Statutory time limits for Canterbury earthquake claimsPage 10

When does the clock stop for class action plaintiffs?Page 8

Trustees’ insurers face exposure to contribution claimsPage 4

EditorialPage 2

Case updatePage 14

COVER TO COVERM A G A Z I N E F O R T H E N E W Z E A L A N D I N S U R A N C E M A R K E T J U N E 2 0 1 6 / I S S U E E I G H T

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Opening the door?The Supreme Court’s decision in Hotchin, reviewed in this issue, has quite wide implications for professional indemnity insurers. It opens the door to a wider scope of contribution claims between tortfeasors than permitted by the Court of Appeal’s decision, which the Supreme Court overturned. The Supreme Court’s decision seems right: It seems just for a defendant liable for a plaintiff’s loss to be able to recover a contribution or indemnity from another person jointly liable for the same loss, rather than bearing 100% of the plaintiff’s loss simply because the plaintiff chose to sue only one of several potential defendants. The implication for insurers is that there are likely to be more contribution claims to defend, but also more contribution claims to bring on behalf of insureds who are being sued. In general it is likely to be prudent to ensure, if possible, that such contribution claims are dealt with at the same time as the main action; or at least that, if deferred, appropriate protection is in place to avoid the person bringing the contribution claim having to prove that they would have been liable in the main action if it had gone to trial – not a pleasant prospect for most litigants (or their insurers).

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We also discuss limitation issues relating to class actions and earthquake claims.

When does the limitation clock stop running in representative actions? Should the Supreme Court’s decision in the Feltex litigation have universal application? Arguably not.

Earthquake claims face uncertain limitation defences, not least due to a new Limitation Act coming into force between the two most significant Canterbury earthquakes. We examine the application of limitation provisions to earthquake cases.

We hope you find the articles in this issue relevant, useful and interesting.

Please take a few moments to email me at covertocover@minterellison.co.nz if you would like to provide any thoughts about this issue or ideas for future issues. We have no objection to bulletpoints!

Toby GeeEditor

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Trustees’ insurers face exposure to contribution claims Supreme Court decision

Guardian Trust on the basis that, as trustee for Hanover Finance, Guardian Trust was obliged to contribute to his $18 million settlement payment. He argued that the trustee was also liable because it should have identified his breach of duty and should have prevented him from causing further loss to investors. He claimed that, as Guardian Trust was also liable to the same investors, he was entitled to a contribution from them to the payment he had made to settle his own liabilities.

The High Court and Court of Appeal decided the claim must fail

The High Court and subsequently the Court of Appeal decided that Mr Hotchin’s claim failed to disclose an arguable case. It was therefore bound to fail and should be struck out.

At the core of their decision is the meaning of the words ‘the same damage’. A right of contribution between defendants arises only where the defendants’ wrongful conduct causes the same damage to the plaintiffs. The claims against Mr Hotchin and Guardian Trust relied on different breaches of duty. The Courts held that Guardian Trust had merely provided an opportunity for the loss to arise, and that, unlike Mr Hotchin, the Trust owed no direct duty to investors. This meant that Mr Hotchin and Guardian Trust were not alleged to have caused

‘the same damage’ to investors. Therefore Mr Hotchin’s claim for a contribution could not succeed.

The Supreme Court has decided that the claim could succeed

The Supreme Court overturned the Court of Appeal decision and held, by a majority of three to two, that Mr Hotchin’s claim should not be struck out.

In short, the Supreme Court took the view that both claims arose in respect of the same loss, i.e. that suffered by Hanover’s investors. The Court held that it would be artificial to prevent Mr Hotchin from seeking a contribution from Guardian Trust merely because the nature of its alleged liability was not identical to that of Mr Hotchin.

What does this mean for trustees and their insurers?

The Supreme Court’s decision broadens the circumstances in which directors (and other defendants) may seek a contribution from trustees and their insurers on the basis that the trustees were at fault in failing to identify the directors’ own breaches. It will be easier for directors to join trustees to proceeding and compel them and their insurers to incur defence costs and account for potential liabilities. Defence costs may be incurred even where claims against the trustees may have no real merit, because it is more difficult to strike them out on the basis that they cannot succeed.

T he Supreme Court has opened the door to

‘contribution’ claims against trustees for directors’ liabilities. While significant barriers remain, trustees and their insurers face defence costs and possible liabilities for claims that previously could have been struck out without a trial.

Mr Hotchin’s contribution claim In Hotchin v Guardian Trust [2016] NZSC 24, former Hanover Finance principal Mark Hotchin brought a claim against Guardian Trust, arguing that if he had breached duties to investors, then so too had Guardian Trust. Mr Hotchin had agreed to pay $18 million to settle claims brought on behalf of investors. He sought a contribution to this payment from Guardian Trust.

Originally, the Financial Markets Authority brought an action against Mr Hotchin claiming that he had negligently approved an investment prospectus containing misleading statements. The claim was settled for a payment by Mr Hotchin of $18 million made on the basis that he did not admit liability.

Having settled the FMA’s claims, Mr Hotchin then claimed against

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“The High Court and subsequently the Court of Appeal decided that Mr Hotchin’s claim failed to disclose an arguable case.”

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“The decision opens the door to contribution claims against trustees and their insurers, but significant challenges remain for directors wishing to do so.”

The Supreme Court offered a glimmer of hope for trustees and their insurers, however. Justice Glazebrook observed that it was “highly arguable” that a director’s claim for contribution from a trustee would be contrary to the statutory scheme, which places emphasis upon directors’ liabilities. As approving the prospectus was Mr Hotchin’s responsibility as a director, it was arguable that compelling Guardian Trust to contribute to a settlement was contrary to the statutory scheme, in that it allowed directors to avoid some of the liability resulting from their conduct.

The difficulty with that argument is that it would arguably apply by analogy in other cases of joint and several liability. So it remains to be seen whether and, if so, how other Courts will take up Justice Glazebrook’s approach.

The Court also observed that, if Mr Hotchin was to take his claim to trial, it was not obvious how it could be just and equitable to compel Guardian Trust to contribute, particularly where the trustees relied on the director’s own statements. Furthermore, in order to succeed at trial, Mr Hotchin would have to prove

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his own liability for negligence which he had steadfastly refused to acknowledge. The claim was not so weak, however, that it could be struck out as having no prospects of success at all.

The decision highlights a problem for defendants who wish to settle a claim against them without admitting liability and also wish to seek contribution from a trustee or other alleged tortfeasor. In order to avoid being in the invidious position – like Mr Hotchin - of having settled and then having to prove their own breach of duty in

order to obtain a contribution, it will often be prudent, where possible, for defendants to bring any other tortfeasors into the frame before settling with the plaintiff.

In summary, the decision opens the door to contribution claims against trustees and their insurers, but significant challenges remain for directors wishing to do so. Andrew Horne Emma Wilkins

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When does the clock stop for class action plaintiffs?When is it unfair to stop a claim in its tracks due to its age, and when is it unfair to allow it to proceed? This often vexed question can be crucial in litigating difficult claims. Class actions are an example.

At the start of any litigation, among the first questions any defendant will ask is whether the claims have been brought within the limitation period, or whether the plaintiff is out of time. Often, this is a relatively straightforward calculation. But not always.

Limitation periods are designed to strike a balance between, on the one hand, giving plaintiffs to access to justice, and, on the other hand, protecting defendants from the unfairness of defending stale claims. Defendants should have sufficient information about a claim to be able to investigate and obtain the necessary evidence before the age of the claim makes it too difficult for them to do so, rendering a trial unfair.

Complexities in calculating the limitation period can arise in a number of respects. For example, the date on which the cause of action accrued may be unclear. Or it may be uncertain when the plaintiff first knew enough about the cause of action to start the clock ticking.

Outside the class action context, however, it is generally clear when a plaintiff has brought their claim, for the purposes of assessing when the limitation clock stopped: a proceeding is commenced by the filing of a statement of claim. It’s as simple as that. But the stakes get higher and the calculus gets fuzzier when the claims are brought by a representative plaintiff who purports to represent a class of persons with the same interest in the subject matter of the proceeding under High Court Rule 4.24. For insurers of defendants facing a class action, this can lead to difficulty in evaluating what a claim is worth and the potential liability the claimant faces – and therefore the resources that it is reasonable to expend on investigating the merits of the claim when it is first brought.

At first blush, it appears unclear when the limitation clock has been stopped for members of the class. High Court Rule 4.24 requires a representative to have either the consent of those persons he purports to represent or a representative order from the Court before the representative plaintiff can be said to represent the class. So if an erstwhile representative plaintiff files a statement of claim before obtaining consent or a court order, ie before they can be said to represent anyone else, on whose behalf have they brought the claims, thereby stopping the

“At first blush, it appears unclear when the limitation clock has been stopped for members of the class. ”

limitation clock for those claims? Does it vary for each member of the class according to when they elected to opt-in to the claim? Is it determined by the date of the court’s representative order? Or is it sufficient that a representative plaintiff asserts to represent a class of plaintiffs on the date of filing the statement of claim?

The Supreme Court unpicked this Gordian knot in the Feltex litigation1 and determined that the representative plaintiff stopped the limitation clock for all plaintiffs in the class, irrespective of consent or court order, on the date the statement of claim was filed. The judgment was made in the context of a discernible and measurable plaintiff class – the representative plaintiff brought a claim on behalf of all purchasers of Feltex shares in the initial public offering. As a result, the Supreme Court reasoned the policy underpinning limitation periods was upheld, ie, the defendants were “fully informed of the nature and potential extent of the claims at the time the proceedings were filed”.

However, in other contexts, the class of plaintiffs or the extent of the claim will not be as readily identifiable, and the approach may lead to an unwieldy and ill-defined class of potential plaintiffs, each with specific and unique circumstances surrounding

1 Credit Suisse v Houghton, Saunders et al, [2014] SC 37

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their claim to relief despite a common interest in the subject matter of the claim. For example, in the leaky homes class actions, representative actions brought on behalf of owners of buildings with allegedly defective cladding products could extend the limitation period for an indeterminate class of plaintiffs who own a variety of buildings that potentially contain a variety of products used in a variety of applications.

The Supreme Court in Feltex emphasised that the class action mechanism furthers the objectives of securing the just, speedy and inexpensive determination of a proceeding. Yet allowing plaintiffs to opt in and take advantage of the limitation clock stopped by the representative plaintiff may be unjust. It effectively extends the limitation period for those plaintiffs at a time when the defendants may not have enough information to fully investigate the potential claims; either because the issues are inadequately defined for unknown plaintiffs, or because the potential value of the action is so unclear that the defendants cannot ascertain what resources they should reasonably apply to their investigations. For insurers of defendants facing a class action, this means that the insurers’ exposure may Molly Powers

Toby Gee

change over time as plaintiffs opt in or, as is often the case, as the plaintiffs refine their case and the classes they purport to represent.

We are currently waiting for the Supreme Court to make its decision2 on whether the 10-year long-stop limitation period applies to actions relating to defective products incorporated into buildings. It seems clear that limitation issues in class actions are not going to go away. As the Courts and others have previously commented, the introduction of a clearly defined class action regime would benefit all involved in this complex area.

2 In the Carter Holt Harvey litigation.

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Statutory time limits forCanterbury earthquake claimsThe sixth anniversary of the September 2010 Canterbury earthquake is a few short months away and the sixth anniversary of the February 2011 event will occur soon after. With many hundreds of claims still unresolved, new court proceedings continue to be filed, albeit only at the rate of about one per week in the first quarter of 2016.

The Limitation Acts of 1950 and 2010 impose statutory time limits on the issue of court proceedings. Unless there are special circumstances such as concealment, which do not normally arise in earthquake claims, proceedings based on insurance claims must normally be issued within six years of the date on which the cause of action arose or the relevant act or omission occurred, depending on which statutory regime applies.

Concerns have been expressed about whether earthquake claimants may lose the right to sue their insurers if they do not issue proceedings before the sixth anniversary of the relevant earthquakes. Claimants who anticipate issuing proceedings will not wish to run the risk that their claim may become time-barred. This may lead to uncertainty if proceedings are not issued; or to proceedings being issued prematurely and unnecessarily where an insured wishes to preserve its position.

When does the six-year period begin to run?The date of an earthquake is the earliest date upon which time may begin to run, but the start date may be later.

The position is complicated by the fact that a new limitation regime came into effect on 1 January 2011, so the two most significant earthquakes occurred under different statutory regimes. Under the 1950 Act, in most claims based on contract or tort, time began to run when the cause of action arose. Under the 2010 Act, time begins to run at the time of the act or omission on which the claim is based. This is a potentially significant difference.

Insurers and claimants have expressed a range of views as to when time begins to run for an earthquake claim under an insurance policy for limitation purposes. The Earthquake Commission has indicated that it considers that time begins to run on the date that a claim is denied, which will be later than the date of the relevant earthquake.

The English law approach is to deem insurers to be in breach of their obligations under the policy as soon as an insured event occurs. This results from a legal fiction that treats insurers as having promised to hold the insured harmless. This

approach was initially adopted by the New Zealand courts in two High Court decisions in 2009, Arnold v AIG Life and Sovereign Assurance v Scott (a decision on a strike-out application brought by the insurer). However, in Sovereign the Court of Appeal overturned the High Court decision, holding that the cause of action arose when all of the necessary events had occurred that would entitle the insured to sue. The court held that time would begin to run once a claim on the policy had arisen and the insurer had declined to meet it. On appeal, the Supreme Court declined to strike out the claim, holding that it was necessary to explore the factual position at trial to identify when the relevant events had occurred. While Sovereign was not an earthquake claim the same principles are likely to apply.

Time for limitation purposes may therefore begin to run on different dates for different earthquake claims, depending upon their particular circumstances. It is possible that time will not begin to run for some claims until the insurer breaches a duty, which may occur months or years after the earthquake. Furthermore, insurers’ breaches may occur in a number of ways, from denial of cover to unreasonable delay. It is possible that an insured may have several claims for different breaches, some of which become time barred while others do not.

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“It is possible that an insured may have several claims for different breaches, some of which become time barred while others do not.”

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ICNZ’s response to limitation concernsIn December 2015, the Insurance Council of New Zealand (ICNZ) reported that its members, who are AA Insurance, FMG, the IAG brands, MAS, Tower and Vero, wished to reassure their customers that they would not rely upon limitation defences for residential claims arising out of the Canterbury earthquakes provided that proceedings were filed before 4 September 2017.

This means that customers of those insurers may be confident that they will not need to issue proceedings before 4 September 2017, irrespective of when their own limitation dates may have expired. This allows them a further year to negotiate with their insurer or proceed with their repair or rebuild, without being concerned that time to issue proceedings (if required) will expire.

The ICNZ insurers’ agreement not to rely upon limitation in proceedings filed before 4 September 2017 only affects claims that would otherwise have become time barred before that date. It does not extend time for other claims. For instance, a claim that would become time-barred in December 2017 will not be extended under the current ICNZ offer. The benefit of this approach is that it avoids the need to identify when time begins to run for individual claims, as any claim may be issued before 4 September 2017 irrespective of when it arose.

How insureds should deal with possible time barsInsureds who are concerned that their claims may become time-barred should approach their insurers for confirmation that they will adopt the ICNZ approach and agree not to rely upon limitationsfor proceedings filed before 4 September 2017 or another appropriate date. Extensions may be requested if necessary. If insurers will not agree, it may be prudent to issue proceedings to protect claims.

Andrew Horne

Nick Frith

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Under the microscope:

Case study one: Residential lessor cannot claim insured losses from lessee The Court of Appeal recently decided that an insured lessor of residential premises cannot claim the cost of repairs from a lessee, where the damage was caused by an event for which the lessor is insured. This decision signals a departure from the widespread understanding that there is no immunity for residential tenants who cause damage to a premises in breach of the Residential Tenancies Act 1986.

Holler and Rouse v Osaki

The appellants owned a house insured by AMI. They entered into a residential tenancy agreement with Mr Osaki, who lived in the house with his wife and children.

In 2009, Mrs Osaki left a boiling pot of oil unattended, and a fire broke out causing substantial damage to the house.

AMI indemnified the appellants for the repairs, but exercised its rights of subrogation and issued summary judgment proceedings to recover the fire repair costs from the Osakis. The grounds of appellants’ claim were that the fire was caused by the Osakis’ negligence, which put Mr

Osaki in breach of the tenancy agreement, and sections 40-41 of the Residential Tenancies Act 1986 (the RTA), which state that tenants must not carelessly damage the premises. After the High Court found in favour of the Osakis, the appellants appealed.

The Osakis argued that sections 268-269 of the Property Law Act 2007 (the PLA) barred the appellants’ claim. Sections 268-269 of the PLA provide that an insured lessor cannot claim the costs of repairing a damaged or destroyed premises from a lessee, where the damage was caused by an event for which the lessor is insured.

The Court found in favour of the Osakis, holding that sections 268-269 of the PLA were not inconsistent with the tenant obligations under the RTA and therefore were applicable to residential tenancies. The effect of this decision is that the owners (and their insurers) are prevented from claiming the repair costs from the tenants.

Before this decision, insurers may have relied on an understanding that residential tenants are liable to compensate landlords for the cost of damage they cause to a premises. However, the Court’s decision departs from this position, and may have a significant impact on insurers’ considerations of

the risks in insuring tenanted residential properties. Landlords may be required to pay higher premiums, which could (in light of the fact that this cost cannot be recovered from tenants) result in higher residential rents around the country.

In this section we comment on recent Canterbury earthquake decisions and other selected recent developments in New Zealand insurance law

Recent cases of interest

Patricia Green

Isabelle McKay

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Settlements can validly include unknown issues

The Court had to interpret the settlement agreement, and specifically whether it extended to facts or law about which the parties were mistaken or ignorant. In doing so, the Court was seeking to ascertain the parties’ presumed intention and give effect to it.

The court gave the following guidance:• A party may enter a binding

compromise of a claim or right of which it knows nothing. Releases are routinely written to cover all claims known or unknown. The objective of such language is closure. Courts will readily give effect to this language and recognise that finality facilitates settlements.

• However, where the circumstances demand, a court may read down the general language of a release to exclude claims about which the party granting the release knew nothing and could not be expected to know anything.

“The primary question on appeal was whether Prattley had assumed the risk of mistake in the settlement agreement. ”

Case study two: Court of Appeal rejects mistake as a basis for challenging settlement agreement

Prattley Enterprises Limited v Vero Insurance New Zealand Limited [2016] NZCA 67

Vero has successfully resisted an appeal by Prattley against the High Court’s decision in Prattley Enterprises Limited v Vero Insurance New Zealand Limited [2015] NZHC 1444, which we described in a previous issue of Cover to Cover.

Background – Prattley sought to reopen settlement on the grounds of mistake

Prattley settled with Vero following earthquake damage to its Christchurch building. In the settlement agreement, the parties agreed that Vero’s payment was made in final settlement of all claims arising out of the policy or the earthquake damage. Prattley subsequently sought to reopen the settlement agreement, alleging that when it settled both parties were mistaken about the measure of its entitlement under the policy.

The question: Did Prattley assume the risk of a mistake?

The primary question on appeal was whether Prattley had assumed the risk of mistake in the settlement agreement. If so, then the court would not reopen the settlement, because the Contractual Mistakes Act 1977 precludes relief where a contract “expressly or by implication makes provision for the risk of mistakes” and then assigns that risk to a party.

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No justification for reading down the release

The Court held that in the settlement, Prattley had assumed the risk that there could be future unknown claims in connection with the damage, the earthquakes and the policy.

The Court assumed that any possible common mistake could only be about the measure of Prattley’s entitlement to indemnity under the policy. Even if there was such a mistake, there was no justification for reading down the general words of the release, which plainly extended to any unknown claim under the policy for earthquake damage to the building.

Comments

This decision demonstrates the Courts’ desire to respect and protect the finality of settlements, and reinforces the difficulties in challenging release clauses in settlement agreements. However, it may leave the door open a chink for litigants who subsequently discover claims they could not previously have known about, depending on the wording of their settlement agreement.

Other issues: (1) Partial expert evidence

may be inadmissible;(2) basis of indemnity was de-

preciated replacement cost, not market value.

The Court also considered two secondary issues.

First, the Court discussed the unhelpfulness, and potential inadmissibility, of evidence from an expert who had a financial interest in the outcome of the litigation.

The Court warned that any failure to comply with the duty of impartiality is a breach of the Expert Code of Conduct and the evidence is presumptively inadmissible under section 26(2) of the Evidence Act 2006.

Secondly, the Court discussed whether the appropriate measure of indemnity under the sum-insured reinstatement clause following destruction is market value or depreciated replacement cost. Prattley’s policy wording reflected the character of the building and the Court concluded that depreciated replacement costs were consequently a more suitable measure of indemnity than a realistic market value.

Andrew Horne

John Fowler

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Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information, please contact us: E: covertocover@minterellison.co.nz w: www.minterellison.co.nz/insurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

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