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Christchurch property investor Ridgecrest wins IAG policy appeal in Supreme Court

Ridgecrest NZ, a property investor, has won an appeal in the Supreme Court over insurance cover provided by IAG New Zealand for a Christchurch building damaged in four successive earthquakes.

The closely held Ridgecrest had originally taken its case to the High Court after a dispute with the local unit of Insurance Australia Group about the nature of its policy. Ridgecrest had contended it was entitled to the maximum cover of $1.98 million for the final quake on June 13, 2011, that damaged the building beyond repair, and also for losses caused by the three preceding quakes.

IAG, which hadn't been able to complete repair work from the earlier quakes by the time each new one hit, maintained it was only liable to pay the maximum cover for the final 'happening' and only for cost of repairs actually undertaken in the three previous quakes. The High Court found in IAG's favour and the Court of Appeal came to the same conclusion, albeit on different grounds.

The Supreme Court pondered three issues: whether IAG was required to make payments in relation to the earlier quakes; whether losses from the earlier quakes should be treated as merged or subsumed into the loss from the final quake; and whether Ridgecrest's claim was precluded by the "indemnity principle" under which insurance policies "are construed to avoid an insured recovering more than the amount of the loss." (see the judgment attached)

In the Supreme Court judgment released today, justices John McGrath, William Young, Susan Glazebrook, Peter Blanchard and Andrew Tipping unanimously allowed the appeal. They found that Ridgecrest was entitled to be paid out to the policy limit of $1.98 million in each of the earlier quakes and that the merger principle did not apply. They also concluded that the indemnity principle didn't apply because the policy limit was below the replacement value of the building.

However they did find that Ridgecrest wasn't entitled to recover more than replacement value of the building or to double-count its losses.

Ridgecrest was awarded costs of $25,000 and orders for costs in the High Court and Court of Appeal were set aside. Instead, IAG would meet Ridgecrest's costs in those courts.

IAG New Zealand is the nation's biggest general insurer, with local brands State, NZI and AMI. In the 12 months ended June 30, it posted a 56 percent gain in profit to A$183 million after lifting household premiums and making more online sales.

IAG said this month it had settled about 58 percent of its Canterbury earthquake claims as at June 30, amounting to more than $3.3 billion in claim settlements. Projects were taking longer than expected and the company expected the rebuild completion date to extend out to mid-2016, it said, later than the previous target.


RAW DATA: Judgment (PDF)241.08 KB

Comments and questions

Congratulations to Ridgecrest.

Time and again, these big businesses play the game of trying to burn off their clients. The best part about this judgement is it has set a precedent, for other judges to follow.

The SFO should have had the balls to do the same with some of these finance company directors, to put them out of (bad) business for good. Unfortunately, thats what you get with hollow men!

This is clearly the right decision, and given that 5 of our (presumably) top judges unanimously thought so, why was it too hard for both the High Court and the Appeal court - especially as these two courts apparently found different ways to get it wrong?

Reading the detail above (without reading the judgement), IAG was right on the last claim - maximum payable was the $1.98m - but well wrong on the settlement for the earlier losses.

Out of interest though - the Appeal court's comment that they were liable for up to $1.98m each loss as that didn't breach the indemnity principle (ie. meaning they can't make a profit out of this, its got to put them back in the same situation), suggests that the total replacement cost of the building was in excess of $1.98m x 3. If Ridgecrest underinsured by that amount, they've been playing the odds to cut costs, and other policy holders have possibly been subsidising them to a fair degree.