Reopening an insurance cash settlement agreement? Supreme Court says no!

In Prattley Enterprises Limited v Vero Insurance NZ Limited [2016] NZSC 158 the Supreme Court unanimously confirmed that a signed settlement agreement was binding on the parties, where the insured party asserts it was operating under a mistake over its entitlement under the policy.

On appeal from the Court of Appeal, Prattley had (again) sought to set aside the settlement agreement it signed with its insurer Vero, on the basis that both it and Vero entered the settlement under a common mistake as to the correct measure of indemnity under the policy.

Background Prattley owned the three storey building known as Worcester Towers in Central Christchurch, which was insured by Vero on an indemnity basis. The total building sum insured was $1,605,000.

Worcester Towers was damaged in the 4 September and 26 December 2010 earthquakes and "red-stickered". In the major earthquake of 22 February 2011, the building was severely damaged. In August 2011, after limited negotiations, Prattley and Vero agreed that Vero would pay Prattley $1,050,000 plus GST in "full and final settlement" of its insurance claim. The building was "subsequently demolished in September 2011".

Prattley's appeal Prattley's case was based on section 6 of the Contractual Mistakes Act 1977, which provides relief to any party where all the parties were influenced in their respective decisions to enter into the contract by the same mistake, and the mistake resulted in a substantially unequal exchange of values.

Prattley argued that both parties had assumed the policy was a standard indemnity policy, but on the proper interpretation of the policy, the measure of loss should have been based on the costs to repair the damage for the first two earthquakes in 2010 and the reinstatement for the third (all subject to the $1,605,000 sum insured limit). Prattley says that as a result of the common mistake for all three events, it received sufficiently less than its entitlement under the policy. It quantified its total recoverable loss at $3,388,000 plus GST.

High Court

In the High Court, Dunningham J concluded that, relying on the Court of Appeal's decision in QBE Insurance (International) Ltd v Wild South Holdings Ltd [2014] NZCA 447, if Prattley were to recover for the unrepaired damage (caused by the first two earthquakes) it would be indemnified in respect of economic losses which it had not incurred and thus would breach the "indemnity principle". However, as shown in the evidence, Prattley...