The Time For Payment Of Indemnity Value: Show Me The Money!

Article by Dean Carrigan, Gareth Horne and Leah Hewish.

A recent judgment of the High Court of New Zealand indicates how New Zealand courts will approach indemnity disputes associated with commercial property damage caused by the Christchurch earthquakes. TJK (NZ) Limited v Mitsui Sumitomo Insurance Company Limited1(TJK v Mitsui) concerned the distinction between the indemnity value and reinstatement value of damaged property, with a focus on when these amounts become payable. The decision is consistent with and reinforces Australian principles in relation to the timing of payments under commercial property policies.

Background

TJK (NZ) Limited (TJK) was the owner of Clarendon Tower (the Property), a high-rise office building that suffered extensive damage in the 2010 and 2011 Christchurch earthquakes. The Property has been demolished in accordance with the direction of the Canterbury Earthquake Recovery Authority (CERA).

TJK held a business indemnity policy with Mitsui Sumitomo Insurance Company Limited (Mitsui) in relation to the Property (the Policy) that included an extension for earthquake risks. Extension MD020 allowed TJK to recover the indemnity value of TJK's loss and extension MD022 provided full reinstatement cover following damage caused by an earthquake.

Under extension MD022, "Reinstatement" meant either replacement of lost or destroyed property, or repair of the damaged property "to a condition substantially the same as, but not better...than, its condition when new." Importantly, extension MD022 contained a provision (special condition 4) that stated that no payment of more than the indemnity value will be paid "until the cost of reinstatement has been actually incurred."

TJK v Mitsui

TJK claimed interlocutory declaratory relief seeking immediate payment of the indemnity value of the Property. Mitsui agreed that the indemnity value of the Property was "the least amount that Mitsui must pay" but asserted that it was liable to pay only when TJK had actually incurred the costs of reinstatement. The question before the High Court of New Zealand was whether the payment of indemnity value was due immediately, or only after the cost of reinstatement had been incurred by TJK.

Focusing on the terms of special condition 4, Miller J outlined the differences between indemnity value and reinstatement cost, noting that:

A payment in respect of indemnity value reflects loss arising from the diminution in the market value of the relevant...