Appeal Court keeps merger doctrine in play for Christchurch insurance claims

The door may still be open for insurance companies to rely on the merger doctrine to limit their liability for Christchurch earthquake claims.

This is one of the implications of a recent Court of Appeal judgment1 relating to an insurance dispute.

The merger doctrine...

...originates from UK marine law and is potentially relevant to Christchurch because it applies to circumstances where damage is sustained across successive events. It provides that:

"Where under the same policy, a partial loss, which has not been repaired or otherwise made good, is followed by a total loss, the assured can only recover in respect of the total loss".2 The doctrine is reflected in the Marine Insurance Act 1908 which states that the insurer will be liable for successive losses, even though the total amount of such losses may exceed the sum insured, but that where a partial loss which has not been made good is followed by a total loss, the assured can only recover in respect of the total loss.

The case

The dispute concerned a commercial property in Christchurch which sustained damage in four earthquakes and was eventually damaged beyond repair. Repairs had been commenced but not completed between the first and second earthquake and between the second and third.

The building owner took the insurer to court seeking payment of the aggregate value of the estimated damage caused by each of the earthquakes. The insurer argued it was liable only for the cost of the repairs which had actually been undertaken and - once the building was judged irreparable - for the maximum amount payable under the policy for any one event (being $1.98 million).

The parties agreed to seek a preliminary ruling on the question of whether, where there have been a number of "happenings" within an insurance period, the insured is entitled to be paid for the damage arising from each happening to the limit on each occasion of the sum insured.

The High Court

The High Court's short answer was 'no'. It found that:

the merger doctrine was unlikely to apply outside a marine context, noting that although it was provided for in the Marine Insurance Act, it was not referred to in any other insurance legislation the terms of the policy favoured the property owner's argument in that it stated that the limit of liability was available for the insured to claim in the event of a loss on as many occasions as a loss was incurred during the insured period, but that this insurance contract had been frustrated...