Recent Developments in Insurance Law

Recent Developments
in Insurance Law
Duncan Laing
Simpson Grierson
Topics 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
Nominated Sum Policies – current
• 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
Asset 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
Reinstatement 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.
Reinstatement 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
• 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.
Earthquake 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.
Earthquake 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.
Islington Park Limited v ACE
Insurance Limited (CA)
• Industrial building complex damaged during Chch
• 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
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”.
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.
Firm PI 1 Limited v Zurich
• 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
• Majority held that sum insured included the EQC
• Amount payable by insurer was therefore the difference
between the sum insured and the EQC payment.
Galbraith 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.
The Winners and Losers
6 November 2014
•How and why is LG Insuring?
• Learning’s from recent events?
• Is there a Better Way?
LG’s diverse range of Assets
• Assets for provision of essential services,
e.g. water, wastewater, storm-water, waste, transport
• Community/wellbeing assets, e.g. libraries,
parks, halls, galleries, theatres, housing
• Guardians of Community Assets, Councils
have traditionally made decisions based on public expectation
How are Councils Insuring?
• 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
Why 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
Learning’s -Recent Events
• Insurance is more than ‘just about
premium cost’
• Cover is sometimes not what you
• Know how your Policies will respond
when you need them
Is there a Better Way?
• Develop an Insurance Strategy
• Considered Approach
• Linkages and Alignment to
Statutory obligations,
Compliance regimes,
Stakeholder recognition
Annual/Term Plans
Insurance Strategy
• Outcomes
What is Insurable
What to Insure
Why Insure
How Much Insurance
What type of Insurance
What Level of Self Retention
Audit Trail
What to Insure/is Insurable
• Criticality of Assets
• Why are the Assets Critical
– Essential to Service Deliverables
– Community Expectation
• Risk exposure of the Assets to Physical
Why Insure?
• Is Affordable Insurance available
• Can the risk(s) be retained
• What is the Plan for the Asset, renewal,
• Basis of Insurance, replacement cost or other
• Perils to be Insured, full perils including catastrophe
How Much Insurance
• 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
Insurance Strategy Benefits
Validated Decisions
Best use of Self Funding Capability
Insurance you Need and can Afford
Considered & Best Practice Approach
It is a Better Way

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