NZILA President’s message
Jonathan Scragg

Insurers end year on a high note

Vero and Vero Liability have enjoyed success in two notable cases this year – Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2015] NZHC 144 and Heartland Bank Ltd (formerly Marac Finance Ltd) v Vero Liability Insurance Ltd v [2015] NZSC 168.

Both cases were the subject of presentations at NZILA’s 2015 conference and deserve further mention.

Re-opening settlement agreements

In Prattley, the plaintiff owned Worcester Towers in Christchurch. The building was damaged in multiple earthquake events before being rendered a total loss following the February 2011 earthquake. Prattley cash settled its material damage claim for $1,050,000. That sum was the market indemnity value at the time of loss. A settlement agreement was completed.

Prattley then received advice it was entitled to more and brought a further claim on the policy. That was refused by Vero. Prattley launched proceedings and raised four arguments why the settlement should be re-opened. All arguments failed in the High Court:

• Vero breached its obligation to act in good faith: the High Court found Vero had acted openly in negotiations and Prattley had relied on its own legal advice on entitlements before signing the settlement agreement.

• Vero breached the Fair Trading Act: the court found Vero had an honestly held belief about its obligations which could not constitute misleading or deceptive conduct and Prattley had not relied on Vero’s opinion, having obtained its own legal advice.

• Both parties were mistaken: the court found even if both parties were mistaken about Prattley’s entitlement, Prattley had accepted that risk in the settlement agreement.

• Lack of consideration: while Prattley argued the settlement agreement was not a compromise and Vero was only fulfilling its contractual obligations, the High Court found both parties had provided valid consideration through compromise when negotiating the settlement agreement.
The High Court also found that, even if it was wrong in its findings, on the facts Prattley was not entitled to be paid more. That was because on the evidence Prattley had no intention of rebuilding and so its loss was measured by the indemnity value of the building.

The decision provides certainty for parties settling claims and demonstrates the courts will be slow to re-open settlement agreements. The decision in Prattley has been appealed and was due to be heard by the Court of Appeal in late November 2015.

Employee dishonesty

In Heartland Bank, the Supreme Court has declined an insured (Heartland Bank) leave to appeal against a decision of the Court of Appeal, in which Vero Liability successfully argued it was not liable to indemnify the insured under an employee crime policy. In the High Court, Vero Liability had been found liable to the insured under the policy.

An employee of Heartland Bank (formerly Marac Finance Ltd) responsible for managing a particular client account had been making advances to the client in excess of his delegated authority. The employee concealed the advances from Marac’s credit committee and board. The client collapsed, owing more than $4 million to Marac.

Vero Liability argued the employee had not been “dishonest” within the meaning of that term in the policy, as his acts were not intended to cause the insured employer loss. The Court of Appeal ([2015] NZCA 288) did not accept that submission, holding that dishonesty means “simply not acting as an honest person would in the circumstances”.

The Court of Appeal found the employee had committed acts of dishonesty by failing to disclose unauthorised lending or the status of the client account to management, by taking steps to conceal the unauthorised lending, and by lying to Marac’s internal auditor about the account.

The Court of Appeal did agree with Vero Liability that the employee’s dishonest acts were not committed with intent to cause the insured employer loss. Rather, the employee’s conduct was intended to conceal he had exceeded his delegated authority, in an attempt to keep his job.

The Court of Appeal relied on evidence the employee had received no personal benefit and his actions were based on a misguided belief the client’s debt to Marac could be repaid through continued trading. The Court of Appeal also agreed with Vero Liability that Marac had not suffered a direct financial loss because of the employee’s dishonesty, because loss arising from debts incurred because of acts outside the indemnity period was not covered.

On declining the insured leave to appeal, the Supreme Court accepted Vero Liability’s submission the Court of Appeal had not imported a requirement the dishonest employee subjectively desire loss to be incurred by the employer.

The Supreme Court saw the difference between the High Court and the Court of Appeal as a factual one and declined to grant leave on the basis the issue could not be a matter of general or public importance or of general commercial significance. Nor did the Supreme Court consider there had been a risk of a miscarriage of justice.

Successful year

2015 has been a highly successful year for NZILA. We held our largest-ever annual conference with more than 300 delegates attending, of whom about 40% were drawn from the insurance industry, including underwriters, claims managers, brokers and loss adjusters.

NZILA also appointed two new honorary life members, Darryl Cowan and Richard Johnstone. Both have made very significant contributions to NZILA, including giving service over many years as executive officers and national committee members.

2016 promises to be an exciting year. NZILA is set to return to Queenstown for the annual conference (mark your diaries now for September 21-23, 2016). We have an expanded program of other activities planned, including the start of an NZILA lecture series in Auckland, Wellington and Christchurch, and several discussion group sessions to be held across the country, including in some regional centres.

I wish all readers of Resolve a very merry Christmas and a happy New Year. I hope you enjoy the summer break and the opportunity to unwind and recharge with family and friends.