Insurance Update

APRIL 2016 INSURANCE UPDATE Inconsistent language in an indemnity policy affects method of settlement The Court of Appeal recently considered the Consistent with market practice, the insurer in this case correct way of cash settling a claim for destruction argued that market value was the correct measure of the indemnity payable. However, the starting point is always 1 of a building covered under an indemnity policy. what the insured contracted for under the policy. It found that the language used in the policy The Court of Appeal noted that although the policy was precluded the insurer from paying the building’s an indemnity one, the insuring clause said: lost market value. Instead, the Court of Appeal You will be indemnified by payment, or at our option, by found the building’s depreciated replacement repair or by replacement of the lost or damaged property. cost was the more appropriate measure. Further, the insurer had added a special note to the policy, Why was this so? which said: We will repair or reinstate the building to a reasonably The parties agreed that the Material Damage Policy had equivalent appearance and capacity using the original design been arranged on an indemnity only basis. It contained the and suitably equivalent materials. usual insuring clause, which referred to indemnifying the insured. The reinstatement extension did not apply. The Court of Appeal was influenced by the references to ‘replacement’ in the insuring clause and by the language The Court of Appeal accepted that the principle of used in the special note. It said: betterment applies to an indemnity only policy and that depreciation should be allowed for. However, the As noted at [22] above, the special notes confirm the cover question arose as to whether this allowance should be reflected the building’s original appearance, capacity and calculated by assessing the lost market value of the design. That is notwithstanding that Prattley chose not to building, or by assessing the building’s depreciated purchase full reinstatement cover. In our opinion replacement cost. These two calculations do not always “reinstatement” in this policy was not merely a method by result in the same figure. which the insurer might discharge its obligations. It was also a primary measure of the material damage indemnity; When a building is destroyed, the insurance industry primary because it reflected the parties’ agreement that practice is to assess the insured’s loss under an indemnity cover would reflect the special character of the building. policy by way of loss of market value. Depreciated replacement cost is usually only used where a building has As a consequence of this, the Court of Appeal found that no market value because of the nature of it (eg a church). the insurer was required to settle the claim by paying the 1 Prattley Enterprises Ltd v Vero Insurance NZ Ltd [2016] NZCA 67 Insurance Update | 1 depreciated replacement cost of the building, not its lost 2. In any event, do not use language elsewhere in the market value. This was because the policy language policy that implies the policy will reinstate or replace foresaw reinstating the building. the building. In addition, do not refer to reasonably equivalent appearance, capacity, design and materials. The lesson here for insurers is clear. If you wish to settle This is the language of a replacement policy, not an claims for the destruction of buildings under indemnity indemnity policy. policies by paying their market value: If you have any questions, or require further information 1. Ideally, say so in the policy; and regarding any aspect of this publication, please contact us. KEY CONTACTS Crossley Gates Peter Leman Partner Partner T +64 9 300 3823 T +64 4 474 3240 [email protected] [email protected] Grant Macdonald Partner T +64 9 300 3896 [email protected] ABOUT DLA PIPER NEW ZEALAND DLA PIPER OFFICES DLA Piper New Zealand is part of DLA Piper, a global law firm Auckland Wellington operating through various separate and distinct legal entities. DLA Piper Tower Chartered Accountants House Further information can be found at www.dlapiper.com 205 Queen Street 50 - 64 Customhouse Quay Auckland NZ 1010 Wellington NZ 6011 COPYRIGHT T +64 9 303 2019 T +64 4 472 6289 If you would like to reproduce any of this publication, please contact [email protected] [email protected] [email protected] This publication is intended as a general overview and discussion of the subjects dealt with, and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. This may qualify as “Lawyer Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. Copyright © 2016 DLA Piper. All rights reserved. | APRIL 16 Insurance Update | 2.

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