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High Court of New Zealand Decisions |
Last Updated: 7 March 2014
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2013-409-001291 [2013] NZHC 3518
BETWEEN SYDENHAM RECYCLING LIMITED Plaintiff
AND IAG NEW ZEALAND LIMITED Defendant
Hearing: 25 & 26 November 2013
Additional submissions: 2 December 2013
Counsel: ACC Hooker for Plaintiff
C J Hlavac for Defendant
Judgment: 20 December 2013
JUDGMENT OF WHATA J
Introduction
[1] Sydenham Recycling Limited (SRL) recycles waste. The
earthquake of
22 February 2011 significantly damaged their working premises. Various
repairs were needed and undertaken. The costs of these
repairs were paid by
IAG New Zealand Limited (IAG) under business interruption cover. SRL, however,
was concerned that the premises
might be demolished at any time and in December
2011 put a proposal to IAG to relocate to another site. The proposal was
supported
by an independent assessor, but it was rejected by IAG on 23 February
2012, one day after the expiry of the indemnity period.
[2] SRL now seeks damages of $500,000, being the sum insured
under the policy. SRL nevertheless continues to operate
out of the same
premises.
SYDENHAM RECYCLING LIMITED v IAG NEW ZEALAND LIMITED [2013] NZHC 3518 [20 December
2013]
Central issue
[3] The central issue is whether SRL’s proposal is covered by the
following
policy wording:
L. ADDITIONAL INCREASED COST OF WORKING
You are insured for reasonable additional expenses that are not
otherwise covered by this policy, provided they are incurred during the
indemnity period:
1. to avoid or diminish the reduction in turnover, or
2. to resume or maintain normal business operations. No cover
is provided for reinstating your property damage. (Emphasis in
original)
[4] By the conclusion of the hearing, this central issue gave rise to
the following key questions.
(a) Was the relocation necessary to resume or maintain normal business
operations?
(b) Were the proposed costs of the relocation reasonable?
(c) Were the proposed costs “incurred” during the indemnity
period?
[5] As noted by counsel for the defence these issues are different from
the issues as stated pre-trial. In particular, the
emphasis has moved from
whether the relocation was necessary to avoid or diminish a reduction in
turnover to an emphasis on the need
to resume or maintain normal business
operations. In any event, I am satisfied that the central issue as pleaded
contemplated a
contest about the scope of cover under either clause Ll or clause
L2.
Facts
[6] The facts are reasonably straightforward. SRL entered into a lease for premises at 350 Wilsons Road North with New Zealand Railways (KiwiRail). It had been up and running at that site for about six months prior to the 22 February 2011
earthquake. The earthquake caused damage to the building used by SRL for
its business, namely as a waste transfer station. The
building was assessed by
engineers who concluded:
Preliminary indications are that this building has been affected by the
earthquake with damage that has affected the structural
elements of the
building, but can be occupied as the building does not have any significant
stability issues, due to the temporary
bracing which has been installed since
the earthquake.
[7] The engineers further recommended:
Due to extensive work required to repair the building, we recommend that
costings for demolition of the building with reinstatement
be checked against
the remedial works to rectify the damage noted above. We also note that the
site may require geotechnical testing
or may be subject to new geotechnical
restrictions under any updated council regulation.
[8] Mr Stapleton, a director of the plaintiff, notified IAG who
ultimately engaged Aaron Clegg, an assessor from McLarens Young,
to assess any
claims made by SRL. At about the same time Andrew Fusco from Worldclaim
was engaged by Mr Stapleton to assist
in managing the Mastagard Group’s
claims, which included SRL’s claims.
[9] Various works were paid for by IAG, including temporary property
and repair work to a warehouse area, constructing a portacom
to replace ablution
facilities in the damaged building, as well as for the cost of hiring temporary
load cells to enable the weighbridge
to continue to operate. These
costs were paid for under the insurance cover referred to at paragraph [3]
so the plaintiff
could continue to operate its business.
[10] In early December 2011, the plaintiff then sought IAG’s agreement to fund the cost of purchasing a replacement building, to be erected on an alternative location, and associated relocation costs. By this stage Mr Stapleton had a drafted a Heads of Agreement between Hornby Recycling Limited (HRL) (another subsidiary of Mastagard) and Owaka Holdings Limited (OWL), the effect of which, if executed, would mean that HRL would lease land from OWL and could construct a new building for SRL’s recycling business. The agreement contemplates a 10 year lease at
$100,000 per annum together with a right to purchase.
[11] Mr Clegg was then retained by IAG to provide a report on the proposal.
In that report Mr Clegg made a number of observations
including:
Circumstances
The insured tenant has suffered significant damage requiring that
they relocate their operation.
[12] And further:
The claim for damage to the building is being handled by Stephen Crawford of
TPA Godfrey’s. We have discussed the damage
present and claims
position with him and appointed engineers Aurecon.
Damage to the building is extensive and according to engineers it is probable
that it is beyond economic repair. It is yet to be
determined whether this is
as a result of the event of 22 February or 13 June 2011. If the latter
earthquake has caused
additional damage that has lengthened the repair
period then it is possible that there may be a second Business Interruption
claim to consider.
Regardless of the outcome of the above enquiries the Insured are unable to
continue to operate from the site during either repairs
or demolition and
reconstruction.
Since the event the building has been unsafe to enter, robbing the insured of
ablution and smoko room facilities. A & A
Coombs Builders Limited
constructed a portacom to replace these. This was located on site and
connected to services.
The weighbridge’s deck was bounced by the earthquake crushing the load
cells. Hire cells were installed whilst replacements were
sought.
[13] The report then observed:
We are satisfied that the following items represent additional costs
reasonably incurred specifically to diminish the Insured’s
reduction in
turnover resulting from damage to the building.
• Relocation of site office
• Relocation of plant and equipment
• Hire of a weigh bridge
• Transfer of plant and equipment back to Wilsons Road
• Marketing to advise customers of change of address
[14] The report then noted:
Relocation of the Insured’s machinery and its installation and
commissioning at an alternate site falls within the bounds of
the cover
provided. Although items listed are an estimate there is nothing to suggest
these are not realistic. The Insured is motivated
to incur costs within the
indemnity period. The only item which requires serious consideration is the
temporary building (individual
cost $737,831.00 excluding GST).
The earthquake has seriously diminished Christchurch’s building stock.
As such the Insured have been unable to find a suitable
premises that has the
Resource Management Act consent required to operate a refuse transfer
station. The Insured asked Environment
Canterbury if they could run a
transfer station without cover. The request was declined as it would give the
rubbish handled a
greater opportunity to be blown into neighbouring
properties.
We are satisfied that the building’s cost is to resume normal business
operations. The insured did not own the building at
350 Wilsons Road and
therefore purchase of the temporary structure is not reinstatement of their
property. However it needs to
be considered as to whether costs are
reasonable. Given the current lack of suitable buildings within Christchurch
and the wider
Canterbury region it would be difficult to argue to
the contrary.
[15] The report also made other observations, including that the
plaintiff was motivated to minimise disturbance and that the
building would
likely be purchased before 21 February 2012, within the indemnity period. The
report then considered whether the
plaintiff would benefit from the buildings
beyond the indemnity period, and observed that the structure is not
permanent
and that a shareholder of the plaintiff entity is $127,500
excluding GST better off. However the report considered that that
is simplistic
and overall concluded:
Based on the above you may consider that a significant proportion (if not
100%) of the cost associated with purchase of the temporary building is covered as an Additional Increased Cost Of Working. An adjustment as
described above is attached in Appendix A Table 3.
[16] Attached and marked Annexure A is a copy of the tables included in
the report, including Table 3.
[17] IAG did not respond to the proposal or the assessor’s report
until 23 February
2012, one day after the indemnity period had expired. In that reply, a representative of IAG made the following observations:
During the indemnity period which ceases on 22 Feb, clients have
maintained trading at 350 Wilsons Road and can still trade
from there in the
immediate future - we (Vero and ourselves) have paid out various costs under
their ACOW cover to enable them to
do this.
Clients have now decided that they want to purchase a building for their long
term future and are asking that we continue the balance
of their sum insured on
ACOW towards this purchase.
We do not consider that some $450,000 could be considered a reasonable
additional expense incurred during the Indemnity Period.
1. To avoid or diminish the reduction in turnover, or
2. To resume or maintain normal business operations.
Evidence
[18] Mr Stapleton and Mr Hunt provided evidence as to the background to
SRL’s operations and to the claim. Mr Stapleton
identifies the prospect of
having to shut down the business, loss of market share and a knock on effect to
the Mastagard operation
as driving factors behind the claim under clause L. He
also says that the business continues to be significantly affected by the
earthquake damage, referring to the following examples:
(a) The concrete floor is cracked and broken;
(b) Due to cracks in the yard, soil and liquefaction debris constantly
surfaces creating a dusty environment;
(c) The cracks in the floor within the building have required temporary
repairs;
(d) The resource consent under which the plaintiff operates requires strict controls around waste and other material being kept on site and that prior to the earthquakes the plaintiff would routinely close all main doors to prevent this problem but has not been able to do this given the damage to the building.
[19] Mr Stapleton’s formal proposal to IAG was not finalized before
November
2012 and it took him almost five months from becoming aware that he needed to put a concrete proposal to actually submitting a proposal. He also had no signed contractual right to relocate, and he accepted that there may be consenting issues with establishing SRL’s business at the Owaka location. But he said the framework of a deal was in place and that there was a willingness from the landlord to assist. Mr Stapleton said that he was prepared to commit to a ten year lease for the alternate site because he could not get a lease or any type of arrangement based on an
18 month period (being the estimated time needed for relocation).
[20] Mr Stapleton also addressed questions about
KiwiRail’s rights and obligations. He agreed that SRL was
still
obliged to pay rent and that theoretically KiwiRail should be maintaining the
premises. But he did not want to risk early termination
of the lease. As he put
it:
We are there by the grace of God as it is.
[21] Mr Stapleton accepted that the relocation was not going to avoid a
reduction in turnover during the indemnity period, but
he maintained it would
affect business operations during the indemnity period because he was proposing
to relocate through that period.
[22] It was also put to Mr Stapleton that if IAG agreed to his proposal
then he would still have had an obligation to pay rent
to KiwiRail. He
expressed the view that KiwiRail would have been comfortable with the plaintiff
moving out and said further it was
inarguable that the building would have to be
pulled down at some stage. Mr Stapleton conceded though that he did not
take legal
advice on his position regarding the lease.
Mr Hunt
[23] Mr Hunt is a chartered accountant and part time in-house financial controller for Mastagard Group. He provided tables dealing with budgeted and actual revenue and gross profit for the 12 month periods ended March 2011, 2012 and 2013. Those tables reveal that both gross revenue and gross profit was materially superior in the
post earthquake period. He also explained the reason for this increase is
that 2011 is a partial year only and that SRL really started
to complete trade
in or about 2010 whereas the 2012 figures are for a full year.
[24] IAG called evidence from two witnesses, Mr Clegg, and Mr John
Burrows, a specialist business interruption loss adjuster.
Mr Clegg
[25] Mr Clegg details his various dealings in relation to the
plaintiff’s business.1
He refers to his various recommendations that certain costs be paid
under the
plaintiff’s material damage policy, including for work to the
weighbridge at a cost of
$47,524.90 together with the installation of hired load cells to the
weighbridge at a cost of $8,529.55.
[26] Mr Clegg describes the structures at the plaintiff’s site in
the following way:
12. The main structures at the Wilsons Road site are a fully enclosed
office building which contain offices and ablution facilities,
a semi- enclosed
warehouse area which SRL used for its waste transfer operations, and a
weighbridge.
13. The warehouse has roughly the same floor area as the office
building and consists of a Colorsteel roof, steel portal frame
and concrete
floor slab. It is situated immediately adjacent to the office building but
separate from it. It is in this area that
SRL carries out its waste transfer
operations which essentially consists of receiving general waste which is
transported to the site
in refuse trucks, compacting the waste using compactors
and then arranging for the compacted waste to be transported off site by
truck
to landfill. The weighbridge is situated at the entranceway to the warehouse
area to weigh the refuse trucks when they arrived
and departed.
[27] Mr Clegg observes that the office building had limited use in SRL’s operations apart from the ablution facilities. He says that the most significant damage was to the office building with comparatively minor damage to the
warehouse area.
1 He refers to five reports produced by him dated 26 April 2011, 30 May 2011, 24 August 2011,
11 November 2011, and 17 January 2012.
[28] Mr Clegg also narrates the background to and content of his report
to IAG noted at [11]-[15] above. He notes that since his
report of January 2012
he has had the benefit of SRL’s financial information and that this
information shows that SRL’s
turnover and associated gross profit has in
fact increased following the earthquake. He says that he was not aware that
KiwiRail
was prepared to allow the plaintiff to remain in the premises for a
further two years and if he had been aware of that at the time
he wrote his
report to IAG it would have influenced the considerations he gave and expressed
in that report. For these reasons,
and with the benefit of hindsight, he does
not now consider that the proposed relocation and replacement building
purchase
would have been a reasonable expense.
[29] Mr Clegg conceded that he did not seek the financial information
relating to the performance of SRL at the time of preparing
his report and
further, in answer to a question from me, he said that that report was
sufficiently informed to be reliable.
Mr Burrows
[30] Mr Burrows is also a chartered loss adjuster, but he
specialises in the adjustment of business interruption
insurance claims.
Mr Burrows helpfully describes business interruption policies in the following
way:
11. Business interruption policies are only sold in conjunction with a
material damage policy, which provides insurance cover
for the physical property
(buildings and other property) itself. Business interruption policies will
only respond where the interruption
results from loss or damage which is covered
under the insured’s material damage policy.
12. An exception to this is where the insured does not own the building and the other property which they use to carry on their business activity, and do not insure it. For such insureds, business interruption policies typically provide cover for interruption resulting from loss or damage to property used by the insured for its business provided that the loss or damage would be covered as a claim under the insured’s material damage policy if it owned the property. In the case of the NZI Business Interruption policy (“the NZI policy”) this is provided under the definition of “insured damage” ...
[31] He observes further:
14. Although it is common for insureds to take out cover for loss of
profits, in some instances an insured will elect not to
take this cover but only
to take cover for additional increased cost of working (“AICOW”).
AICOW cover provides insurance
for additional expenses (that is, expenses over
and above its normal operating expenses) that the insured incurs to avoid or
diminish
a reduction in turnover, or to resume or maintain its normal business
operations. The rationale for only taking out AICOW cover and
not loss of
profits cover is generally that the insured believes that the nature of its
business is such that in the event of loss
or damage to its business premises or
plant it will be able to quickly resume normal operations without any
significant impact on
turnover. AICOW cover is designed to assist with this.
A typical example is where an insured suffers damage to some of its
business plant, which requires repairing. AICOW will cover the cost of
hiring replacement plant until the damaged plant is repaired
and returned to
service.
15. It is important to understand, however, that AICOW does not cover
the cost of repairing or replacing the damaged property
itself. In the case of
the NZI policy, the AICOW insuring clause clearly provides that no cover is
provided for reinstating the
insured’s property damage.
[32] Mr Burrows also expresses the opinion that the indemnity period is
important from an insurer’s point of view because
it limits the period of
interruption for which the insurer is required to provide cover. An
insured’s premium is calculated,
and tied, based on the length of the
indemnity period.
[33] Mr Burrows also expresses the following opinion:
28. It is my opinion therefore that once the propping,
weighbridge repairs and replacement ablution facilities had
been taken care of
(all of which were paid for by IAG under AICOW cover), the damage to the
building (the insured damage) no longer
affected SRL’s ability to carry
out its business operations. By that stage SRL had resumed its normal business
operations,
so much so that it was able to achieve a greater turnover following
the earthquake that it had prior to the earthquake.
29. In my opinion therefore, the indemnity period in fact ended prior to the expiry of the 12 month period provided for in the schedule, and prior to SRL’s request that IAG meet (in part) its relocation costs and the cost of purchasing a temporary replacement building.
[34] Mr Burrows then addresses at some length the turnover and gross profit of SRL in the period subsequent to the request for additional expenditure. He observes that the rate of gross profit increased from 15.3% in the year before the earthquake to
22.9% in the year after the earthquake. He says that the turnover, or
revenue, increased from approximately $1.7 million in the
year prior to the
earthquake to about $3.1 million in the year after the earthquake, increasing
again in the following year to $3.3
million.
[35] In light of this information, he does not consider that the purchase
of a replacement building to allow SRL to relocate was
a reasonable expense to
avoid or diminish a reduction in turnover during the indemnity
period.
[36] He also says that SRL was able to resume or maintain its normal
business operation soon after 22 February 2011 and certainly
prior to SRL
presenting its proposal for relocation and associated costs in December
2011.
[37] He also opines that the proposed building was not temporary, noting
for example that it has a warranty of some 15 years.
He also says that it is
illogical that SRL, by virtue of being a lessee and not an owner, could benefit
in the purchase of a major
capital asset to replace its business premises under
its business interruption policy, when it would clearly not have been able to
do
so had it been the building owner. He also says that there is considerable
uncertainty as to whether or not, had SRL moved, it
would have returned to the
current KiwiRail site.
[38] For all of the foregoing reasons he does not believe that the
proposed cost of purchasing a replacement building was “reasonable”
as an additional increased cost of working.
[39] Mr Burrows accepted under cross-examination that in forming his view as to whether Sydenham had returned to normal business operations, he did not make any attempt to obtain information, for example whether Sydenham had lost any customers due to the dilapidated state of its premises, and he conceded that he had not been in touch with Sydenham about its operation and he could not exclude the possibility that physical day-to-day operations changed significantly even though
turnover might remain the same or improve. He also accepted that resuming
normal business operations is not necessarily related to
reduction in
turnover.
[40] I also understand Mr Burrows to accept that the cost of works,
including temporary repairs so that a business can continue
with its operations,
would be covered by the policy. He used the following example:
In this case there was a fear that the building was unsafe and so it required
propping so the building was propped so it wouldn’t fall down.
...
[41] He also accepted that continual problems with compliance with the
resource consent and having to undertake additional works
to achieve compliance
resulting from the damage is not normal business operations.
[42] He says further that:
... so if those costs had been incurred related to those concerns
they would’ve been claimable under the policy.
[43] Mr Burrows also helpfully addressed the Court on a case study
referred to by
Mr Hooker in the following terms:
Right, so where this tenant has to enter into a lease agreement that’s
longer than his indemnity period, for the period after
the end of the indemnity
period that he continues to occupy that premises, that lease cost is for his own
account. ....
But the unused portion, so when his building is ready and he can move back
into his reinstated premises then the insurance company
pick up the unused
portion of the lease that extends beyond the end of the indemnity
period.
[44] Mr Burrows maintained under cross-examination that the indemnity period remains significant for the purposes of circumscribing the level of the cover. He accepted that costs incurred over and above what has been described as the “economic limit” are covered by this type of policy. But any such cover would terminate at the end of the indemnity period.
[45] Mr Burrows also said:
The fact that it [the building] is uneconomic to repair or has to come down
at some stage doesn’t stop them from doing normal
business in that
building until such time as it has to come down or activity in the building has
to stop while repairs take place.
[46] He accepted that maintaining a place in a market is a relevant
consideration for the purpose of assessing the reasonableness
of an expense. He
used the following illustration:
... if the insured didn’t have loss of profit turnover and just had
additional increased cost of working cover, and had to go
out and buy widget
from somebody else, then this item of cover would cover the whole cost of that
widget not just the 10 cents either
above the economic limit, it will also cover
the first dollar. ....
The Contract2
[47] The contract records the central agreement in this way:
You agree to pay us the premium described in the schedule
and comply with this policy. In exchange, we agree to insure you
as set out in this policy.
[48] It states further:
You are insured for business interruption resulting from
insured damage.
Your claim will be calculated as set out in “Insured
Items” (below). Cover under each “Insured Item” applies only
when you have taken that item and it is specified in the
schedule.
[49] Business interruption is defined as:
Interruption to or interference with your business
operations.
[50] The insured items are identified under the following headings,
namely:
A. LOSS OF INSURED PROFIT B. LOSS OF RENT
C. LOSS OF REVENUE D. PAYROLL
E. PAYROLL – DUAL BASIS F. WAGES – DUAL BASIS
G. WAGES IN LIEU OF NOTICE H. REDUNDANCY PAY
I. CLAIMS PREPARATION COSTS J. BOOK DEBTS
K. REWRITING OF RECORDS
L. ADDITIONAL INCREASED COST OF WORKING
[51] Items A through F include provision for “increased cost of
working”. The maximum amount of this expense covered
by the policy is
subject to a set formula for each Item, capping the additional expenditure at a
level no greater that the loss avoided
by the
expenditure.3
[52] Clause L then states:
L. ADDITIONAL INCREASED COST OF WORKING
You are insured for reasonable additional expenses that are not
otherwise covered by this policy, provided they are incurred during the
indemnity period:
1. to avoid or diminish the reduction in turnover, or
2. to resume or maintain normal business operations. No cover is
provided for reinstating your property damage.
[53] The wider contract is expressly brought into frame by the phrase
“expenses that are not otherwise covered by this policy”.
The
expenses otherwise covered by this policy include the increased cost of working
for the items just mentioned.
[54] Relevantly, the policy deals with “Basis of
Settlement” in the following
terms:
E. PAYMENT ON ACCOUNT
We will make interim payments provided you produce evidence to our
satisfaction of a loss covered by this policy.
[55] The obligations of the insured are then specified including, among
other things, to notify, minimise loss, provide full information,
and to be
truthful. Further the contract states:
8. Incurring costs
All costs claimed for under this policy must be necessarily and
reasonably incurred.
You are not authorised to start any repairs without our
permission unless the repairs are necessary to prevent further loss or
liability.
[56] Indemnity period means:
The period that:
(a) starts when the insured damage occurs, and
(b) ends no later than the number of months specified in the schedule as
the ‘Indemnity Period’,
during which, your business operations are affected because of that
insured damage.
[57] Insured damage is then defined:
Loss occurring at the situation to any property (or part) owned or used by
you for the business, provided that the loss:
(a) is covered as a claim under your material damage policy, or would
have been but for the excess, or
(b) would be covered as a claim under your material damage policy if
you owned the property, or
(c) is caused by the explosion of a pressure vessel.
[58] I address the significance of the words used, in context, when dealing with the agreed issues.
Interpretative frame
[59] Context, background and experiences are relevant when
interpreting the contract and an apparently plain meaning can
be displaced when
considered in its particular factual setting.4 This may include pre
and post contractual conduct.5 But it is usual to begin with the
contract’s language, which may supply a provisional meaning, and the
plainer the words the
less likely it is that the parties intended them to mean
something else.6
Plaintiff ’s submissions
[60] The plaintiff contends that:
(a) The AICOW cover relates to two types of additional cost - namely to
avoid a reduction on turnover or to enable normal business
operations to
resume;
(b) The first question is whether the costs were incurred to resume or
maintain normal business operations;
(c) As at December 2011 SRL had not returned to normal operations, with
ongoing repairs needed to the floor, problems with compliance
with resource
consents and additional maintenance to keep liquefaction dust and
debris under control;
(d) It was reasonable for SRL to spend $1.2 million to save a business with an annual turnover of $3 million a year, and Mr Burrows agreed that it would be reasonable to spend $586,000 to prevent such a
business from collapse;
(e) SRL’s business would be
destroyed if they did not have somewhere to
work while full repairs were completed;
(f) The real issue for IAG is price, not the fact of the need for
alternative premises;
(g) SRL are only seeking that IAG make a relatively small contribution
to the new building ( about $40,000), with the balance
attributable to
relocation costs;
(h) As to the indemnity period, SRL has not resumed normal business
operations, and it should not be prejudiced for its “substantial
and
dogged efforts to stay in business” after the decision was made by IAG
to decline the proposal to relocate;
(i) In clause L2, the requirement to “resume normal business
operations”
is not limited by the term “during the indemnity
period”;
(j) In any event, additional expenditure extending beyond the
indemnity period may attract cover, where that expenditure was
necessary to
incur to resume or maintain business within the indemnity period;
(k) As to whether costs were in fact incurred, SRL says they
would clearly have been incurred had IAG not refused to
approve the
cost;
(l) In response to the suggestion that the building was a
permanent structure and capital expenditure was not covered,
the evidence is
clear that the proposed building is a temporary building and SRL would stay
there only as long as necessary.
[61] Overall, SRL submits that the purpose of clause L2 was to provide cover to resume business, not solely to protect profit or turnover. Subsequent trading levels were therefore irrelevant to the specific limb relied upon by SRL. The evidence is clear that SRL had not returned to normal business operations, and that SRL had to relocate to avoid a potentially catastrophic impact on its operations.
Defendant’s submissions
[62] The defendants closed by emphasising the following:
(a) The joint memorandum of counsel framed one of the primary issues as
whether the cover was necessary to “avoid or diminish
a reduction in the
indemnity” - but SRL’s case has shifted to whether the
proposed cost was required to resume
normal business operations;
(b) Once a business has resumed normal business operations, it cannot
have further entitlement to AICOW loss;
(c) AICOW is a top up cover designed to supplement cover provided by
the balance of the policy, including under clause A, Loss
of Insured Profit,
which is subject to an economic limit;
(d) Underwriters could not possibly have intended to provide de facto
clause A Loss of Insured Profit type cover with cheaper
cover under clause
L,7 especially where it is clear that SRL made a decision not to take
cover for the Loss of Insured Profit;
(e) The proposal could not have been addressed to clause L1, as an expense necessary to avoid or diminish reduction in turnover, as a formal proposal was not tabled until December 2011 and even if accepted immediately could not be given effect to until February
2012, with the indemnity period closing on 22 February;
(f) As to clause L2, the indemnity period is a maximum period, with the cover expiring on the earliest date the business is returned to normal operations, and cover was provided by IAG necessary to enable SRL
to resume business well before the December
proposal;
7 Harry Roberts Riley on Business Interruption Insurance (9th ed, Sweet & Maxwell, 2011) at
[3.17].
(g) The key remaining issue is whether under clause L2 the uncertainty regarding the ability to stay at Wilsons Road meant that SRL had not returned to normal operations; and L2 does not provide cover for this
– rather, it provides cover to keep SRL trading, and it did
so successfully;
(h) In any event, the proposal was so uncertain that it did not provide
the surety sought - there was no complete leasing agreement,
SRL was not a party
to the draft heads of agreement, the consenting position was not clear,
SRL’s financial ability to fund
the balance of the purchase price was
unclear, and KiwiRail’s position on the Wilsons Road lease was
unclear.
(i) Further, the benefit of the proposal was for a separate legal
entity - Hornby Recycling Limited.
(j) While there will be situations where a cost incurred will confer a
benefit extending beyond the indemnity period, the extent
of the benefit beyond
that period must be taken into account when assessing its
reasonableness.
(k) In the present case, all of the benefit would have incurred after
the expiry of the indemnity period and for a very substantial
time - in effect
SRL obtaining ownership of a replacement building - something it
could not achieve under clause
L had it owned the building (ie because
of the express reinstatement exclusion).
Relevance of subsequent events/conduct
[63] At the conclusion of the hearing I invited counsel to submit to me on whether IAG could rely on ex post facto justification for rejecting the proposal. Mr Hlavac emphasised that SRL carried the burden of proving that there was any breach, and that in any event, applying an orthodox approach to contract litigation, it does not matter when the justification for rejecting the proposal is identified. Mr Hooker by contrast referred to a principle adopted in some places in the United States called
“mending the hold”.8 This principle is said to
preclude insurers from raising belated defences to claims. Mr Hlavac cautioned
against importing a principle
from the United States, especially a principle of
such limited heritage.
[64] Having reflected on these submissions, while post refusal conduct
and events may shed light on the issue of necessity and
reasonableness, I prefer
to proceed on the basis liability for breach is to be determined primarily by
reference to the proven facts
as at the date of the alleged breach, and not
subsequently.9 I also consider that the case law relating to
“mending the hold” appears to be about inadequate pleading, rather
than
substantive factual findings. I give it no further
consideration.
[65] I note for completeness that counsel were otherwise unable to cite
any case law directly dealing with the business interruption
clause under
scrutiny. However, reference was made by both counsel to the leading text on
business interruption cover, Riley on Business
Interruption Insurance.10
As will become apparent, I have taken my lead from it.
Assessment
[66] The key elements of clause L are reasonably clear:
(a) The claim must involve “reasonable additional
expenses;”
(b) The expenses must not be “otherwise covered by the
policy;”
(c) The expenses must be “incurred during the indemnity
period:
(i) to avoid or diminish the reduction in turnover, or
(ii) to resume or maintain normal business operations,” and
(d) No cover is provided for “reinstating” property
damage.
8 Harbour Ins Co v Cont’l Bank Corp [1991] USCA7 69; 922 F2d 357 (7th Cir, 1990); Ohio and Mississippi Railway
Company v McCarthy [1877] USSC 187; 96 US 258 (1877).
9 Cf. Stirling v Poulgrain [1980] 2 NZLR 402 (CA) at 420, 424.
10 Harry Roberts Riley on Business Interruption Insurance (9th ed, Sweet & Maxwell, 2011).
[67] Clause L serves, on its terms, a clear contractual purpose to insure
SRL for business interruption11 during the indemnity period.12
This temporal aspect is important, because the policy cover, and the
premiums attached to it, is inextricably linked to the indemnity
period.
[68] I also agree with counsel that this case gives rise to three key
questions:
(a) Was the relocation necessary to resume or maintain normal business
operations?
(b) Were the proposed costs of the relocation reasonable?
(c) Were the proposed costs “incurred” during the indemnity
period?
[69] In approaching the case in this way I have not lost sight of the
fact that clause L must be interpreted as a seamless whole
and in furtherance of
the contractual purpose.
[70] I will deal with each issue in turn. I also propose to
address, for completeness, whether the relocation was
necessary to avoid or
reduce loss of turnover as this was the first issue identified pre-trial. I also
observe that there was no
dispute that the February earthquake was the damaging
event, and it was not suggested that the plaintiff needed to prove a causal
nexus between the damage to the building and the earthquake.
[71] In making my assessment I acknowledge the submission in Mr Hlavac’s two
sets of supplementary closing submissions that the plaintiff carries the
burden of proof.
11 Refer [47] and [48]
Necessary?
[72] Addressing first the key words used. The ambit of cover is
circumscribed by the requirement to show that cover is needed:
(a) to avoid or diminish the reduction in turnover or
(b) to resume or maintain normal business operations.
[73] The concepts of “avoid” in L1, and
“maintain” in L2, are directed to preventing or militating
against the interruption to the business, and involve an assessment of ongoing
future effect or risk to the business from insured
damage. They are necessarily
forward looking. The concepts of “diminish” and
“resume,” by contrast, contemplate
providing a remedy to ongoing
interruption.
[74] Under all scenarios SRL has to satisfy13 IAG that the
proposal was necessary either to prevent interruption to the business
and/or to remedy an ongoing interruption
to it. IAG could reasonably reject
any proposal where there was no actual, real or appreciable risk of
interruption. The assessment
however of the need or otherwise for additional
expense is properly an objective one and based on the information available at
the
time of the proposal, though subsequent events may shed light of the issue
of necessity.
[75] Turning to the assessment of fact: the state of the building at Wilsons Road and the risk to SRL was described in the expert assessment dated 3 June 2011 included in the common bundle, together with the independent report of Mr Clegg. As noted above, the expert assessment observed damage to structural elements, and recommended consideration be given to demolition “due to extensive work required to repair the building”. Specific examples of suggested repair included the following
observations:
13 Refer [54]
ITEM DESCRIPTION SUGGESTED REPAIR MAIN WAREHOUSE
Concrete Block wall outside the main
warehouse frontage has excessive spalling of concrete to concrete block. This section of wall is currently temporarily propped to prevent further damage
This blockwall has been extensively
damaged, and is collapsing in
some locations.
Allow to break out all damaged concrete block, and rebuild
using a filled concrete block, with steel bars in either direction.
It is
likely that the foundations through this area will need to be broken out and
repoured according to the revised ground conditions
once advised by the
geotechnical engineers
Concrete slab foundations through main warehouse area
These foundations have suffered extensive damage due to differential settlement.
Investigation into the option of lifting the building using a combination
of screw piling, and epoxy urethane injection could be made,
but is unlikely to
be economic.
Cracking to mortar between concrete blocks to full height wall against
southern boundary
Wall appears to be leaning toward
Mastagard property
This unfilled concrete block wall has been damaged beyond repair due
to the resultant deflection toward the Mastagard property.
Allow to
demolish entirely and rebuild with a filled concrete block. Block
reinforcing is likely to be H12@ 400mm c/c and
each way, with foundations to
suit ground conditions.
[76] The same expert assessment, however, observed that occupation
could continue due to temporary bracing.
[77] Mr. Clegg’s report, completed in January 2012 stated, among other
things,
that:
Damage to the building is extensive and according to engineers it is probable
that it is beyond economic repair
[78] The report also states that:
... the Insured are unable to continue to operate from the site due to either
repairs or demolition and reconstruction
[79] And further:
The premises leased by Sydenham Recycling has suffered extensive damage and is likely to be demolished. Even if it was economic to repair the Insured would have to vacate whilst the work was completed.
[80] No expert evidence or other assessments were produced to contradict
the factual observations noted above. Mr Clegg has however
since changed his
opinion about the need to relocate, because he now understands KiwiRail were
prepared to allow ongoing occupation
of the site (and in light of the positive
turnover achieved by SRL). It is also notable that SRL took 5 months to put out
a proposal
to IAG to relocate, notwithstanding the expert assessment in June
2011. This suggests that SRL at least did not consider that there
was a pressing
need to relocate at least until December 2011, though I accept that these were
trying times for SRL, and some delay
in putting a proposal together was
understandable.
[81] Based on the foregoing evidence as to fact, the site was severely
damaged and would require extensive repair at some
time. Temporary
bracing enabled ongoing occupation, but the combination of the record of
physical damage, and the probable need
for substantial repair meant that it was
prudent on the part of SRL to take steps to protect itself from the prospect
that it may
be required to exit the property at short notice. But I think that
the absence of any demand from KiwiRail to exit provides an objective
tipping
point against the inference that there was the requisite need to fully relocate
in December 2012 in order to avoid loss in
turnover or to maintain normal
operations. As a minimum IAG could have legitimately sought further information
about the likelihood
of such a demand, and greater clarification as to the
likely timing of any repair works.
[82] I am also not satisfied that the proposal was necessary to resume business given that SRL was in fact able to carry on business and at a level that materially exceeded turnover and gross profit pre earthquake. As noted, the engineering advice also indicated that business could continue on the site (though with the prospect of substantial repairs). While there were plainly ongoing problems with the site, including damaged floors, site management issues and related consent compliance issues, I do not see them as sufficiently significant to warrant by themselves full relocation of the business. If anything, SRL could have sought further funding to mitigate the impact of these activities if it could show it was having an appreciable impact on normal operations.
[83] I reject, however, the suggestion made by Mr Burrows that SRL having resumed normal operation, the cover under clause L was expended. The cover at clause L2 plainly provides cover to resume and to maintain normal business operation. The latter gives rise to an ongoing obligation to enable the insured to continue operations throughout the indemnity period. Provided that the underlying costs to “maintain” normal business operations relate to insured damage, I can see no reason to preclude cover simply because normal business operations had otherwise already resumed. Ultimately Mr Burrows conceded that where ongoing repairs were
clearly affecting operations, further ongoing cover may be
justified.14
[84] In any event it follows from the foregoing that objectively
assessed, the requisite need to relocate has not been established.
I propose
nevertheless to examine the issue of reasonableness and when the costs were
“incurred”.
Reasonable?
[85] The concept of “reasonable” in clause L is not a term
that is capable of bright line definition, for the simple
reason that the
circumstances where expenses might be incurred to avoid a loss in turnover or to
resume or maintain normal business
operation will vary greatly. There are
however some tolerably clear limitations.
[86] First, clause L, and the policy as a whole, is not a reinstatement
policy so that it is not directed to the physical repair
or replacement of
damaged property per se. This limitation is plainly expressed by the
words:
No cover is provided for reinstating your property damage. (Emphasis
in original)
[87] Second, the costs must be “additional expenses that are not otherwise covered by this policy”. I reject the suggestion by Mr Hooker that this limitation is not engaged as SRL has no cover under the balance of the policy. Rather, as the subheading suggests,15 clause L is directed to the “Additional Increased Cost of
Working”, that is additional to the cost of working
already ordinarily covered
14 Refer [40] above.
15 I note that the contract states that “the headings in this policy are for reference only and do not form part of it. They are not to be used when interpreting the policy”. Given the confluence of the words used in clause L and the heading, I see nothing in this prohibition.
elsewhere in the policy. These are the costs of working identified at items
A-F subject to the specified economic limit for each.
They cover a wide range of
activity, as Riley observes:16
Payments under the provisions for increase in cost of working can be made for
a wide variety of expenditure. The payment of the
additional part of overtime
wages, either to an insured’s employees to try to make good the loss of
production or to builder’s
or other tradesmen’s workers to speed up
the restoration of the damaged property and plant, are regular features of
claims.
Other typical examples are the cost of having provisional repairs made
to buildings or plant, of temporary roofing, or of the installation
of heating,
lighting or power arrangements of a provisional nature, which subsequently have
to be scrapped. It might be possible
to promote some turnover by having work
done on commission or by having components or finished products made by other
firms, thus
incurring an increase in productive costs which can be claimed under
this clause. The occupation of temporary premises generally
entails additional
expenditure of various kinds which may continue for a prolonged period.
Sometimes it is necessary to purchase
premises, or buy out another business,
purely as a temporary measure, with a subsequent loss on resale when the
insured’s premises
are again ready for occupation. Heavy
advertising expenditure may be necessary for a considerable period after the
restoration
of the damaged property in order to regain lost custom.
[88] Nor is it commercially plausible to suggest that cover under clause
L provides de facto cover for items A-K. Riley explains:17
... Nevertheless it is unlikely to have been the intention of those who
drafted the wording that the policyholder should be able to
buy back the impact
of underinsurance on increase in cost of working. From the underwriters
perspective the premium differential
is significant between gross profit and
additional increase in cost of working, so again it is unlikely to be their
intention that
underinsurance could be bought back cheaply. ...
From a practical perspective it is well worth noting that:
...
Claims under additional increase in cost of working
seeking to recover underinsurance of Item 1(b), tend to receive the
same short
shrift as attempts to recover buildings and other material damage underinsurance
as either increase in cost of working
or additional increase in cost of
working.
[89] Third, any claimable additional expense must be “incurred during the indemnity period”. I see no reason to add any gloss to the plain language used to
define indemnity period, namely that it “starts when the insured
damage occurred”
16 At [3.12].
17 At [3.17].
(February 22) and finishes “no later than the number of months specified in the schedule (12 months) .... during which, your business operations are affected”. The clear implication of this is that the maximum period of cover for business interruption is 12 months from the date of damage. Riley also explains that:18
... Therefore, should it happen that the period of interruption following an
incident exceeds the maximum indemnity period the insurers
will not be liable
for that proportion of any additional expenditure which will benefit the
business after the end of that limit.
This may be a difficult apportionment to
determine in practice but it is a reasonable provision against an insured
embarking on
expenditure at the insurers’ expense with a view to helping
turnover after the period of their liability has ended (see also
para.
15.22).
[90] But, notwithstanding these clear limitations, clause L must be
sufficiently flexible to provide cover for the costs of business
interruption
not directed to the losses otherwise covered by the balance of policy. Notably,
the cover in those items is carefully
circumscribed to additional expenditure
“solely” to avoid the respective losses covered by those
items.19 Logically, additional expenditure not directed to those
losses (eg, profit, rent) is not precluded from cover under clause
L.
[91] As Riley also explains, Additional Increased Cost of Working (AICOW) cover is designed to serve three broad types of expenditure. First, to protect businesses that must resume operations as soon as possible, irrespective of the economic consequences, for example transport systems or to maintain market share. Second, to avoid the uncertainty of the economic limit (ie, that any expenses must not be greater than the saving enjoyed from the expenditure). And third, to provide cover for parts of the business that do not benefit turnover or profit directly. Riley also notes that in relation to additional expenditure only policies are commonly associated with administrative bodies not engaging in profit making activities, with the implication that serious damage to the office will not result in loss of revenue but
will require considerable additional expenditure to
remedy.20
[92] Furthermore the extent of the cover afforded by this type of cover was also helpfully illustrated by Mr Burrows in this way when explaining a situation where
the insured must buy widgets from a competitor to hold market
share:
18 At [3.15].
19 See Annexure B.
20 At [6.34]-[6.36].
In this case, yeah it would have been so even if the insured didn’t
have loss of profit turnover and just had additional increased
cost of working
cover, and had to go out and buy the widget from somebody else, then this item
of cover would cover the whole cost
of that widget not just the 10 cents either
above the economic limit, it will also cover the first dollar. ....
[93] The cover might also extend to rental cost outside of the indemnity
period, provided that but for the additional rental cost,
a lease could not have
been obtained. Mr Burrows put it this way:
Right, so where this tenant has to enter into a lease agreement that’s
longer than his indemnity period, for the period after
the end of indemnity
period that he continues to occupy that premises, that lease cost is for his own
account. ....
But the unused portion, so when his building is ready and he can move back
into his reinstated premises then the insurance company
pick up the unused
portion of the lease that extends beyond the end of the indemnity
period.
[94] But Riley also refers to the need to achieve a proportionate
allocation of burden (albeit in the context of ordinary increases
in cost of
working).21
Circumstances can also arise where the insured incurs additional expenditure
which contractually continues beyond the end of the indemnity period,
e.g. the insured is obliged to sign a lease for a number of years in order to
obtain
alternative accommodation even though they may only require accommodation
for a matter of months. In these circumstances
it is generally
accepted that the full cost of the lease (and other costs associated with the
occupation of the temporary premises)
are effectively incurred when the lease is
signed. Provided the expenditure is economic insurers will benefit from the
mitigation
measures taken. Difficulties may arise, however, in circumstances
where the policyholder finds that they need to occupy the temporary
premises
beyond the expiry of the maximum indemnity period. In these circumstances it is
only equitable that they should bear a proportionate
share of the cost of the
alternative premises (see para.15.22).
(Emphasis in original)
[95] In the present context, there was no dispute that clause L provided cover for some replacement facilities to enable SRL to resume normal business operations. For this reason the cost of a new ablution block was approved, even though it might be said to involve partial reinstatement, the benefits of which extend well beyond the indemnity period. There also seemed no doubt that had SRL in fact been forced to exit the premises within the indemnity period, then the costs of alternative premises
would be covered for the duration of the indemnity period.
21 At [3.15(b)].
[96] In light of the foregoing, putting aside the timing issue (addressed
below), I am satisfied therefore that the costs of relocating
are literally
covered by clause L, assuming for present purposes that they are necessary to
avoid the reduction in turnover and/or
to maintain normal business operation.
These are the relocation costs recorded in Clegg’s report and noted at
[13]. The purpose
of the claim is not directed to any individual loss
otherwise covered by the policy. Rather it is directed to the securing the
future
operation of the business per se and broadly within the first category of
expenditure identified in Riley.
[97] There is then however the further issue of whether any proposal
could have been given effect to within the indemnity period.
Mr. Stapleton
accepted that he was unlikely to have achieved relocation within the indemnity
period. A corollary of this is that
the expenses would not be incurred to avoid
business interruption during the period of indemnity. While clause L expressly
ties the
indemnity period to the timing of the expenses incurred, it cannot be
cut adrift from the clear purpose of the policy to protect
against business
interruption during the period of indemnity. Significantly SRL tendered the
proposal so late (December) that the
productivity / operational benefits of the
proposal would be derived outside of the indemnity period. On those facts, I do
not consider
that the expenses reasonably fall under the auspices of the
policy.
[98] I am also unable to accept that clause L provides in effect full
cover for complete and long term re-establishment of SRL’s
business,
including new buildings at another location. It seems inconceivable to me that
an insurer would commit to such open ended
cover in light of the outliers just
mentioned, especially the non- reinstatement limitation.
[99] On this I find that if the relocation occurred, SRL will inevitably occupy the new premises well beyond the indemnity period. It will also have the benefit of a new building from which to continue SRL’s operations or the operations of an affiliate. Indeed, even if SRL returns to the KiwiRail site, it will have secured a lease over alternative premises from which other related operations can and in my view would very likely, operate. Mr Stapleton was quite clear that Mastagard could make use of the property should SRL return to the KiwiRail site.
[100] In these circumstances, SRL cannot reasonably claim the cost of the
building or other permanent structures or related expenses
as this would plainly
infringe the non-reinstatement limitation. I also distinguish this exercise from
the cases where the insured
might expect cover for the cost of the extended
lease, for three reasons. First, the proposed lease is for 10 years with a right
of purchase. It could never have been in the expectation of the insurer to
protect SRL against this type of lease liability. Second,
it is quite plain to
me that the securing of the Owaka site by SRL serves a wider management purpose
for Mastagard, and this benefit
could not have been anticipated by either SRL or
IAG as an “additional expense” or incidental benefit covered by the
policy. Third, the lateness of the claim for cover militates strongly against
the reasonableness of the claim for build cost. As
noted, I accept the basic
submission that only the relocation itself was at all possible within the
indemnity period and without
operational savings occurring within the that
period.
[101] Having said all of that, this is an example where bright lines cannot
be drawn. If there was an absolutely pressing need to
relocate, for example a
notice to evict had been issued due to the insured damage, then I would have
resolved the matter differently.
In my view the incurring of expenses
associated with relocation noted at [13] would then properly and reasonably
serve the contractual
purpose.
Incurred within the indemnity period?
[102] The final issue is whether the expenses, if recoverable, were incurred within the indemnity period. I accept that there is some force to Mr Hlavac’s contention that the unsigned heads of agreement hardly provided a firm basis upon which to assume that liability had been incurred within the indemnity period. But I accept Mr Stapleton’s evidence that he was confident that had he obtained approval from IAG, he could have completed the contract and incurred the requisite liability within the period. It is also notable that the policy demands that no repair is started without
prior approval unless the repairs are necessary to prevent further loss or liability.22
Plainly therefore IAG can hardly complain that SRL waited for approval before
contracting liability to relocate.
22 Refer [55].
[103] I am also satisfied that Mr. Stapleton’s commercial
relationship with OWL is such that there can be a reasonable level
of confidence
that he could have secured a final agreement. As to consenting issues, that is a
practical matter for SRL. Plainly
it would not want to invest more than $1m of
its own resources only to find it cannot operate at the location. Against
this
background, I am satisfied that had IAG approved the proposal, SRL
would have been able to incur the requisite liability during
the indemnity
period.
Summary on issues
[104] I am unable to accept full relocation was necessary. While there was
an appreciable risk that relocation might be necessary
at some time, the
engineering advice was that the site could continue to be occupied and SRL had
operated at the site for several
months at better than pre damage productivity
levels. I am also unable to accept that the additional expenses claimed were
reasonable.
SRL’s claim was so late that any benefit derived from the
relocation fell outside the indemnity period. Rather I consider that
it must
have been in the contemplation of the parties that the cover was addressed to
business interruption during the indemnity
period. This would not however
preclude claims based on a demonstrably pressing need to relocate as that would
then serve the contractual
purpose. I am satisfied though that the costs could
have been incurred within the indemnity period.
Damages
[105] While I have not found a breach of the policy, it may assist the
parties to have my views on the issues of damages.
[106] Contractual damages are payable in the sum necessary to put the innocent party in the position they would have been had the contract been performed,23 and
the measure for assessing damages must be reasonable in all the
circumstances.24
23 Stirling v Poulgrain [1980] 2 NZLR 402 (CA) at 422-425, and see Marlborough District
Council v Altimarloch Joint Venture Ltd [2012] 2 NZLR 726 (SC) at [184]-[189].
24 Ibid.
Liability arises at the date of the breach, and ordinarily damages are
measured at that date.25
[107] Complicating matters, in this case the contractual liability was to
pay for expenses “incurred”. That was the
promise made by IAG. But
no expenses have in fact been incurred. Rather, SRL elected not to commit itself
to transfer without IAG’s
prior approval. If SRL had succeeded in its
claim, IAG was obliged to provide cover for the relocation expenses and thus SRL
would
have been entitled to damages for those matters, provided however that it
either pays for those expenses or liability to pay for
those expenses is
incurred. The measure would then be such cost when the liability
arises.
[108] For completeness, I do not consider that the simple fact SRL has been
able to continue operations at the site affects the
liability to pay or the
quantum of damages. To deprive SRL of damages because it was able to continue at
the Wilsons Road site would,
in effect, allow IAG to benefit from its breach
(assuming there was one). Moreover, SRL should, as I have said, be put in the
position
it would have been had IAG performed its part of the contract (again,
assuming breach).
Other issues
[109] I record my concern at the approach taken by IAG to the proposal. No evidence was given by IAG about the reason for not replying to SRL within the indemnity period. Without a suitable explanation, this has the appearance of contrivance to avoid the effective operation of the policy. By approaching the policy in this way, its practical purpose is undermined, as an insured cannot be confident that the policy enables them to “avoid” loss or to “maintain” their business. There is then the related concern that IAG has taken advantage of its failure to adhere to the policy by relying on subsequent conduct to justify the decision to decline cover. Further, a one paragraph explanation for refusal, against the recommendation of an
independent assessor, in effect precipitated this
litigation.
25 Stirling v Poulgrain [1980] 2 NZLR 402 (CA) at 420, 424.
Outcome
[110] I find that:
(a) SRL has not established, on the balance of probabilities, a proper
factual basis for the claim that relocation was necessary
as at December
2011;
(b) The full claim made by SRL for the cost of relocation and the new
building and related expenses was not reasonable in
the
circumstances;
(c) The expenses could have been incurred within the indemnity period; (d) Objectively assessed, IAG’s refusal was justified.
[111] In the result, I am therefore not satisfied that IAG was liable to
provide cover for the purpose of relocation.
[112] Submissions on costs may be made within 20 working days. My
observation at [109] should be considered by counsel. In this
regard, while I
have found that relocation was not necessary, the difficulties confronted
by SRL justified other remedies,
particularly to achieve compliance. The
approach taken by IAG precluded thorough examination of these remedies. Nothing
in this
judgment should be seen to exclude whatever claim there may have been
available to SRL during the indemnity period had the policy
been approached on a
proper basis.
Solicitors:
Andrew Hooker, Auckland
Young Hunter, Christchurch
ANNEXURE A
ANNEXURE B
A LOSS OF INSURED PROFIT
...
2. Increase in cost of working:
You are insured for the additional expenditure reasonably incurred by you solely to avoid or diminish the reduction in turnover. Provided that this additional expenditure does not exceed the sum produced by the following formula:
[the rate of insured profit] x [the amount of the reduction in
turnover avoided by the additional expenditure].
3. Reduced Margin
You are insured for any reduction in insured profit that fairly
results from the increase in ratio of [the purchase price of materials used and
goods sold], to [turnover] maintained during the indemnity
period.
We will not make an adjustment for an increase in the ratio
of any other uninsured expense to turnover because the increase
could result from a fixed cost element in the expense, that should have been
insured.
...
B LOSS OF RENT
...
2. Increase in cost of working:
You are insured for the additional expenditure reasonably incurred by you
solely to avoid or diminish the reduction in rent. Provided that this
additional expenditure does not exceed the amount of the reduction in
rent avoided by the additional expenditure.
...
C LOSS OF REVENUE
...
2. Increase in cost of working:
You are insured for the additional expenditure reasonably incurred by
you solely to avoid or diminish the reduction in revenue. Provided
that this additional expenditure does not exceed the amount of the reduction
in revenue avoided by the additional expenditure.
...
D PAYROLL
...
2. Increase in cost of working:
You are insured for the additional expenditure reasonably incurred by
you solely to avoid or diminish the reduction in turnover.
Provided that this additional expenditure does not exceed the sum produced
by the following formula:
[the rate of payroll] x [the amount of the reduction in turnover
avoided by the additional expenditure].
...
E PAYROLL – DUAL BASIS
...
2. Increase in cost of working:
In addition to ‘Insured Item A, Part 2’, you are insured
for additional expenditure reasonably incurred by you solely to avoid or
diminish the reduction in turnover. Provided that this
additional expenditure does not exceed the amount that would have been
payable under ‘Insured
Item E, Parts 1.1 and 1.2’ above had such
expenditure not been incurred.
F WAGES – DUAL BASIS
...
2. Increase in cost of working:
In addition to ‘Insured Item A, Part 2, you are insured
for the additional expenditure reasonably incurred by you solely to
avoid or diminish the reduction in turnover. Provided that this
additional expenditure does not exceed the amount that would have been payable
under ‘Insured Item F, Part
1.1 and 1.2’ above had such expenditure
not been incurred.
(Emphasis in original)
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