports policies also refer to physical loss when they speak of loss for which a claim is payable or which is insured by the policy. So the insurers argument is that the term bears different meanings within the same 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. 26 Notice [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 See Watson v Haggitt [1928] AC 127 (PC). Waitaki (PC), above n 13, at 518. Bank of New Zealand v Board of Management of the Bank of New Zealand Officer s Provident Assoc [2003] UKPC 58, [2004] 1 NZLR 577 at [26] albeit in a legislative context. See also Kazakstan Wool Processors (Europe) Ltd v Nederlandsche Credietverzekering Maatschappij NV [2000] Lloyd s Rep IR 371 (CA).

19 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 an additional 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 the insurers arguments. If it were correct that until payment the insured has no need of reinstatement, 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 notice

20 need 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 that an insurer s notice, when given, must allow the insured a reasonable time in which to do so. 28 But that is a separate question. Conclusions [55] For these reasons we prefer the insureds construction of the policies. 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 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].

21 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 insured 29 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. The insurer s liability is always limited by the insured s loss. It may be limited by other provisions too; for example, average. These limits should not be confused with one another. 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. He That is, the cover cancelled by loss for event #1 and the limit of cover for event #2. 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. Wild South Holdings Ltd, above n 1, at [147].

22 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 more comprehensive 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 to pay 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: 34 There 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 be available. [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 observe that in the Lloyds policy, as in QBE s, the premium is calculated pro rata Marriott, above n 2, at [91](b). The case was argued before Dobson J delivered his decision but delivered some weeks later. Crystal Imports Ltd, above n 5, at [60].

23 [66] We agree with Cooper J s answer, with one qualification. The Judge commenced his answer by stating that: 35 The 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 the February 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 the reinstatement 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, and Ridgecrest NZ Ltd v IAG New Zealand Ltd, in which Dobson J held that it does not. 36 Since 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 when At [144]. Ridgecrest NZ Ltd v IAG New Zealand Ltd [2012] NZHC 2954, (2012) 17 ANZ Insurance Cases [Ridgecrest (HC)].

24 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 claims 37 Ridgecrest, above n 6, at [48].

25 and undoing what reinstatement effected. In the High Court Cooper J understood that such was among the insurers objectives, 38 as Dobson J evidently also did in Ridgecrest. 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 is perhaps 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. 42 The indemnity principle survives Ridgecrest [77] The indemnity principle was described in Castellain v Preston as the fundamental principle of insurance: 43 The 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 Crystal Imports Ltd, above n 5, at [115] [116]. Ridgecrest (HC), above n 36, at [51]. At [33] [40]. Peter Spiller New Zealand Law Dictionary (7th ed, LexisNexis NZ Ltd, Wellington, 2011) at 189. 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. Castellain v Preston (1883) 11 QBD 380 (CA) at 386 per Brett LJ.