MARCH 2015

INSURANCE UPDATE

Deprivation of use is not physical loss to the

Imagine being legally forced out of your house The house suffered some shaking damage in the indefinitely because the Canterbury earthquakes earthquakes; however, the estimated repair cost for that damage fell well within EQC’s cover. Mrs Kraal received increased the risk of large rocks from a nearby the government’s red-zone offer but pursued her claim hillside breaking loose and smashing into it, against EQC and her private insurer in the hope of endangering your life. Your house is untouched, receiving a larger sum. She claimed both covers responded because of the physical loss of use of the house. but you are deprived of its use. Does your house In the High Court, Mallon J found against Mrs Kraal. cover this? Mallon J’s initial reaction at Mrs Kraal appealed to the Court of Appeal. the beginning of the High Court hearing for Kraal v EQC and Allianz NZ Ltd was that it ought to. COURT OF APPEAL DECISION However, she concluded, and the Court of The key to Mrs Kraal’s success was establishing there was Appeal has recently agreed, that deprivation of cover under the Earthquake Commission Act 1993 (Act). This was because without cover, the Allianz policy use is not ‘physical loss or damage to the was unlikely to respond (as it was designed to only property’. This means that the physical loss of use provide top-up cover above the level of cover provided is neither covered by the Earthquake Commission under the Act). (EQC), nor topped-up by private insurance. Both the High Court and the Court of Appeal noted that the cover under the Act required ‘physical loss to property’. BACKGROUND The use of the word ‘to’ was critical. The physical loss must be in relation to the property itself. This was to be Shortly after the 22 February 2011 earthquakes, civil contrasted with physical loss of use of the property, which defence authorities required Mrs Kraal to leave her house refers to the owner and not the property itself. because of the perceived risk of further rock falls from hills immediately across the road. On 13 July 2011, on The Court of Appeal decided that the plain meaning, the receipt of geotechnical advice, Christchurch City Council context, the legislative history, and the relevant authorities issued a notice under section 124(1) of the Building Act in New Zealand, Australia and England, all support an 2004. The effect of the section 124 notice was to make it interpretation of the Act that limits the meaning of natural an offence for any person to use or occupy the house or disaster damage to physical damage to the property that permit another person to use or occupy the house. arises from a natural disaster.

Insurance Update | 1 The Court of Appeal concluded that physical loss or damage What remains are the general conditions of the policy requires a disturbance to the materials or structure of the that benefit the insurer, which are often one-sided building or other object. This was not the case here. Since without a corresponding justification. In light of the new EQC was not liable under the Act, the top-up cover under unfair contract term sections to be incorporated into the the Allianz policy was not available either. Fair Trading Act 1986, a term giving the insurer an unfettered right to vary or cancel the policy mid-term may COMMERCE COMMISSION RELEASES UNFAIR be at risk of being determined unenforceable. CONTRACT TERMS GUIDELINES The Commerce Commission can apply to the District The Commerce Commission has published its final version Court or High Court for a declaration that a term is an of the Unfair Contract Terms Guidelines and its unfair contract term. A declaration to this effect by the approach to enforcing the new unfair contract term District Court or High Court has the effect of making an sections incorporated into the Fair Trading Act 1986, existing term unenforceable and prohibits the party relying which took effect from 17 March 2015. The Guidelines on the term from continuing to use the term any further. include a section relating to insurance contracts. PROFESSOR ROBERT MERKIN QC The unfair contract terms provisions only apply to standard form domestic insurance policies. Even then, they only We are proud to announce that, in February 2015, apply to insurance contracts entered into with an insurer Professor Robert Merkin, Special Counsel in our for the first time after 17 March 2015. They do not apply insurance team, was appointed Queen’s Counsel Honoris to variations of the terms of existing insurance contracts Causa in England and Wales under letters patent issued or to the renewal of existing insurance with an insurer. by the Crown. For new domestic insurance policies entered into after This honorary appointment is reserved for lawyers who 17 March 2015, some terms are deemed to be reasonably are not practising barristers, and only a handful of necessary to protect the interests of the insurer and are appointments are made every year. Professor Merkin was exempt from being declared unfair terms. These are terms appointed an honorary QC for his contributions to the that: law of insurance and arbitration over the last 20 years. The Lord Chancellor presented the honorary title to • identify the subject matter or risk insured against, Professor Merkin at Westminster Hall. including terms identifying an uncertain event; If you have any questions or require further information • specify the sum(s) insured; regarding any aspect of this update, please contact us. • exclude or limit the liability of the insurer to indemnify the insured; • describe the basis on which claims may be settled or that specify any sums to be contributed by the insured, such as an excess; • provide for the payment of the premium; • relate to the duty of utmost good faith owed by all parties; and • specify the requirements for disclosure or relate to the effect of any non-disclosure or misrepresentation by the insured.

Insurance Update | 2 KEY CONTACTS

Crossley Gates Peter Leman Partner Partner T +64 9 300 3823 T +64 4 474 3240 [email protected] [email protected]

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