Court orders bad faith penalty

A Christchurch earthquake litigation case has signalled that courts will make "inroads into insurers' powerful position in negotiated settlements", barrister and Victoria University of Wellington law lecturer Bevan Marten told the NZILA conference.

In the High Court's December 2016 decision in Young v Tower Insurance, the insurer argued a home was repairable and the insured said it must be rebuilt.

Architect Gregory Peter Young's four-level residential property in the Port Hills of Christchurch was badly damaged. He had designed the home, on a steep section facing east, and it was completed in March 2007.

After the relationship between insurer and insured broke down, Justice Gendall delivered judgement on 7 December 2016 that found Mr Young's claim in the main succeeded. The home was "beyond repair in terms of the policy. Therefore, given it was regarded as a rebuild, the maximum payable by [Tower] was to be $1,620,887". That was $500,000 less than Mr Young had claimed.

Justice Gendall said Mr Young was also successful, to a limited degree, in a "ground-breaking claim" for general damages against the insurer. A "nominal" award of general damages of $5,000 was made. But he was unsuccessful in a claim for exemplary damages.

In a subsequent 16 March 2017 costs judgement, Justice Gendall found Tower had to pay Mr Young and his trustee company that owned the property $188,724 in costs.

Dr Marten said the insurer's behaviour was not considered sufficiently "outrageous conduct" to enable an award of exemplary damages. Justice Gendall said: "Exemplary damages in tort are awarded to punish a defendant who is guilty of outrageous wrong, to deter that person and others from similar misconduct in the future, and to register the court's condemnation of that behaviour."

In response to Mr Young's complaints about the time taken to settle, Justice Gendall said: "The claim must be viewed in the context of 25,000 other earthquake claims [Tower] has processed since the Christchurch earthquake sequence began and the strained capacity of the available experts pool to provide assistance and reports."

Dr Marten said general damages for bad faith were "rare in a contractual claim", but Justice Gendall wanted to examine the duty of utmost good faith beyond the duty of disclosure, which he said was not settled in NZ.

He said insurers had to disclose all relevant information at claim time and act "reasonably, fairly and transparently in the conduct of a claim". "You don't have to play nice, but you can't be misleading or deceptive."

There was an early surveyors' report that said the Youngs' house should be rebuilt and that was "not revealed to the Youngs, so there was a failure to disclose". That prompted the $5,000 damages penalty.

"That one report was enough to open the avenue for an attack for damages," Dr Marten said.

"The door is open a crack. It's not floodgates, but it's worth a crack for plaintiff lawyers," he said.

He suggested the NZ Government must "step up to the plate and look at legislative solutions".

"I'm not sure how nervous this makes insurers, but I don't think insureds will get too much traction with it."

Young v Tower Insurance Ltd [2016] NZHC 2956