IN the COURT of APPEAL of NEW ZEALAND CA776/2013 [2014] NZCA 447 BETWEEN QBE INSURANCE (INTERNATIONAL) LIMITED Appellant AND

IN THE COURT OF APPEAL OF NEW ZEALAND CA776/2013 [2014] NZCA 447 BETWEEN QBE INSURANCE (INTERNATIONAL) LIMITED Appellant AND WILD SOUTH HOLDINGS LIMITED AND MAXIMS FASHIONS LIMITED Respondents CA881/2013 AND BETWEEN PETER STANLEY MARRIOTT AND EUNICE ANN MARRIOTT Appellants AND VERO INSURANCE NEW ZEALAND Respondent CA65/2014 AND BETWEEN CRYSTAL IMPORTS LIMITED Appellant AND CERTAIN UNDERWRITERS AT LLOYDS OF LONDON First Respondents SIRIUS INTERNATIONAL INSURANCE GROUP LIMITED Second Respondent Hearing: 5, 6 and 7 August 2014 Court: Wild, French and Miller JJ Counsel: M R Ring QC and F W Rose for QBE Insurance (International) Ltd N R Campbell QC and S P Rennie for Wild South Holdings Ltd, Maxims Fashions Ltd and P S and E A Marriott D J Goddard QC and PJH Hunt for Vero Insurance New Zealand Ltd QBE INSURANCE (INTERNATIONAL) LIMITED v WILD SOUTH HOLDINGS LIMITED AND MAXIMS FASHIONS LIMITED CA776/2013 [2014] NZCA 447 [10 September 2014] Z G Kennedy and I Rosic for Crystal Imports Ltd B D Gray QC and K Pengelly for Certain Underwriters at Lloyds of London and Sirius International Insurance Group Ltd Judgment: 10 September 2014 at 2.00 pm JUDGMENT OF THE COURT A The appeals and cross-appeals are allowed to the extent set out at [138]– [149] of the judgment. B Costs are reserved. ____________________________________________________________________ REASONS OF THE COURT (Given by Miller J) TABLE OF CONTENTS Introduction .............................................................................................................. [1] Facts and issues ........................................................................................................ [4] QBE v Wild South and Maxims Fashions (Fogarty J) ........................................... [5] Marriotts v Vero (Dobson J) ................................................................................... [9] Crystal Imports v Lloyds (Cooper J) .................................................................... [12] Issues ....................................................................................................................... [15] Interpretation ......................................................................................................... [18] Reinstatement ......................................................................................................... [19] The issue ............................................................................................................... [19] What the policies say ............................................................................................ [20] Submissions .......................................................................................................... [24] Is the insured indifferent to reinstatement of cover pending the insurer’s payment? .............................................................................................................. [35] “Loss” in the reinstatement clauses ..................................................................... [46] Notice ................................................................................................................... [49] Conclusions .......................................................................................................... [55] Reinstatement of cover in operation .................................................................... [56] The High Court judgments ................................................................................... [59] Merger ..................................................................................................................... [69] Why merger? ........................................................................................................ [72] The indemnity principle survives Ridgecrest ....................................................... [77] The indemnity principle and successive losses .................................................... [81] The insured’s loss: the indemnity principle in operation ..................................... [87] Destroyed ................................................................................................................ [90] Deductible ............................................................................................................. [109] Average .................................................................................................................. [122] The Marriotts’ entitlement to repair costs ......................................................... [134] Results and answers ............................................................................................. [138] Automatic reinstatement ..................................................................................... [139] Deductible .......................................................................................................... [143] Other questions in the Marriott appeal .............................................................. [145] Remaining question in the Crystal Imports appeal ............................................ [148] Costs ...................................................................................................................... [151] Appendix Introduction [1] The Christchurch area experienced serious earthquakes on 4 September 2010, 22 February 2011 and 13 June 2011. Frequently two and sometimes all of these events happened within the annual term of an insurance policy covering a given property. Damage from one earthquake often awaited repair when the next one struck. [2] The policies at issue in these appeals all concerned commercial buildings. Each policy provided full replacement cover subject to a sum insured, and each provided for annual aggregate with automatic reinstatement of cover upon loss. One policy was renewed between earthquakes. [3] The successive losses raise two distinct questions which divide the owners and insurers: what is the limit of an insurer’s liability in these circumstances, and for what losses may an insured claim indemnity? Facts and issues [4] The three judgments under appeal answered preliminary questions which rested upon agreed statements of fact. The full statements of fact and preliminary questions are collected in an appendix to this judgment. QBE v Wild South and Maxims Fashions (Fogarty J) [5] This appeal concerns two substantial commercial buildings that were damaged in the September, February and June events, all of which happened within the annual terms of the policies. [6] The policies include an automatic reinstatement clause under which cover reinstated on loss unless either party gave notice to the contrary. Notice has never been given but QBE Insurance (International) Ltd says it is still not too late, for cover is not cancelled and reinstated for any given loss until the insurer has paid, and then only to the extent of payment. The insureds, Wild South Holdings Ltd and Maxims Fashions Ltd, say that cover reinstated in full immediately upon each earthquake, so that the full sum insured is available for each event, and notice cannot be given retrospectively. [7] The policies also provide for a deductible. QBE says that the deductible is to be subtracted from the sum insured, which supplies the operative limit of its liability. The insureds say that it must be deducted from their actual loss, which is much larger, meaning that they should receive the sum insured free of deductible. [8] Five questions were asked but only two are now relevant. Those questions and Fogarty J’s answers are:1 Q2. What is the proper interpretation and application of the automatic reinstatement clause in the policies? A. (a) The insurer and the insureds have a reasonable period of time to give written notice to the contrary. If they do not given written notice within a reasonable period of time, it will be too late for either the insurer or the insureds to dispute automatic reinstatement. (b) Whether or not there was automatic reinstatement of cover, before the February quake and thereafter before the June quake, depends upon the knowledge and conduct of the parties to the policies after each quake. Evidence is required before a Court can judge whether the reasonable time for giving notice to the contrary has passed. … Q5. What is the proper application of any excess or deductible under the policies? A. The answer … in respect of Wild South, is that the deductible applies to the adjusted loss. Marriotts v Vero (Dobson J) [9] Peter and Eunice Marriott own two commercial buildings (actually a duplex with a common centre wall) which were damaged in the September and February events. The Marriotts say that they were also damaged in June, but Vero Insurance New Zealand Ltd says that any such damage is academic because the buildings were “destroyed” by the February event. The policy renewed on 22 May 2011. [10] The policy contains an automatic reinstatement clause. Vero gave notice on 15 October 2013, purporting to cancel reinstatement of cover with effect from the September 2010 event. It has paid what it says is the indemnity value. The policy also provides for a deductible or excess, which Vero has subtracted from the sum insured. [11] Four questions were asked. The questions and Dobson J’s answers are:2 1 Wild South Holdings Ltd v QBE Insurance (International) Ltd [2013] NZHC 2781 at [147] and [152]. Fogarty J chose not to answer question 5 in the case of Maxims Fashions, and it is not in issue on appeal. Q1. When is the building destroyed under

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