Canterbury earthquake decisions Page 12

Who pays for earthquake strengtheningPage 8

Proposed reforms to the EQC Act a different approach to claims management Page 4

Editorial Sharing the cost of earthquake protectionPage 2

Health and safety reform ndash a reflectionPage 16

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 N O V E M B E R 2 0 1 5 I S S U E S I X

2

C O V E R T O C O V E R

Sharing the cost of earthquake protection

In this issue we look at two areas of legal change relating to earthquake protection reform of the Earthquake Commission and the proposed requirements for the seismic strengthening of buildings Both are aspects of improving New Zealandrsquos preparedness for the inevitable future earthquakes One by (among other things) streamlining the way in which state-funded compensation for earthquake damage is managed and the other by reducing the likely extent of damage in future earthquakes

3

Both aspects of reform involve considerations of efficiency fairness and how costs should be shared Both will undoubtedly give rise to complexities for the insurance industry

No doubt at a macro level a crucial question in the event of a substantial natural disaster is whether the money to fix it comes from within New Zealand or from overseas resources by way of insurance and re-insurance

These reforms do not directly relate to the level of overseas cover for natural disasters However reducing the likely level of damage in future earthquakes as the seismic strengthening provisions aim to do and improving the efficiency of claims handling of state-funded compensation for natural disasters as the EQC reforms aim to do are significant parts of New Zealandrsquos earthquake strategy It will pay to get them right

We also reflect on key aspects of the much-discussed health and safety reforms which are rightly on the agendas of directors and officers of companies and firms across New Zealand

Lastly we include our usual review of some recent earthquake-related insurance decisions Insurers of Christchurch properties will note with some relief the Court of Appealrsquos decision in Domenico v Tower Insurance overturning the High Courtrsquos decision that Tower had made a deemed election as to the basis of settlement of a claim by reason of unreasonable delay However those hoping for some guidance from the Court of Appeal as to what delay might be considered to be unreasonable or whether unreasonable delay can ever give rise to a deemed election may be disappointed by the Courtrsquos ambivalent approach to those issues

As always I hope that you find Cover to Cover relevant and interesting We welcome feedback so please do not hesitate to email any thoughts to me on covertocoverminterellisonconz

Toby GeeEditor

2

C O V E R T O C O V E R

Sharing the cost of earthquake protection

In this issue we look at two areas of legal change relating to earthquake protection reform of the Earthquake Commission and the proposed requirements for the seismic strengthening of buildings Both are aspects of improving New Zealandrsquos preparedness for the inevitable future earthquakes One by (among other things) streamlining the way in which state-funded compensation for earthquake damage is managed and the other by reducing the likely extent of damage in future earthquakes

3

Both aspects of reform involve considerations of efficiency fairness and how costs should be shared Both will undoubtedly give rise to complexities for the insurance industry

No doubt at a macro level a crucial question in the event of a substantial natural disaster is whether the money to fix it comes from within New Zealand or from overseas resources by way of insurance and re-insurance

These reforms do not directly relate to the level of overseas cover for natural disasters However reducing the likely level of damage in future earthquakes as the seismic strengthening provisions aim to do and improving the efficiency of claims handling of state-funded compensation for natural disasters as the EQC reforms aim to do are significant parts of New Zealandrsquos earthquake strategy It will pay to get them right

We also reflect on key aspects of the much-discussed health and safety reforms which are rightly on the agendas of directors and officers of companies and firms across New Zealand

Lastly we include our usual review of some recent earthquake-related insurance decisions Insurers of Christchurch properties will note with some relief the Court of Appealrsquos decision in Domenico v Tower Insurance overturning the High Courtrsquos decision that Tower had made a deemed election as to the basis of settlement of a claim by reason of unreasonable delay However those hoping for some guidance from the Court of Appeal as to what delay might be considered to be unreasonable or whether unreasonable delay can ever give rise to a deemed election may be disappointed by the Courtrsquos ambivalent approach to those issues

As always I hope that you find Cover to Cover relevant and interesting We welcome feedback so please do not hesitate to email any thoughts to me on covertocoverminterellisonconz

Toby GeeEditor

3

Both aspects of reform involve considerations of efficiency fairness and how costs should be shared Both will undoubtedly give rise to complexities for the insurance industry

No doubt at a macro level a crucial question in the event of a substantial natural disaster is whether the money to fix it comes from within New Zealand or from overseas resources by way of insurance and re-insurance

These reforms do not directly relate to the level of overseas cover for natural disasters However reducing the likely level of damage in future earthquakes as the seismic strengthening provisions aim to do and improving the efficiency of claims handling of state-funded compensation for natural disasters as the EQC reforms aim to do are significant parts of New Zealandrsquos earthquake strategy It will pay to get them right

We also reflect on key aspects of the much-discussed health and safety reforms which are rightly on the agendas of directors and officers of companies and firms across New Zealand

Lastly we include our usual review of some recent earthquake-related insurance decisions Insurers of Christchurch properties will note with some relief the Court of Appealrsquos decision in Domenico v Tower Insurance overturning the High Courtrsquos decision that Tower had made a deemed election as to the basis of settlement of a claim by reason of unreasonable delay However those hoping for some guidance from the Court of Appeal as to what delay might be considered to be unreasonable or whether unreasonable delay can ever give rise to a deemed election may be disappointed by the Courtrsquos ambivalent approach to those issues

As always I hope that you find Cover to Cover relevant and interesting We welcome feedback so please do not hesitate to email any thoughts to me on covertocoverminterellisonconz

Toby GeeEditor

4

C O V E R T O C O V E R

Proposed reforms to the EQC Act A different approach to claims management

F ollowing the Canterbury earthquakes the

Earthquake Commission (EQC) completed almost 70000 home repairs settled more than 500000 claims and paid out over $85 billion As a result of the Christchurch experience and other events since the introduction of the Earthquake Commission Act 1993 (EQC Act) proposed reforms of the EQC Act are currently under consideration What is the focus of the review what are the proposed reforms and what do they mean for insurers

5

What is the focus of the EQC Act reviewThe reform proposals are directed atbull ensuring the EQC scheme

remains focussed on insuring homes

bull resolving difficulties experi-enced in Canterbury in relation to the interaction of land and building cover

bull better integrating EQCrsquos and private insurersrsquo claims handling processes and

bull ensuring the ongoing financial sustainability of the scheme

One of EQCrsquos roles is to support research and education about natural hazards and how to reduce their impact Under the proposed reforms that role would continue

What are the proposed reformsThe nine key reforms proposed on 6 July 2015 includebull requiring claimants to lodge

their EQC claim with their private insurer (not EQC)

bull restricting EQCrsquos land cover to situations where rebuilding is not practicable to focus more on building cover

bull increasing the EQC monetary cap on building works cover (EQC cap) from $100000 to $200000 (each plus GST)

bull retaining the Natural Disaster Fund and Crown guarantees

bull expanding the EQC building cover to include site works and access ways

bull removing EQCrsquos provision of contents insurance

bull changing the variable excess ($200 to $1000) to a standard $2000 per claim

bull aligning EQCrsquos scheme terms more closely with those of private insurers and clarifying and simplifying some terms and

bull implementing pricing principles and review provisions for EQC to improve the schemersquos sustainability

The review will not change any claims entitlements from events that have already happened

The Government called for submissions which closed on 11 September 2015 More detail is contained in the Treasury paper available online

What do the proposed reforms mean for insurersBelow we discuss how two of the proposed reforms could affect insurers

Should the EQC cap be increased to $200000

Private insurers can be expected to charge higher premiums for homeowners in higher-risk locations A higher EQC cap for a flat-rate premium nationwide would effectively make homeowners in lower-risk locations subsidise homeowners with dwellings in higher-risk locations On the other hand the current nationwide flat-rate model at relatively low cost has advantages Without

that model the take-up of natural disaster insurance could decline creating uncertainty for home owners communities and the government if a natural disaster were to strike

Would a higher EQC cap have an effect on attracting and retaining insurers to the New Zealand market particularly if more claims would be met under EQCrsquos first loss insurance cover and would need to be handled by private insurers Should there be regional variations How would a higher EQC cap affect the premiums charged by private insurers ndash would that help or stunt the take up of natural disaster insurance

It is to be hoped that such issues will be carefully considered by the government in evaluating the responses to the proposed reforms and in progressing the proposals towards implementation if adopted

Should private insurers control the claims handling process

After the Canterbury earthquakes EQC needed to scale up its

ldquoDepending on how exactly the reform is implemented insurers may also need to consider their obligations from a public law perspectiverdquo

6

C O V E R T O C O V E R

operations rapidly to deal with large numbers of claims The need for claimants to make separate EQC claims and private insurance claims separately handled has also been seen to be inefficient

The proposal to make private insurers the first point of contact for lodging claims seems to have been generally well received The proposed reforms would also allow (but not require) EQC to outsource other areas of claims handling Some suggest that private insurers could be better equipped to take on this role after a substantial natural disaster given their existing capability to

scale up claims handling by drawing on internal global resources to deal with large numbers of claims A single point of contact could also help simplify a claimantrsquos claim handling experience

The proposed reforms for managing claims envisage an agreement between each insurer and EQC A number of operational commercial regulatory and legal issues would need to be addressedbull Which technology and op-

erational changes would be required to each otherrsquos systems

bull How would claims handling be funded

ldquoThe current review should result in improved efficiency in the handling of future earthquake claims but whatever system is adopted there are likely to be significant issuesrdquo

7

Wade PearsonJane Parker

bull How would performance be measured

bull Would a private insurerrsquos reputation and marketing capability provide sufficient protection for EQC around the quality of claims management service if private insurers have less lsquoskin in the gamersquo due to a higher EQC cap

bull How would data be shared and claimants protected

bull What level of discretion would private insurers have to settle claims

bull How would the risk of delay due to disagreement between EQC and the private insurer

on the treatment of a claim be managed particularly for a revised EQC Act with less supporting case law

bull How would claims and rela-tionships be managed where multiple private insurers are involved

bull How would the need for flexi-bility (to keep up with current practice) and certainty over the longer term be balanced

Depending on how exactly the reform is implemented insurers may also need to consider their obligations from a public law perspective for example

under the Official Information Act and Public Records Act

Insurers may wish to consider such issues now so as to be in a position proactively to engage with government as to how the proposals are implemented if they are adopted

What happens nextMinisters will consider submissions before making any decision on a reform package and expect to introduce a bill to Parliament in early 2016

The current review should result in improved efficiency in the handling of future earthquake claims but whatever system is adopted there are likely to be significant issues for insurers to deal with at both a policy level and an operational one The more proactively insurers engage with the review the better the likely outcomes for both insurers and policy-holders

8

C O V E R T O C O V E R

Who pays for earthquake strengtheningThe Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

The Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

Many existing leases are on older forms which do not cover responsi-bilities if the building is identified as earthquake-prone Parties should use lease negotiations to clarify responsibilities and processes for earthquake-prone buildings

Insurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offer

What does the new legislation doThe main priority of the EPB Bill is to establish consistent timeframes for identifying and strengthening (or demolishing) earthquake-prone buildings Following a recent Government policy announcement1 the EPB Bill is expected to be amended to introduce three categories of seismic risk zone by geographical location to stage the assessment and strengthening process over periods of 20 35 and 50 years respectively instead of a blanket national timeframe

Who will be respon-sible for earthquake-related hazardsIt is not yet clear how the operation of the EPB Bill will overlap with the Health and Safety at Work Act 2015

In a controversial decision last year the High Court considered whether the earthquake-prone status of a building under the Building Act 2004 constitutes a hazard for the purpose of the Health and Safety in Employment Act 1992 (the HSE Act)2 The lease of the building

1 See wwwbeehivegovtnzreleasemore-targeted-approach-earthquake-prone-build-ings2 Overton Holdings Limited v APN New Zealand Limited [2014] NZHC 1966

required the tenant (who was the prior owner of the building) to comply with the HSE Act in respect of the ldquopremises and its fit-out fixtures and fittingsrdquo3 The building was later identified as being earth-quake-prone The landlord argued that the lease obliged the tenant to eliminate all hazards where practicable - such hazards including the earthquake-prone status of the building and that therefore the tenant was responsible for earthquake-strengthening

The Court found that the definition of hazard in section 2 of the HSE Act does not include the earthquake-prone status of a building because the obligations in respect of earthquake-prone buildings are exclusively dealt with by the Building Act 2004 The tenantrsquos obligations under the lease therefore did not extend to strengthening the earthquake-prone premises

The decision does not sit comfortably with the broad definition of lsquohazardrsquo under the HSE Act It remains to be seen whether it will be followed in other cases Once the HSW Act comes into force the decision may have less relevance as the HSW Act refers to lsquorisksrsquo as well as lsquohazardsrsquo

Further WorkSafe has said it expects both building owners

3 Ibid at [13]

ldquoInsurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offerrdquo

9

ldquoGiven the timeframe for assessment and strengthening is expected to be at least 20 years many current leases may expire or require renewal before strengthening works are contemplated let alone commencedrdquo

1 0

C O V E R T O C O V E R

1 1

(b) an obligation on the landlord to complete strengthening works within an agreed timeframe

(c) if the building is identified as earthquake-prone and requires strengthening during the proposed lease term (including any renewed terms) recording in detail any relocation process rent abatement or tenant contribution to the costs of strengthening (whether directly or indirectly via an improvements rent provision)

(d) landlordrsquos warranties as to the seismic capacity of a building throughout the term of a lease or

(e) suitable termination rights if during the lease term the building is identified as earthquake-prone or otherwise below a mutually agreed strength threshold or if the occupation of the building by staff is contrary to an internal policy

Obtaining a seismic assessment will inform discussion and negotiations Parties should also ensure that the internal fit-out will be designed and installed in harmony with the structural performance of the building under earthquake stress to minimise safety risks due to failure or movement of services and fittings

Involving insurersParties should also as part of their new lease negotiations andor insurance renewal processes test different scenarios with their insurers to ascertain what possible losses associated with earthquake strengthening would be covered

Holly Hill

Patricia Green

For example will the tenant be able to rely on its business interruption insurance if it has agreed a process for temporary relocation to permit the landlord to undertake strengthening works Similarly will the tenantrsquos business interruption insurance operate if the landlord has agreed to a rent abatement in certain circumstances How might the partiesrsquo statutory liability insurance operate if a landlord or tenant is criticised for failing to take sufficient steps to ensure earthquake strengthening is carried out

For now the practical takeaway for insurers is to consider how their current insurance policies would respond where earthquake strengthening works are needed and whether to offer further protection for some associated losses

and their tenants to treat building components and hazards as they would any other potential workplace hazard4 It is therefore wise to assume that while the landlord (as owner of the building) will typically be required to comply with the strengthening requirements of the EPB Bill the earthquake-prone status of a building may be a risk for the purpose of the Health and Safety at Work Act 2015 for which the tenant will also have a degree of responsibility at least in terms of identifying and monitoring building performance and risks and ensuring insofar as reasonably practicable that its employees and others affected by its operations are not exposed to health and safety risks

Clarifying obligations through the leaseGiven the timeframe for assessment and strengthening is expected to be at least 20 years (and up to 50 years in low risk areas) many current leases may expire or require renewal before strengthening works are contemplated let alone commenced Parties should therefore take that opportunity to discuss terms on how to deal with seismic strengthening issues for example by considering(a) an agreement to lease

conditional on the landlord carrying out required strengthening works before the lease term commences (with the tenant separately arranging temporary accommodation in the meantime)

4 WorkSafe New Zealand ldquoDealing with earthquake-related hazards Information for employers and owners of workplace buildings ndash Position Statementrdquo 13 December 2013

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

5

What is the focus of the EQC Act reviewThe reform proposals are directed atbull ensuring the EQC scheme

remains focussed on insuring homes

bull resolving difficulties experi-enced in Canterbury in relation to the interaction of land and building cover

bull better integrating EQCrsquos and private insurersrsquo claims handling processes and

bull ensuring the ongoing financial sustainability of the scheme

One of EQCrsquos roles is to support research and education about natural hazards and how to reduce their impact Under the proposed reforms that role would continue

What are the proposed reformsThe nine key reforms proposed on 6 July 2015 includebull requiring claimants to lodge

their EQC claim with their private insurer (not EQC)

bull restricting EQCrsquos land cover to situations where rebuilding is not practicable to focus more on building cover

bull increasing the EQC monetary cap on building works cover (EQC cap) from $100000 to $200000 (each plus GST)

bull retaining the Natural Disaster Fund and Crown guarantees

bull expanding the EQC building cover to include site works and access ways

bull removing EQCrsquos provision of contents insurance

bull changing the variable excess ($200 to $1000) to a standard $2000 per claim

bull aligning EQCrsquos scheme terms more closely with those of private insurers and clarifying and simplifying some terms and

bull implementing pricing principles and review provisions for EQC to improve the schemersquos sustainability

The review will not change any claims entitlements from events that have already happened

The Government called for submissions which closed on 11 September 2015 More detail is contained in the Treasury paper available online

What do the proposed reforms mean for insurersBelow we discuss how two of the proposed reforms could affect insurers

Should the EQC cap be increased to $200000

Private insurers can be expected to charge higher premiums for homeowners in higher-risk locations A higher EQC cap for a flat-rate premium nationwide would effectively make homeowners in lower-risk locations subsidise homeowners with dwellings in higher-risk locations On the other hand the current nationwide flat-rate model at relatively low cost has advantages Without

that model the take-up of natural disaster insurance could decline creating uncertainty for home owners communities and the government if a natural disaster were to strike

Would a higher EQC cap have an effect on attracting and retaining insurers to the New Zealand market particularly if more claims would be met under EQCrsquos first loss insurance cover and would need to be handled by private insurers Should there be regional variations How would a higher EQC cap affect the premiums charged by private insurers ndash would that help or stunt the take up of natural disaster insurance

It is to be hoped that such issues will be carefully considered by the government in evaluating the responses to the proposed reforms and in progressing the proposals towards implementation if adopted

Should private insurers control the claims handling process

After the Canterbury earthquakes EQC needed to scale up its

ldquoDepending on how exactly the reform is implemented insurers may also need to consider their obligations from a public law perspectiverdquo

6

C O V E R T O C O V E R

operations rapidly to deal with large numbers of claims The need for claimants to make separate EQC claims and private insurance claims separately handled has also been seen to be inefficient

The proposal to make private insurers the first point of contact for lodging claims seems to have been generally well received The proposed reforms would also allow (but not require) EQC to outsource other areas of claims handling Some suggest that private insurers could be better equipped to take on this role after a substantial natural disaster given their existing capability to

scale up claims handling by drawing on internal global resources to deal with large numbers of claims A single point of contact could also help simplify a claimantrsquos claim handling experience

The proposed reforms for managing claims envisage an agreement between each insurer and EQC A number of operational commercial regulatory and legal issues would need to be addressedbull Which technology and op-

erational changes would be required to each otherrsquos systems

bull How would claims handling be funded

ldquoThe current review should result in improved efficiency in the handling of future earthquake claims but whatever system is adopted there are likely to be significant issuesrdquo

7

Wade PearsonJane Parker

bull How would performance be measured

bull Would a private insurerrsquos reputation and marketing capability provide sufficient protection for EQC around the quality of claims management service if private insurers have less lsquoskin in the gamersquo due to a higher EQC cap

bull How would data be shared and claimants protected

bull What level of discretion would private insurers have to settle claims

bull How would the risk of delay due to disagreement between EQC and the private insurer

on the treatment of a claim be managed particularly for a revised EQC Act with less supporting case law

bull How would claims and rela-tionships be managed where multiple private insurers are involved

bull How would the need for flexi-bility (to keep up with current practice) and certainty over the longer term be balanced

Depending on how exactly the reform is implemented insurers may also need to consider their obligations from a public law perspective for example

under the Official Information Act and Public Records Act

Insurers may wish to consider such issues now so as to be in a position proactively to engage with government as to how the proposals are implemented if they are adopted

What happens nextMinisters will consider submissions before making any decision on a reform package and expect to introduce a bill to Parliament in early 2016

The current review should result in improved efficiency in the handling of future earthquake claims but whatever system is adopted there are likely to be significant issues for insurers to deal with at both a policy level and an operational one The more proactively insurers engage with the review the better the likely outcomes for both insurers and policy-holders

8

C O V E R T O C O V E R

Who pays for earthquake strengtheningThe Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

The Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

Many existing leases are on older forms which do not cover responsi-bilities if the building is identified as earthquake-prone Parties should use lease negotiations to clarify responsibilities and processes for earthquake-prone buildings

Insurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offer

What does the new legislation doThe main priority of the EPB Bill is to establish consistent timeframes for identifying and strengthening (or demolishing) earthquake-prone buildings Following a recent Government policy announcement1 the EPB Bill is expected to be amended to introduce three categories of seismic risk zone by geographical location to stage the assessment and strengthening process over periods of 20 35 and 50 years respectively instead of a blanket national timeframe

Who will be respon-sible for earthquake-related hazardsIt is not yet clear how the operation of the EPB Bill will overlap with the Health and Safety at Work Act 2015

In a controversial decision last year the High Court considered whether the earthquake-prone status of a building under the Building Act 2004 constitutes a hazard for the purpose of the Health and Safety in Employment Act 1992 (the HSE Act)2 The lease of the building

1 See wwwbeehivegovtnzreleasemore-targeted-approach-earthquake-prone-build-ings2 Overton Holdings Limited v APN New Zealand Limited [2014] NZHC 1966

required the tenant (who was the prior owner of the building) to comply with the HSE Act in respect of the ldquopremises and its fit-out fixtures and fittingsrdquo3 The building was later identified as being earth-quake-prone The landlord argued that the lease obliged the tenant to eliminate all hazards where practicable - such hazards including the earthquake-prone status of the building and that therefore the tenant was responsible for earthquake-strengthening

The Court found that the definition of hazard in section 2 of the HSE Act does not include the earthquake-prone status of a building because the obligations in respect of earthquake-prone buildings are exclusively dealt with by the Building Act 2004 The tenantrsquos obligations under the lease therefore did not extend to strengthening the earthquake-prone premises

The decision does not sit comfortably with the broad definition of lsquohazardrsquo under the HSE Act It remains to be seen whether it will be followed in other cases Once the HSW Act comes into force the decision may have less relevance as the HSW Act refers to lsquorisksrsquo as well as lsquohazardsrsquo

Further WorkSafe has said it expects both building owners

3 Ibid at [13]

ldquoInsurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offerrdquo

9

ldquoGiven the timeframe for assessment and strengthening is expected to be at least 20 years many current leases may expire or require renewal before strengthening works are contemplated let alone commencedrdquo

1 0

C O V E R T O C O V E R

1 1

(b) an obligation on the landlord to complete strengthening works within an agreed timeframe

(c) if the building is identified as earthquake-prone and requires strengthening during the proposed lease term (including any renewed terms) recording in detail any relocation process rent abatement or tenant contribution to the costs of strengthening (whether directly or indirectly via an improvements rent provision)

(d) landlordrsquos warranties as to the seismic capacity of a building throughout the term of a lease or

(e) suitable termination rights if during the lease term the building is identified as earthquake-prone or otherwise below a mutually agreed strength threshold or if the occupation of the building by staff is contrary to an internal policy

Obtaining a seismic assessment will inform discussion and negotiations Parties should also ensure that the internal fit-out will be designed and installed in harmony with the structural performance of the building under earthquake stress to minimise safety risks due to failure or movement of services and fittings

Involving insurersParties should also as part of their new lease negotiations andor insurance renewal processes test different scenarios with their insurers to ascertain what possible losses associated with earthquake strengthening would be covered

Holly Hill

Patricia Green

For example will the tenant be able to rely on its business interruption insurance if it has agreed a process for temporary relocation to permit the landlord to undertake strengthening works Similarly will the tenantrsquos business interruption insurance operate if the landlord has agreed to a rent abatement in certain circumstances How might the partiesrsquo statutory liability insurance operate if a landlord or tenant is criticised for failing to take sufficient steps to ensure earthquake strengthening is carried out

For now the practical takeaway for insurers is to consider how their current insurance policies would respond where earthquake strengthening works are needed and whether to offer further protection for some associated losses

and their tenants to treat building components and hazards as they would any other potential workplace hazard4 It is therefore wise to assume that while the landlord (as owner of the building) will typically be required to comply with the strengthening requirements of the EPB Bill the earthquake-prone status of a building may be a risk for the purpose of the Health and Safety at Work Act 2015 for which the tenant will also have a degree of responsibility at least in terms of identifying and monitoring building performance and risks and ensuring insofar as reasonably practicable that its employees and others affected by its operations are not exposed to health and safety risks

Clarifying obligations through the leaseGiven the timeframe for assessment and strengthening is expected to be at least 20 years (and up to 50 years in low risk areas) many current leases may expire or require renewal before strengthening works are contemplated let alone commenced Parties should therefore take that opportunity to discuss terms on how to deal with seismic strengthening issues for example by considering(a) an agreement to lease

conditional on the landlord carrying out required strengthening works before the lease term commences (with the tenant separately arranging temporary accommodation in the meantime)

4 WorkSafe New Zealand ldquoDealing with earthquake-related hazards Information for employers and owners of workplace buildings ndash Position Statementrdquo 13 December 2013

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

6

C O V E R T O C O V E R

operations rapidly to deal with large numbers of claims The need for claimants to make separate EQC claims and private insurance claims separately handled has also been seen to be inefficient

The proposal to make private insurers the first point of contact for lodging claims seems to have been generally well received The proposed reforms would also allow (but not require) EQC to outsource other areas of claims handling Some suggest that private insurers could be better equipped to take on this role after a substantial natural disaster given their existing capability to

scale up claims handling by drawing on internal global resources to deal with large numbers of claims A single point of contact could also help simplify a claimantrsquos claim handling experience

The proposed reforms for managing claims envisage an agreement between each insurer and EQC A number of operational commercial regulatory and legal issues would need to be addressedbull Which technology and op-

erational changes would be required to each otherrsquos systems

bull How would claims handling be funded

ldquoThe current review should result in improved efficiency in the handling of future earthquake claims but whatever system is adopted there are likely to be significant issuesrdquo

7

Wade PearsonJane Parker

bull How would performance be measured

bull Would a private insurerrsquos reputation and marketing capability provide sufficient protection for EQC around the quality of claims management service if private insurers have less lsquoskin in the gamersquo due to a higher EQC cap

bull How would data be shared and claimants protected

bull What level of discretion would private insurers have to settle claims

bull How would the risk of delay due to disagreement between EQC and the private insurer

on the treatment of a claim be managed particularly for a revised EQC Act with less supporting case law

bull How would claims and rela-tionships be managed where multiple private insurers are involved

bull How would the need for flexi-bility (to keep up with current practice) and certainty over the longer term be balanced

Depending on how exactly the reform is implemented insurers may also need to consider their obligations from a public law perspective for example

under the Official Information Act and Public Records Act

Insurers may wish to consider such issues now so as to be in a position proactively to engage with government as to how the proposals are implemented if they are adopted

What happens nextMinisters will consider submissions before making any decision on a reform package and expect to introduce a bill to Parliament in early 2016

The current review should result in improved efficiency in the handling of future earthquake claims but whatever system is adopted there are likely to be significant issues for insurers to deal with at both a policy level and an operational one The more proactively insurers engage with the review the better the likely outcomes for both insurers and policy-holders

8

C O V E R T O C O V E R

Who pays for earthquake strengtheningThe Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

The Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

Many existing leases are on older forms which do not cover responsi-bilities if the building is identified as earthquake-prone Parties should use lease negotiations to clarify responsibilities and processes for earthquake-prone buildings

Insurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offer

What does the new legislation doThe main priority of the EPB Bill is to establish consistent timeframes for identifying and strengthening (or demolishing) earthquake-prone buildings Following a recent Government policy announcement1 the EPB Bill is expected to be amended to introduce three categories of seismic risk zone by geographical location to stage the assessment and strengthening process over periods of 20 35 and 50 years respectively instead of a blanket national timeframe

Who will be respon-sible for earthquake-related hazardsIt is not yet clear how the operation of the EPB Bill will overlap with the Health and Safety at Work Act 2015

In a controversial decision last year the High Court considered whether the earthquake-prone status of a building under the Building Act 2004 constitutes a hazard for the purpose of the Health and Safety in Employment Act 1992 (the HSE Act)2 The lease of the building

1 See wwwbeehivegovtnzreleasemore-targeted-approach-earthquake-prone-build-ings2 Overton Holdings Limited v APN New Zealand Limited [2014] NZHC 1966

required the tenant (who was the prior owner of the building) to comply with the HSE Act in respect of the ldquopremises and its fit-out fixtures and fittingsrdquo3 The building was later identified as being earth-quake-prone The landlord argued that the lease obliged the tenant to eliminate all hazards where practicable - such hazards including the earthquake-prone status of the building and that therefore the tenant was responsible for earthquake-strengthening

The Court found that the definition of hazard in section 2 of the HSE Act does not include the earthquake-prone status of a building because the obligations in respect of earthquake-prone buildings are exclusively dealt with by the Building Act 2004 The tenantrsquos obligations under the lease therefore did not extend to strengthening the earthquake-prone premises

The decision does not sit comfortably with the broad definition of lsquohazardrsquo under the HSE Act It remains to be seen whether it will be followed in other cases Once the HSW Act comes into force the decision may have less relevance as the HSW Act refers to lsquorisksrsquo as well as lsquohazardsrsquo

Further WorkSafe has said it expects both building owners

3 Ibid at [13]

ldquoInsurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offerrdquo

9

ldquoGiven the timeframe for assessment and strengthening is expected to be at least 20 years many current leases may expire or require renewal before strengthening works are contemplated let alone commencedrdquo

1 0

C O V E R T O C O V E R

1 1

(b) an obligation on the landlord to complete strengthening works within an agreed timeframe

(c) if the building is identified as earthquake-prone and requires strengthening during the proposed lease term (including any renewed terms) recording in detail any relocation process rent abatement or tenant contribution to the costs of strengthening (whether directly or indirectly via an improvements rent provision)

(d) landlordrsquos warranties as to the seismic capacity of a building throughout the term of a lease or

(e) suitable termination rights if during the lease term the building is identified as earthquake-prone or otherwise below a mutually agreed strength threshold or if the occupation of the building by staff is contrary to an internal policy

Obtaining a seismic assessment will inform discussion and negotiations Parties should also ensure that the internal fit-out will be designed and installed in harmony with the structural performance of the building under earthquake stress to minimise safety risks due to failure or movement of services and fittings

Involving insurersParties should also as part of their new lease negotiations andor insurance renewal processes test different scenarios with their insurers to ascertain what possible losses associated with earthquake strengthening would be covered

Holly Hill

Patricia Green

For example will the tenant be able to rely on its business interruption insurance if it has agreed a process for temporary relocation to permit the landlord to undertake strengthening works Similarly will the tenantrsquos business interruption insurance operate if the landlord has agreed to a rent abatement in certain circumstances How might the partiesrsquo statutory liability insurance operate if a landlord or tenant is criticised for failing to take sufficient steps to ensure earthquake strengthening is carried out

For now the practical takeaway for insurers is to consider how their current insurance policies would respond where earthquake strengthening works are needed and whether to offer further protection for some associated losses

and their tenants to treat building components and hazards as they would any other potential workplace hazard4 It is therefore wise to assume that while the landlord (as owner of the building) will typically be required to comply with the strengthening requirements of the EPB Bill the earthquake-prone status of a building may be a risk for the purpose of the Health and Safety at Work Act 2015 for which the tenant will also have a degree of responsibility at least in terms of identifying and monitoring building performance and risks and ensuring insofar as reasonably practicable that its employees and others affected by its operations are not exposed to health and safety risks

Clarifying obligations through the leaseGiven the timeframe for assessment and strengthening is expected to be at least 20 years (and up to 50 years in low risk areas) many current leases may expire or require renewal before strengthening works are contemplated let alone commenced Parties should therefore take that opportunity to discuss terms on how to deal with seismic strengthening issues for example by considering(a) an agreement to lease

conditional on the landlord carrying out required strengthening works before the lease term commences (with the tenant separately arranging temporary accommodation in the meantime)

4 WorkSafe New Zealand ldquoDealing with earthquake-related hazards Information for employers and owners of workplace buildings ndash Position Statementrdquo 13 December 2013

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

7

Wade PearsonJane Parker

bull How would performance be measured

bull Would a private insurerrsquos reputation and marketing capability provide sufficient protection for EQC around the quality of claims management service if private insurers have less lsquoskin in the gamersquo due to a higher EQC cap

bull How would data be shared and claimants protected

bull What level of discretion would private insurers have to settle claims

bull How would the risk of delay due to disagreement between EQC and the private insurer

on the treatment of a claim be managed particularly for a revised EQC Act with less supporting case law

bull How would claims and rela-tionships be managed where multiple private insurers are involved

bull How would the need for flexi-bility (to keep up with current practice) and certainty over the longer term be balanced

Depending on how exactly the reform is implemented insurers may also need to consider their obligations from a public law perspective for example

under the Official Information Act and Public Records Act

Insurers may wish to consider such issues now so as to be in a position proactively to engage with government as to how the proposals are implemented if they are adopted

What happens nextMinisters will consider submissions before making any decision on a reform package and expect to introduce a bill to Parliament in early 2016

The current review should result in improved efficiency in the handling of future earthquake claims but whatever system is adopted there are likely to be significant issues for insurers to deal with at both a policy level and an operational one The more proactively insurers engage with the review the better the likely outcomes for both insurers and policy-holders

8

C O V E R T O C O V E R

Who pays for earthquake strengtheningThe Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

The Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

Many existing leases are on older forms which do not cover responsi-bilities if the building is identified as earthquake-prone Parties should use lease negotiations to clarify responsibilities and processes for earthquake-prone buildings

Insurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offer

What does the new legislation doThe main priority of the EPB Bill is to establish consistent timeframes for identifying and strengthening (or demolishing) earthquake-prone buildings Following a recent Government policy announcement1 the EPB Bill is expected to be amended to introduce three categories of seismic risk zone by geographical location to stage the assessment and strengthening process over periods of 20 35 and 50 years respectively instead of a blanket national timeframe

Who will be respon-sible for earthquake-related hazardsIt is not yet clear how the operation of the EPB Bill will overlap with the Health and Safety at Work Act 2015

In a controversial decision last year the High Court considered whether the earthquake-prone status of a building under the Building Act 2004 constitutes a hazard for the purpose of the Health and Safety in Employment Act 1992 (the HSE Act)2 The lease of the building

1 See wwwbeehivegovtnzreleasemore-targeted-approach-earthquake-prone-build-ings2 Overton Holdings Limited v APN New Zealand Limited [2014] NZHC 1966

required the tenant (who was the prior owner of the building) to comply with the HSE Act in respect of the ldquopremises and its fit-out fixtures and fittingsrdquo3 The building was later identified as being earth-quake-prone The landlord argued that the lease obliged the tenant to eliminate all hazards where practicable - such hazards including the earthquake-prone status of the building and that therefore the tenant was responsible for earthquake-strengthening

The Court found that the definition of hazard in section 2 of the HSE Act does not include the earthquake-prone status of a building because the obligations in respect of earthquake-prone buildings are exclusively dealt with by the Building Act 2004 The tenantrsquos obligations under the lease therefore did not extend to strengthening the earthquake-prone premises

The decision does not sit comfortably with the broad definition of lsquohazardrsquo under the HSE Act It remains to be seen whether it will be followed in other cases Once the HSW Act comes into force the decision may have less relevance as the HSW Act refers to lsquorisksrsquo as well as lsquohazardsrsquo

Further WorkSafe has said it expects both building owners

3 Ibid at [13]

ldquoInsurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offerrdquo

9

ldquoGiven the timeframe for assessment and strengthening is expected to be at least 20 years many current leases may expire or require renewal before strengthening works are contemplated let alone commencedrdquo

1 0

C O V E R T O C O V E R

1 1

(b) an obligation on the landlord to complete strengthening works within an agreed timeframe

(c) if the building is identified as earthquake-prone and requires strengthening during the proposed lease term (including any renewed terms) recording in detail any relocation process rent abatement or tenant contribution to the costs of strengthening (whether directly or indirectly via an improvements rent provision)

(d) landlordrsquos warranties as to the seismic capacity of a building throughout the term of a lease or

(e) suitable termination rights if during the lease term the building is identified as earthquake-prone or otherwise below a mutually agreed strength threshold or if the occupation of the building by staff is contrary to an internal policy

Obtaining a seismic assessment will inform discussion and negotiations Parties should also ensure that the internal fit-out will be designed and installed in harmony with the structural performance of the building under earthquake stress to minimise safety risks due to failure or movement of services and fittings

Involving insurersParties should also as part of their new lease negotiations andor insurance renewal processes test different scenarios with their insurers to ascertain what possible losses associated with earthquake strengthening would be covered

Holly Hill

Patricia Green

For example will the tenant be able to rely on its business interruption insurance if it has agreed a process for temporary relocation to permit the landlord to undertake strengthening works Similarly will the tenantrsquos business interruption insurance operate if the landlord has agreed to a rent abatement in certain circumstances How might the partiesrsquo statutory liability insurance operate if a landlord or tenant is criticised for failing to take sufficient steps to ensure earthquake strengthening is carried out

For now the practical takeaway for insurers is to consider how their current insurance policies would respond where earthquake strengthening works are needed and whether to offer further protection for some associated losses

and their tenants to treat building components and hazards as they would any other potential workplace hazard4 It is therefore wise to assume that while the landlord (as owner of the building) will typically be required to comply with the strengthening requirements of the EPB Bill the earthquake-prone status of a building may be a risk for the purpose of the Health and Safety at Work Act 2015 for which the tenant will also have a degree of responsibility at least in terms of identifying and monitoring building performance and risks and ensuring insofar as reasonably practicable that its employees and others affected by its operations are not exposed to health and safety risks

Clarifying obligations through the leaseGiven the timeframe for assessment and strengthening is expected to be at least 20 years (and up to 50 years in low risk areas) many current leases may expire or require renewal before strengthening works are contemplated let alone commenced Parties should therefore take that opportunity to discuss terms on how to deal with seismic strengthening issues for example by considering(a) an agreement to lease

conditional on the landlord carrying out required strengthening works before the lease term commences (with the tenant separately arranging temporary accommodation in the meantime)

4 WorkSafe New Zealand ldquoDealing with earthquake-related hazards Information for employers and owners of workplace buildings ndash Position Statementrdquo 13 December 2013

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

8

C O V E R T O C O V E R

Who pays for earthquake strengtheningThe Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

The Building (Earthquake-prone Buildings) Amendment Bill 2013 (the EPB Bill) is on its way to the second reading in the House of Representatives How will it affect the relationship of landlord and tenant and who will be responsible for picking up the cost of seismic strengthening

Many existing leases are on older forms which do not cover responsi-bilities if the building is identified as earthquake-prone Parties should use lease negotiations to clarify responsibilities and processes for earthquake-prone buildings

Insurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offer

What does the new legislation doThe main priority of the EPB Bill is to establish consistent timeframes for identifying and strengthening (or demolishing) earthquake-prone buildings Following a recent Government policy announcement1 the EPB Bill is expected to be amended to introduce three categories of seismic risk zone by geographical location to stage the assessment and strengthening process over periods of 20 35 and 50 years respectively instead of a blanket national timeframe

Who will be respon-sible for earthquake-related hazardsIt is not yet clear how the operation of the EPB Bill will overlap with the Health and Safety at Work Act 2015

In a controversial decision last year the High Court considered whether the earthquake-prone status of a building under the Building Act 2004 constitutes a hazard for the purpose of the Health and Safety in Employment Act 1992 (the HSE Act)2 The lease of the building

1 See wwwbeehivegovtnzreleasemore-targeted-approach-earthquake-prone-build-ings2 Overton Holdings Limited v APN New Zealand Limited [2014] NZHC 1966

required the tenant (who was the prior owner of the building) to comply with the HSE Act in respect of the ldquopremises and its fit-out fixtures and fittingsrdquo3 The building was later identified as being earth-quake-prone The landlord argued that the lease obliged the tenant to eliminate all hazards where practicable - such hazards including the earthquake-prone status of the building and that therefore the tenant was responsible for earthquake-strengthening

The Court found that the definition of hazard in section 2 of the HSE Act does not include the earthquake-prone status of a building because the obligations in respect of earthquake-prone buildings are exclusively dealt with by the Building Act 2004 The tenantrsquos obligations under the lease therefore did not extend to strengthening the earthquake-prone premises

The decision does not sit comfortably with the broad definition of lsquohazardrsquo under the HSE Act It remains to be seen whether it will be followed in other cases Once the HSW Act comes into force the decision may have less relevance as the HSW Act refers to lsquorisksrsquo as well as lsquohazardsrsquo

Further WorkSafe has said it expects both building owners

3 Ibid at [13]

ldquoInsurers may wish to consider what types of losses associated with earthquake-prone buildings they may already cover and what further cover they may be able to offerrdquo

9

ldquoGiven the timeframe for assessment and strengthening is expected to be at least 20 years many current leases may expire or require renewal before strengthening works are contemplated let alone commencedrdquo

1 0

C O V E R T O C O V E R

1 1

(b) an obligation on the landlord to complete strengthening works within an agreed timeframe

(c) if the building is identified as earthquake-prone and requires strengthening during the proposed lease term (including any renewed terms) recording in detail any relocation process rent abatement or tenant contribution to the costs of strengthening (whether directly or indirectly via an improvements rent provision)

(d) landlordrsquos warranties as to the seismic capacity of a building throughout the term of a lease or

(e) suitable termination rights if during the lease term the building is identified as earthquake-prone or otherwise below a mutually agreed strength threshold or if the occupation of the building by staff is contrary to an internal policy

Obtaining a seismic assessment will inform discussion and negotiations Parties should also ensure that the internal fit-out will be designed and installed in harmony with the structural performance of the building under earthquake stress to minimise safety risks due to failure or movement of services and fittings

Involving insurersParties should also as part of their new lease negotiations andor insurance renewal processes test different scenarios with their insurers to ascertain what possible losses associated with earthquake strengthening would be covered

Holly Hill

Patricia Green

For example will the tenant be able to rely on its business interruption insurance if it has agreed a process for temporary relocation to permit the landlord to undertake strengthening works Similarly will the tenantrsquos business interruption insurance operate if the landlord has agreed to a rent abatement in certain circumstances How might the partiesrsquo statutory liability insurance operate if a landlord or tenant is criticised for failing to take sufficient steps to ensure earthquake strengthening is carried out

For now the practical takeaway for insurers is to consider how their current insurance policies would respond where earthquake strengthening works are needed and whether to offer further protection for some associated losses

and their tenants to treat building components and hazards as they would any other potential workplace hazard4 It is therefore wise to assume that while the landlord (as owner of the building) will typically be required to comply with the strengthening requirements of the EPB Bill the earthquake-prone status of a building may be a risk for the purpose of the Health and Safety at Work Act 2015 for which the tenant will also have a degree of responsibility at least in terms of identifying and monitoring building performance and risks and ensuring insofar as reasonably practicable that its employees and others affected by its operations are not exposed to health and safety risks

Clarifying obligations through the leaseGiven the timeframe for assessment and strengthening is expected to be at least 20 years (and up to 50 years in low risk areas) many current leases may expire or require renewal before strengthening works are contemplated let alone commenced Parties should therefore take that opportunity to discuss terms on how to deal with seismic strengthening issues for example by considering(a) an agreement to lease

conditional on the landlord carrying out required strengthening works before the lease term commences (with the tenant separately arranging temporary accommodation in the meantime)

4 WorkSafe New Zealand ldquoDealing with earthquake-related hazards Information for employers and owners of workplace buildings ndash Position Statementrdquo 13 December 2013

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

9

ldquoGiven the timeframe for assessment and strengthening is expected to be at least 20 years many current leases may expire or require renewal before strengthening works are contemplated let alone commencedrdquo

1 0

C O V E R T O C O V E R

1 1

(b) an obligation on the landlord to complete strengthening works within an agreed timeframe

(c) if the building is identified as earthquake-prone and requires strengthening during the proposed lease term (including any renewed terms) recording in detail any relocation process rent abatement or tenant contribution to the costs of strengthening (whether directly or indirectly via an improvements rent provision)

(d) landlordrsquos warranties as to the seismic capacity of a building throughout the term of a lease or

(e) suitable termination rights if during the lease term the building is identified as earthquake-prone or otherwise below a mutually agreed strength threshold or if the occupation of the building by staff is contrary to an internal policy

Obtaining a seismic assessment will inform discussion and negotiations Parties should also ensure that the internal fit-out will be designed and installed in harmony with the structural performance of the building under earthquake stress to minimise safety risks due to failure or movement of services and fittings

Involving insurersParties should also as part of their new lease negotiations andor insurance renewal processes test different scenarios with their insurers to ascertain what possible losses associated with earthquake strengthening would be covered

Holly Hill

Patricia Green

For example will the tenant be able to rely on its business interruption insurance if it has agreed a process for temporary relocation to permit the landlord to undertake strengthening works Similarly will the tenantrsquos business interruption insurance operate if the landlord has agreed to a rent abatement in certain circumstances How might the partiesrsquo statutory liability insurance operate if a landlord or tenant is criticised for failing to take sufficient steps to ensure earthquake strengthening is carried out

For now the practical takeaway for insurers is to consider how their current insurance policies would respond where earthquake strengthening works are needed and whether to offer further protection for some associated losses

and their tenants to treat building components and hazards as they would any other potential workplace hazard4 It is therefore wise to assume that while the landlord (as owner of the building) will typically be required to comply with the strengthening requirements of the EPB Bill the earthquake-prone status of a building may be a risk for the purpose of the Health and Safety at Work Act 2015 for which the tenant will also have a degree of responsibility at least in terms of identifying and monitoring building performance and risks and ensuring insofar as reasonably practicable that its employees and others affected by its operations are not exposed to health and safety risks

Clarifying obligations through the leaseGiven the timeframe for assessment and strengthening is expected to be at least 20 years (and up to 50 years in low risk areas) many current leases may expire or require renewal before strengthening works are contemplated let alone commenced Parties should therefore take that opportunity to discuss terms on how to deal with seismic strengthening issues for example by considering(a) an agreement to lease

conditional on the landlord carrying out required strengthening works before the lease term commences (with the tenant separately arranging temporary accommodation in the meantime)

4 WorkSafe New Zealand ldquoDealing with earthquake-related hazards Information for employers and owners of workplace buildings ndash Position Statementrdquo 13 December 2013

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 0

C O V E R T O C O V E R

1 1

(b) an obligation on the landlord to complete strengthening works within an agreed timeframe

(c) if the building is identified as earthquake-prone and requires strengthening during the proposed lease term (including any renewed terms) recording in detail any relocation process rent abatement or tenant contribution to the costs of strengthening (whether directly or indirectly via an improvements rent provision)

(d) landlordrsquos warranties as to the seismic capacity of a building throughout the term of a lease or

(e) suitable termination rights if during the lease term the building is identified as earthquake-prone or otherwise below a mutually agreed strength threshold or if the occupation of the building by staff is contrary to an internal policy

Obtaining a seismic assessment will inform discussion and negotiations Parties should also ensure that the internal fit-out will be designed and installed in harmony with the structural performance of the building under earthquake stress to minimise safety risks due to failure or movement of services and fittings

Involving insurersParties should also as part of their new lease negotiations andor insurance renewal processes test different scenarios with their insurers to ascertain what possible losses associated with earthquake strengthening would be covered

Holly Hill

Patricia Green

For example will the tenant be able to rely on its business interruption insurance if it has agreed a process for temporary relocation to permit the landlord to undertake strengthening works Similarly will the tenantrsquos business interruption insurance operate if the landlord has agreed to a rent abatement in certain circumstances How might the partiesrsquo statutory liability insurance operate if a landlord or tenant is criticised for failing to take sufficient steps to ensure earthquake strengthening is carried out

For now the practical takeaway for insurers is to consider how their current insurance policies would respond where earthquake strengthening works are needed and whether to offer further protection for some associated losses

and their tenants to treat building components and hazards as they would any other potential workplace hazard4 It is therefore wise to assume that while the landlord (as owner of the building) will typically be required to comply with the strengthening requirements of the EPB Bill the earthquake-prone status of a building may be a risk for the purpose of the Health and Safety at Work Act 2015 for which the tenant will also have a degree of responsibility at least in terms of identifying and monitoring building performance and risks and ensuring insofar as reasonably practicable that its employees and others affected by its operations are not exposed to health and safety risks

Clarifying obligations through the leaseGiven the timeframe for assessment and strengthening is expected to be at least 20 years (and up to 50 years in low risk areas) many current leases may expire or require renewal before strengthening works are contemplated let alone commenced Parties should therefore take that opportunity to discuss terms on how to deal with seismic strengthening issues for example by considering(a) an agreement to lease

conditional on the landlord carrying out required strengthening works before the lease term commences (with the tenant separately arranging temporary accommodation in the meantime)

4 WorkSafe New Zealand ldquoDealing with earthquake-related hazards Information for employers and owners of workplace buildings ndash Position Statementrdquo 13 December 2013

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 1

(b) an obligation on the landlord to complete strengthening works within an agreed timeframe

(c) if the building is identified as earthquake-prone and requires strengthening during the proposed lease term (including any renewed terms) recording in detail any relocation process rent abatement or tenant contribution to the costs of strengthening (whether directly or indirectly via an improvements rent provision)

(d) landlordrsquos warranties as to the seismic capacity of a building throughout the term of a lease or

(e) suitable termination rights if during the lease term the building is identified as earthquake-prone or otherwise below a mutually agreed strength threshold or if the occupation of the building by staff is contrary to an internal policy

Obtaining a seismic assessment will inform discussion and negotiations Parties should also ensure that the internal fit-out will be designed and installed in harmony with the structural performance of the building under earthquake stress to minimise safety risks due to failure or movement of services and fittings

Involving insurersParties should also as part of their new lease negotiations andor insurance renewal processes test different scenarios with their insurers to ascertain what possible losses associated with earthquake strengthening would be covered

Holly Hill

Patricia Green

For example will the tenant be able to rely on its business interruption insurance if it has agreed a process for temporary relocation to permit the landlord to undertake strengthening works Similarly will the tenantrsquos business interruption insurance operate if the landlord has agreed to a rent abatement in certain circumstances How might the partiesrsquo statutory liability insurance operate if a landlord or tenant is criticised for failing to take sufficient steps to ensure earthquake strengthening is carried out

For now the practical takeaway for insurers is to consider how their current insurance policies would respond where earthquake strengthening works are needed and whether to offer further protection for some associated losses

and their tenants to treat building components and hazards as they would any other potential workplace hazard4 It is therefore wise to assume that while the landlord (as owner of the building) will typically be required to comply with the strengthening requirements of the EPB Bill the earthquake-prone status of a building may be a risk for the purpose of the Health and Safety at Work Act 2015 for which the tenant will also have a degree of responsibility at least in terms of identifying and monitoring building performance and risks and ensuring insofar as reasonably practicable that its employees and others affected by its operations are not exposed to health and safety risks

Clarifying obligations through the leaseGiven the timeframe for assessment and strengthening is expected to be at least 20 years (and up to 50 years in low risk areas) many current leases may expire or require renewal before strengthening works are contemplated let alone commenced Parties should therefore take that opportunity to discuss terms on how to deal with seismic strengthening issues for example by considering(a) an agreement to lease

conditional on the landlord carrying out required strengthening works before the lease term commences (with the tenant separately arranging temporary accommodation in the meantime)

4 WorkSafe New Zealand ldquoDealing with earthquake-related hazards Information for employers and owners of workplace buildings ndash Position Statementrdquo 13 December 2013

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 2

C O V E R T O C O V E R

T his issue we examine two recent earthquake-related

cases

Insurers will be somewhat relieved at the Court of Appealrsquos decision in Domenico v Tower Insurance which casts doubt on whether Towerrsquos delay in settling a claim was unreasonable and also whether unreasonable delay can give rise to a deemed election under a policy

Newbery v AA Insurance is a colourful example of policy interpretation which may give comfort to contents insurers but serves as a salutary warning to insureds and brokers in relation to sub-limits and the importance of specifying valuables in contents policies

Can unreasonable delay lead to a deemed election bull Domenico Trustee Limited v Tower

Insurance Limited [2015] NZCA 372

What are lsquoworks of artrsquo bull Newbery v AA Insurance Ltd [2015]

NZHC 2457

Under the microscope Canterbury earthquake decisions In each issue we examine recent case law and what it could mean for you

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 3

Case study one Can unreasonable delay lead to a deemed election On 30 July 2015 the Court of Appeal overturning the High Courtrsquos decision held that it was not open to the court to make a deemed election for the insurer if the insurer failed to make an election under a policy within a reasonable time

Background

A house became a total loss due to the Canterbury earthquakes Under the buildings policy the insurer Tower could elect whether to settle the claim by repair replacement or cash settlement If it elected cash settlement the amount was to be calculated in one of several possible ways

Domenico Trustee Limited v Tower Insurance Limited [2015] NZCA 372At trial the key issue was whether Tower had made a binding election to settle the claim by a cash settlement at replacement value

The High Courtrsquos decision ndash deemed election by reason of delay

The Court held that although Tower had not expressly elected whether to pay a cash settlement or to reinstate the house itself there will come a point at which where a party has not exercised its right to elect it will be deemed to have done so by reason of delay

The Court found that Towerrsquos failure to make an express election over a period of 18 months despite it having acted in good faith in the hope of achieving an amicable settlement constituted an unreasonable delay As a result Tower was deemed to have elected to settle the claim by a cash payment of indemnity value as a base position However if the insured decided to rebuild or purchase another house elsewhere then Towerrsquos liability would increase up to full replacement value as provided for in the policy

The Court of Appealrsquos decision ndash deemed election not properly before the court

One of the difficulties was that the judge had decided the case on a basis which was not pleaded The Court of Appeal re-emphasised case law stating the importance of ensuring that the pleadings accurately reflect the issues and added ldquoWhere it is desired to make a substantial departure from the pleadings it is the duty of the Judge and counsel on both sides to see that a proper application is made for leave to amend the pleadingsrdquo This did not occur and the Court held that Tower had been seriously prejudiced as a result The Court therefore remitted the matter for a retrial by the High Court

The Court of Appeal refrained from deciding whether the judge was correct in holding that Tower had delayed in making an election for an unreasonable period

The Court of Appeal also doubted whether the court can make an election for an insurer by reason of delay It suggested

without expressing a final view that if an insurer is in breach of its obligation to make a decision within a reasonable time the court may order the insurer to make an election which would expose the insurer to contempt proceedings if it failed to do so alternatively damages may be an available remedy

The Court also commented that the Christchurch Earthquake Listrsquos standard practice of enquiring whether an election had been made and if not to give suitable directions seemed to it to be an lsquoeminently practical way of dealing with the issuersquo

Did the Court of Appeal go far enough

The principle that unreasonable delay on the part of an insurer can constitute a breach of contract was not disputed and has not been disturbed by the Court of Appeal

The Court of Appealrsquos refusal to decide whether Towerrsquos delay was unreasonable leaves other insurers and insureds in similar situations in a state of uncertainty as to what might be considered to constitute unreasonable delay in the context of the Canterbury earthquakes

It is perhaps also unfortunate that the Court of Appeal refrained from reaching a conclusion as to whether unreasonable delay can in principle give rise to an election which leaves insurers and insureds in a state of uncertainty as to the effect of unreasonable delay

However insurers will no doubt be relieved that the High Courtrsquos decision was in our view rightly overturned

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 4

C O V E R T O C O V E R

Case study two What are lsquoworks of artrsquoAre mass-produced porcelain collectables lsquoornamentsrsquo or lsquosculpturesrsquo for the purposes of a home and contents policy lsquoYesrsquo and lsquonorsquo were the High Courtrsquos answers when a Mr Newbery sued AA Insurance seeking a declaration that policy limits did not apply to his collection of 30 Lladro pieces with a combined value of $210065 some of which suffered damage in the Canterbury earthquakes

Newbery v AA Insurance Ltd [2015] NZHC 2457Lladro is a Spanish company which produces porcelain figurines in its factory in Valencia Many of Mr Newberyrsquos Lladro pieces were of vintage cars a particular interest of his

The policy

The policy limited cover for lsquojewellery and works of artrsquo to $5000 per item capped at $20000 for any one event lsquoWorks of artrsquo were defined as lsquopictures paintings prints sculptures ornaments tapestries antiques (other than furniture) hand woven mats or rugsrsquo

As the policy was a standard form agreement the Court proceeded on the basis that it needed to focus upon the language of the policy and that context and background were of no assistance to its interpretation

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 5

The judgment

Justice Nation held that Lladro pieces even very large ones fell within the term lsquoornamentrsquo The Court held that it was appropriate to interpret the term widely There was no reason to depart from the ordinary meaning of the word which imposed no size restriction The Court rejected the argument that lsquoornamentrsquo had to be confined to small items and trinkets of low value

ldquoI consider that having regard to the terms of this policy a reasonable insured would have understood that the term lsquoornamentrsquo would apply to an item which had no practical use but which was owned and on show for display because of the value which the owner placed on the appearance and design of the itemrdquo

Although this finding put an end to Mr Newberyrsquos claim Justice Nation also discussed whether or not Lladro pieces were lsquosculpturesrsquo under the terms of the policy He held that a narrower meaning of lsquosculpturersquo was appropriate given his earlier finding that lsquoornamentrsquo had a wide meaning

ldquoLladro is most commonly known and described as associated with the business and factory that produces it As Lladro it will not be commonly seen as an item which has been created or fashioned by the original creator I do not considerhellip that a porcelain piece reproduced on a repetitive basis from a factory sold

and marketed primarily under the name of that business would be considered a sculpture in the way that term is used in the policyrdquo

A reminder of the effect of sub-limits

Apart from any philosophical interest as to how it relates to the question lsquoWhat is artrsquo this case serves as a reminder of the potentially significant effect of sub-limits Insurance industry participants including brokers must consider their ambit carefully

Andrew Horne

Toby Gee

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 6

C O V E R T O C O V E R

Who constitutes an lsquoofficerrsquo was watered-down during the Select Committee stagebull to mean if the PCBU is

bull a company any person occupying the position of a director of the company by whatever name called

bull a partnership any partnerbull a limited partnership any

general partnerbull a body corporate or an

unincorporated body any person occupying a position in the body that is comparable with that of a director of a company

bull to include any other person occupying a position in the PCBU that allows the person to exercise signif-icant influence over the management of the business or undertaking (for example a chief executive) and

bull to exclude any person who merely advises or makes rec-ommendations to one of the above persons

Only time will tell precisely how far the expression lsquoofficerrsquo extends below CEO and how stringently the regulator (WorkSafe New Zealand) interprets the due diligence requirement imposed on officers

Health and safety reform ndash a reflection

At its heart the new Act maintains the focus of the existing 1992 legislation on workplace health and safety But it does so by introducing a new concept of a lsquoperson conducting a business or undertakingrsquo or lsquoPCBUrsquo instead of the employer principal self-employed person controlling a place of work and supplier of plant duty holders under the old Act A new lsquoworkerrsquo concept is also introduced to include employees and contractors through to volunteer workers Workers are subject to new and enhanced obligations in terms of worker engagement participation and representation (although controversially such obligations will not apply to small low risk businesses)

While each PCBU has the primary duty under the new law to ensure the health and safety of workers and others affected by the PCBUrsquos work it is the new due diligence duty on lsquoofficersrsquo that is turning most heads Officers will owe a personal duty of due diligence to ensure that the PCBU complies with its health and safety obligations Breach of that duty will constitute an offence with substantial penalties including imprisonment in the most serious cases

Under the new law an officer must exercise the care diligence and skill that a reasonable officer would exercise in the same circumstances taking into account (without limitation) the nature of the business or undertaking and the position of the officer and the nature of the responsibilities undertaken by the officer In turn due diligence will require taking reasonable steps to

(a) acquire and keep up-to-date knowledge of work health and safety matters

(b) gain an understanding of the nature of the operations of the business or undertaking of the PCBU and generally of the hazards and risks associated with those operations

(c) ensure that the PCBU has available for use and uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking

(d) ensure that the PCBU has appropriate processes for receiving and considering

After some eleventh hour wrangling the Health and Safety at Work Act 2015 was passed on 27 August 2015 and will come into force on 4 April 2016 The new legislation ushers in significant reforms to workplace health and safety in this country Almost five years after the Pike River tragedy it is timely to reflect on such reforms

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 7

information regarding incidents hazards and risks and for responding in a timely way to that information

(e) ensure that the PCBU has and implements processes for complying with any duty or obligation of the PCBU under the Act and

(f) verify the provision and use of the resources and processes referred to above

Largely based on the Australian Model Law (which came into effect on 1 January 2012 in all States except Victoria Tasmania and South Australia) interpretation of the new Act will likely draw on developing Australian jurisprudence

It will be useful to watch caselaw developments across the ditch closely For now however with new offending categories under the new Act carrying significantly increased sanctions it is likely that many insureds ndash particularly directors and officers ndash will be looking hard at the sufficiency of their coverage

Gillian Service

ldquoIt is the new due diligence duty on lsquoofficersrsquo that is turning most headsrdquo

Stacey Shortall

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 8

C O V E R T O C O V E R

Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information please contact us E covertocoverminterellisonconz w wwwminterellisonconzinsurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

1 9

C O V E R T O C O V E R

2 0

MINTERELLISONCONZINSURANCE

C O V E R T O C O V E R

2 0

MINTERELLISONCONZINSURANCE