NZILA President's message
Jonathan Scragg

Quake litigation rumbles on

When can a settlement agreement be re-opened?

Late last year the NZ Supreme Court delivered its much awaited judgement in Prattley Enterprises Ltd v Vero Insurance Ltd [2016] NZSC 158, a Canterbury earthquakes case. The case has been watched keenly by insurers and insureds for guidance on important insurance law issues, including the vexed question of when the courts might allow settlement agreements to be re-opened.

Prattley owned a building in the Christchurch CBD. It sustained serious damage in the 2010 and 2011 earthquakes, was "red stickered", and ultimately demolished.  

Prattley insured the building with Vero, with cover on an indemnity rather than replacement value basis. The policy recorded an indemnity limit of $NZ1.605 million. A joint valuation report valued the building at $NZ1.05 million. There was evidence Prattley had made a conscious decision not to insure for full replacement value. Prattley entered into a settlement agreement with Vero, accepting $NZ1.05 million in full and final settlement of its claims.

Prattley later challenged the settlement on the basis it was mistaken about how indemnity should be calculated. The Contractual Mistakes Act 1977 (CMA) allows relief to be granted if:

• a contract is entered into under the influence of a qualifying mistake of law or fact
• the mistake resulted, at the time the contract was entered into, in a substantially unequal exchange of values
• the contract had not provided for the risk of mistake and recorded that one of the parties would bear that risk.

Prattley was unable to persuade the High Court or the Court of Appeal to re-open the settlement on the grounds of mistake.

The Supreme Court found there was no common mistake, the settlement was distinctly favourable to Prattley, and it declined to re-open it. The court then decided it did not need to consider whether the contract required Prattley to bear the risk of a mistake. It said:

"By settling its claims against Vero in the terms it did, Prattley abandoned any entitlement to go back to Vero for more money. The other side of the coin to this abandonment might be thought to be an acceptance by Prattley of the risk it may have been mistaken as to its entitlements, particularly in light of the fact the settlement was said to be in full and final settlement of any claims, existing and future and known or unknown. At first sight, such acceptance might appear to engage s 6(1)(c) [of the CMA] and thus disqualify Prattley from relief. But, despite the attractive simplicity of this analysis, we have some reservations whether it is necessarily correct.

"The reality is that a party to a contract is unlikely to seek relief under the CMA unless required by the contract to ‘assume the risk" of the mistake. If not so required, such a party would have no need to seek relief but would instead simply rely on the contract. It follows that if s 6(1)(c) is construed broadly, there would be little, and perhaps no, scope for relief under the Act, which would thus be at risk of becoming a dead letter. This may suggest some specificity as to, and not merely a general, assumption of risk may be necessary to engage s 6(1)(c). Working out how to resolve all this may not be easy and [is] a task best deferred until a case arises where such resolution is critical to the result."

There is therefore no final word from the Supreme Court on whether the "full and final settlement" clause in the settlement agreement was sufficient to say Prattley was required to bear the risk of any mistake. Consequently Prattley leaves the door open on whether settlements can be reopened on a misallocation of risk basis.

Do insurers owe a duty of good faith and can they be liable to pay exemplary damages?

In another earthquake case, the High Court gave judgement in December 2016 in Young v Tower Insurance Ltd [2016] NZHC 2956. The case considers whether insurance contracts contain an implied duty of good faith for insurers and whether insurers can be vulnerable to awards of exemplary damages for their conduct when managing claims.

The Youngs' home was significantly damaged in the Canterbury earthquakes. For a long time there was disagreement about the extent of damage and whether the house was a rebuild or could be repaired.

The Youngs complained that Tower had failed to act in good faith towards them in dealing with their claim both by having failed to disclose a material report to them and in the length of time it took to settle the claim.

The court noted that whether an insurer owes a duty of utmost good faith beyond its initial duty of disclosure has never been settled in New Zealand. The court reviewed previous cases that left the point open, examined the Fair Insurance Code, and ultimately decided: "A duty of good faith on the part of the insurer is implied in every insurance contract.

"While the full scope and limits of the duty can be left for another day, as a bare minimum, the duty requires the insurer to:

(a) disclose all material information the insurer knows or ought to have known, including but not limited to the initial formation of the contract and during and after lodgement of a claim
(b) act reasonably, fairly and transparently, including but not limited to the initial formation of the contract and during and after lodgement of a claim, and
(c) process the claim in a reasonable time."

On the facts, the court decided the insurer had breached the duty of good faith by failing to disclose the report to the Youngs. The court awarded general damages of $NZ5,000, noting it was not a major matter.

On the delay argument, the court said the claim must be viewed in context: it was one of 25,000 earthquake claims the insurer had processed from the Christchurch earthquakes and there was strained capacity for available experts. The court found the Youngs were at least partially responsible for some aspects of the delay and had not shown the insurer had caused unreasonable delay to the extent general damages should be awarded.

The court dealt with a claim for exemplary damages swiftly. It said the law was relatively settled in NZ that exemplary damages were not available for breaches of contract: "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."

No evidence suggested the insurer"s behaviour was sufficient to warrant an award of exemplary damages in tort.

The decision in Young suggests that, while every policy in NZ will likely be considered to include an implied term of good faith on the insurer, breaches of that duty requiring recognition beyond an award of general damages are likely to be rare.

No appeal has been lodged in the Young case.