You should read this if you are handling an insurance or reinsurance claim arising from the New Zealand earthquakes.
The New Zealand courts are now handing down judgments on a number of unique insurance issues that arise out of the Canterbury earthquakes in 2010/2011.
Due to the enormous volume of cases, the High Court in Christchurch has established a dedicated list. The list is intended to streamline the dispute resolution process.
On 23 October 2013 Fogarty J. handed down an important judgment in Wild South Holdings & Maxims Fashion Limited v QBE.
The issues heard included the effect of an Automatic Reinstatement of Amount (“ROA”) clause and whether the insurer could still give notice of cancellation of the ROAs.
ROAs were a common feature in commercial property policies in Christchurch. Prior to the earthquakes, it was assumed that commercial buildings in Christchurch were unlikely to suffer significant loss more than once in a year. Christchurch, unlike Wellington, was also not appreciated to be an area at immediate earthquake risk.
The Wild South ROA provided:
“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 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.”
The ROAs have now assumed significance because of the extent to which many owners of commercial buildings in Christchurch were under-insured. Policyholders are seeking to rely upon the ROAs to reinstate their limit for the second and subsequent earthquakes.
In Wild South the Court determined the insurer may still be able to give notice of cancellation if a reasonable period of time had not elapsed.
Two further decisions, however, Marriott v Vero Insurance and Crystal Imports v Lloyd’s, have, for the time being, removed any prospect that notice of cancellation can be given retrospectively by the insurer.
These decisions have both been appealed to the New Zealand Court of Appeal, with a hearing date on 4 and 5 March 2014.
It seems unlikely that the Court of Appeal will be willing to allow the insurers more latitude than they have been given by the High Court with respect to the cancellation of ROAs. This is, particularly, the case where a number of insurers are still trying to resolve significant numbers of claims arising from the first earthquake in September 2010.
Reinsurers and reinsureds with exposure to claims from the New Zealand earthquakes should carefully consider policyholder rights of reinstatement of limit. Where such rights exist within the policies reinsured and could have been cancelled, issues could arise about reinsurer’s liability for claims arising from the second and subsequent earthquakes.