Insured wants compensation for insurer’s breach of its policy duty

Christchurch earthquake causes damage to Max’s property

Max owned premises in Ashburton. The premises were leased to Steven who operated a small business at the premises.

The workshop building on the premises was damaged in the September 2010 Christchurch earthquake. However, the damage was not discovered until after the June 2011 earthquake 2011. The damage did not interfere with Steven’s use and occupation of the building for his small business in any way.

Under the lease, Steven was responsible for arranging insurance. Steven had purchased Surely Insurance’s (“Surely”) Business Pack cover on his own behalf, and on behalf of Max. This cover included material damage cover for the building and business interruption cover including a loss of rentals benefit.

Having discovered the damage, Steven made a material damage claim to Surely in June 2011 for the building to be repaired.

By March 2013 Surely was still assessing the claim. Steven was worried that his business would suffer a financial loss when he was required to leave the premises while the building was being repaired. Steven believed that he would not receive cover for business interruption because too much time had passed since the event which caused the damage. On 1 March 2013 Steven wrote to Max to say that he had decided to end the lease and would be vacating the premises on 30 April 2013.  After Steven ended the lease, Max could not find new tenants because, at that time, it was unclear when the building repairs would be complete.

The repairs began on­­­­­­­­­­­­­ 4 November 2013 and finished on 6 December 2013. However, even once the repairs were completed, Max continued to be unable to find a tenant in the small local market. Max sold the premises in February 2014.

 

The complaint

Max complained that he suffered a financial loss due to Surely’s delay in assessing and carrying out his claim. Max said that had Surely not delayed the claim, Steven would not have ended the lease and he would have continued to receive an income from the rent paid by Steven.

Max’s complaint did not relate to a declined insurance claim. Rather, Max complained that Surely breached its policy duty by not fulfilling the policy’s promise to assess and carry out building repairs within a reasonable time.

Max wanted to receive compensation from Surely for the loss of rental income plus a contribution for the legal costs he incurred while pursuing the loss of rental income claim. Max sought total compensation of ­­­­­­­­­­­­­­­­­­­­­$15,000.

 

FSCL’s view

The New Zealand Court of Appeal[1] has decided on the requirements that need to be met before an insured can receive compensation or ‘damages’ from an insurer’s breach of its policy duty.

Applying the Court of Appeal’s decision to the circumstances of Max’s complaint, Max needed to show that his loss of rental income was caused by Surely’s failure to assess and carry out building repairs within a reasonable time and that it was foreseeable that Max may suffer a loss of rental income if Surely breached its policy duty.

 

1. Did Surely breach its policy duty to access and carry out Max’s claim within a reasonable time?

The assessment and repair process for Max’s claim took from 23 June 2011 until 6 December 2013, a period of just over 2 years and 5 months. Viewed in isolation, this time did appear longer than should reasonably be required to assess, plan, tender and carry out 4 weeks of non-structural repair work to a commercial building.

It was necessary for us to consider what happened as the claim was being assessed to determine if Surely was responsible for the seemingly unreasonably long timeframe. Most of the delay resulted from the lengthy process required to get the property assessed, to get quotes for repair, and to ensure the assessments and repair quotes were correct.

We acknowledged that at the time of Max’s claim, all insurers were in a difficult position due to the unavailability of skilled consultants given the high demand for their services as a result of the widespread earthquake losses. However, in our view the overall assessment and claims handling period was unreasonably long, principally due to Surely’s consultants making mistakes. Surely was not divorced from responsibility for its consultants.

We found that the time taken to access and carry out the claim was longer than the time taken by the reasonable insurer and that Surely had breached its policy duty.

 

2. Was Max’s loss of rental income caused by Surely’s breach of its policy duty?

It was clear from Steven’s notice to quit that Surely’s delay was the reason why Steven decided to end the lease. Therefore we were satisfied that Max’s loss had been caused by Surely’s policy breach.  

 

3. Was it foreseeable that Max may suffer a loss of rental income if Surely breached its policy duty?

The Court of Appeal’s[2] test for ‘remoteness’ says that the damages will not be too remote if the loss was of a kind that should have been within the reasonable contemplation of the parties when they entered into the contract.  

When entering into the insurance contract, Surely and Steven and Max were all aware the premises were commercially tenanted. It must have been within the reasonable contemplation of Surely, Steven and Max that if Surely failed to repair insured damage to the building, Max would suffer a loss of rental income. We found that Max’s loss of rental income from the date Steven vacated the premises to the date the repairs were completed was not too remote to be claimed as damages.

We did not find that Surely was liable to pay to Max the loss of rental income after the repairs were completed. Max argued that had Surely not delayed the repairs, Steven would not have left the premises and he would not have had to find new tenants and/or face the decision of selling the premises. In other words, Max said that Steven would have remained a tenant, to a certain extent, indefinitely.

We accepted that Steven had ended the tenancy because of delays caused by Surely and that without the delays it was likely that Steven would have remained in the premises for longer. However, the lease agreement could have been terminated upon one month’s notice, at any time. There was no guarantee that Steven would have remained a tenant. Even if the earthquake or the delays had never happened, Steven may still have ended the lease at one month’s notice and Max may have faced difficulties finding a new tenant in the local market. This was essentially the same position Max found himself in once the repairs had been completed. We found that from the date the repairs were completed, Max’s loss of rental income was too ‘remote’ in terms of the Court of Appeal remoteness test.

We calculated that the damages Surely was liable to pay to Max for its policy breach were $12,143.12.

 

Could Max recover legal costs?

As we found that Surely was liable to pay Max for loss of rental income, it followed that the legal fees Max incurred pursuing the recovery of the loss of rental income should also be paid by Surely. We calculated that Surely was liable to pay Max’s legal costs totalling $6923.11.

 

Result

We formally recommended that Surely pay Max, $12,143.12 for loss of rental income and $6,923.11 for legal fees in full and final settlement of Max’s complaint and claim, and the complaint was settled on that basis.