New Zealand courts continue to rule against insurers in cases involving reinstatement of cover during the Canterbury earthquakes.

The Court of Appeal last week found that automatic reinstatement cover reinstates immediately following an event. 

A reinstatement can be cancelled, but notice must be given for cancellation at a future date, not retrospectively.

The decision is expected to have implications for reinsurers and insurers because of policyholders’ ability to claim for more than one quake.

An appeal to the Supreme Court is considered likely.

Reinstatement is an issue because of the level of underinsurance and because many buildings damaged in the September 2010 earthquake were often not repaired before the February 2011 quake destroyed them.

Some insureds are claiming for repair costs from September, plus the full sum insured.

The Court of Appeal heard three High Court cases together because of their similar issues involving disputes over commercial building policies: QBE had appealed against a decision over policies with Wild South Holdings and Maxims Fashions; Peter and Eunice Marriott were in dispute with Vero; and Crystal Imports was taking on a group of Lloyd’s underwriters and Sirius International.

The three Court of Appeal judges say during the Canterbury quakes in 2010/11, two or more tremors occurred within one policy term.

Each policy provided full replacement cover, and each provided for an annual aggregate with automatic reinstatement of cover from the date of the loss.

The issues are:

• What does automatic reinstatement mean? Is it continuous or does it reinstate only when depleted by an insurer’s payment?
• Does the marine insurance doctrine of merger apply to material damage policies? The doctrine applies when a total loss follows a partial loss that has not been repaired, and means the insurer only pays the total loss. Although it has never been applied to fire and general policies, it has been argued in Christchurch because buildings had not been repaired when total loss occurred.
• When is a building destroyed?

The judges say a building is not destroyed “merely because the insured means to replace it”. Instead, it is when the damage is so extensive it needs to be rebuilt.

Cover reinstates immediately following the event.

But the judges say that in calculating insurance, the cost of repairing damage from the September and February events together should be merged, and this is the cost of reinstating the building to the policy standard.

This might exceed the sum insured but still not be enough to replace the building.

The doctrine of merger does not apply because the sum insured is reset after each earthquake.

Crystal Imports’ original High Court judgement found the doctrine applied, but the recent Ridgecrest-IAG case in the Supreme Court says it did not, and since that was in the country’s highest court, it sets the rule.

The judges say insurers’ argument for the doctrine in quake cases is “highly controversial”.

Insurers say it is necessary to ensure insureds do not profit by recovering two losses from two events when the actual cost of reinstatement is less than that.