Dodds v Southern Response Earthquake Services Limited [2019] NZHC 2016

• When telling an insured what their entitlement is under a Policy, an insurer must fully disclose all material facts to the insured so that the insured (and their advisors) can fairly assess the insurer’s decision as to policy response.
• The insurer’s duty of good faith to the insured extends beyond the formation of the insurance contract to the handling and settling of an insurance claim and a breach of that duty may result in damages being awarded against the insurer.
• A claim for misrepresentation and/or misleading and deceptive conduct will not be precluded by a ‘full and final’ settlement clause, no matter how broadly drafted.

The Dodds’ house was damaged beyond economic repair in the Canterbury earthquakes.

The Dodds had full replacement cover with AMI.¹ Under their Policy, the Dodds could elect to (i) rebuild the house on the same site; (ii) rebuild the house on another site; (iii) buy another house; or (iv) accept a cash payment based on the market value of their house at the time of the loss.

Under the first option the Dodds were entitled to the actual costs of rebuilding their house on its current site (the full replacement cost). Under Options 2 and 3 the Dodds’ entitlement under the Policy could not exceed the full replacement cost.

In November 2011, Arrow provided Southern Response with a costed Detailed Rebuild/Replace Report (the Complete DRA), which:

• quantified the cost of the materials and labour required to rebuild the house on its current site at $895,957.78;
• assessed the administrative, demolition, design fees, and project contingency costs at $253,028.80 (Contingency Costs); and
• quantified the total cost to rebuild the house on its current site at $1,186,920.75, inclusive of GST (Total Rebuild Costs).

Based on the law at the time, Southern Response took the position that Contingency Costs were not payable under the Policy if the insured (as here) elected Option 3 ‘Buy Another House’, because those costs would not be incurred if the existing house was not rebuilt.² On this basis, Southern Response did not disclose the Contingency Costs to claimants who were not actually rebuilding, because in AMI’s view doing so created ‘confusion’.

Instead, in February 2012, Southern Response provided the Dodds with an abridged version of the report (the Abridged DRA), which did not include Contingency Costs and quantified the cost of rebuilding their house at $895,937.78 (inclusive of GST), $290,982.97 less than the total rebuild cost.

Between September 2012 and February 2013, Southern Response provided the Dodds with additional information explaining the options available to them to settle their claim. Throughout this period Southern Response represented to the Dodds that their maximum entitlement under the Policy was the (slightly adjusted) figure of $894,937, and that this was the cost of rebuilding the dwelling on the site.

Critically, Southern Response never informed the Dodds that they had provided them an Abridged DRA, or that the total rebuild cost was $1,186,920.75 (inclusive of GST).

Ultimately, the Dodds elected to proceed with Option 3 ‘Buy Another House’ and in December 2013 the Dodds settled their claim under the Policy, receiving a cash settlement of $894,937. The settlement was in full and final settlement and discharge of any claims under the Policy and/or any “complaint, claim or right of action” – known or unknown – that the Dodds may have against Southern Response arising indirectly or indirectly out of the earthquakes.

In October 2014 the Court of Appeal³ decided that under policies such as the Dodds’, the insured who elects to build elsewhere is entitled to be paid the contingency costs, a different position than the position when the Dodds settled their claim.

The Dodds subsequently obtained a copy of the Complete DRA through a Privacy Act request. The Dodds considered that they had been seriously misled by Southern Response and had settled their claim for less than their true entitlement under the Policy.

The Dodds pursued three causes of action:

• Misrepresentation (s 35 of the Contract and Commercial Law Act 2017 (CCLA))
• Misleading and deceptive conduct (s 9 Fair Trading Act 1986 (FTA))
• Breach of an implied duty of good faith

The gist of all three causes of action was that Southern Response had falsely represented to the Dodds that the estimated cost of rebuilding their home was $894,937, when in fact it was higher.

The Court found in favour of the Dodds on all three causes of action on the basis that Southern Response had failed to disclose material facts to the Dodds and had thereby misled them as to their true entitlement under the Policy. The Court rejected Southern Response’s primary defence to the claim, namely that the alleged representations were simply its honest opinion as to the operation of the Policy.

The Court ordered Southern Response to pay the Dodds $178,894.30, being the difference between their true entitlement under the Policy and the settlement sum.

HONEST OPINION

An honest opinion, reasonably held by an insurer, as to the insured’s entitlement under a Policy will not be sufficient per se to give rise to liability for a claim premised on dishonesty and/or bad faith.

So, it is unlikely the Dodds would have had a claim against Southern Response, had Southern Response simply disclosed the Complete DRA Report to the Dodds, and advised them that on the basis of existing High Court authority it believed they were not entitled to the Contingency Costs and as a consequence their entitlement under the Policy was limited to $894,937.

Interestingly, the Dodds refused to speculate during the trial what they may have done had the Complete DRA Report been disclosed to them. The Court considered that the Dodds may have attempted to negotiate a higher settlement (although it is unclear on what basis they could have done so given the law as it was at the time), or gone to Court to seek a ruling that overturned the law.  However, equally likely, the Dodds (and their advisors) may have simply accepted that based on the law as it then was, they were only entitled to $894,937.

GOOD FAITH

The Court held that there is an implied common law duty of upmost good faith on an insurer and that this duty extends beyond the formation of the insurance contract to the manner in which claims are dealt with. The scope of this duty is, however, developing and therefore unclear.  Arguably, at a minimum it requires an insurer to:

• disclose all material information to the insured; and
• act reasonably, fairly and transparently during the claims process, including (where appropriate) admitting liability and settling promptly.

A breach of the duty will sound in damages, both ordinary and general damages.

There is very limited authority for the proposition that an insurer has a duty to disclose all material information to the insured. Clearly there must be limits to this obligation, for example, material that is subject to legal privilege.  In our view, the obligation should be limited to the disclosure of material facts.

FULL AND FINAL SETTLEMENT

Southern Response argued that even if the claims against it were made out, liability was excluded by the release clause in the settlement agreement.

Release clauses in settlement agreements of insurance claims are (as here) typically very broadly worded, worded to settle any and all claims, both existing and future claims, known and/or unknown, arising directly or indirectly under the Policy. Such clauses, even when broadly worded, may however not always be effective to exclude claims, such as where the claim in question was clearly not in the contemplation of the parties at the time of settlement.

Here the Court considered that the settlement clause was ineffective to relieve Southern Response of liability for three reasons.

First, the wording did not cover this liability as the claim arose out of statute (Contractual Remedies Act and Fair Trading Act) and not out of either the earthquakes or the Policy. The Court’s rationale being that the phrase “arising out of” in the release requires an actual causal connection between the claim, such that the earthquakes and/or the Policy must be the proximate cause of the loss.  Here the earthquakes did not ‘cause’ Southern Response to engage in misleading and deceptive conduct.

We have some difficulty with this reasoning. The term ‘arising out of’ denotes a broad causal connection such as ‘flowing from’ and therefore has a broader meaning than ‘caused by’.  Here the claim clearly flows from the earthquakes and/or the Policy.

Secondly, settlements induced by misrepresentation can be set aside because the misled party has not freely bargained, but rather has been induced to settle by affirmative misrepresentations by the other party. So, even a well drafted release clause will be ineffective if there is a positive misrepresentation.

Thirdly, the prohibition under s 9 FTA on engaging in misleading and deceptive conduct cannot be contracted out of.

Ultimately, the most telling factor in this case was that the very agreement on which Southern Response sought to rely upon as barring the Dodds’ claim for its misleading conduct, had itself been induced by the very conduct complained of.

Southern Response announced on Friday, 13 September 2019, that it was appealing the decision in order to resolve some “important unanswered questions”. As indicated above, although we question aspects of the decision, the acknowledged failure to disclose the Complete DRA to the Dodds could create a hurdle to any successful appeal.

1. Southern Response Earthquake Services Ltd (Southern Response) subsequently assumed AMI’s liability under the Policy.
2. Turvey Trustee Ltd v Southern Response Earthquake Services Ltd [2012] NZHC 3344 and Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2013] NZHC 1433
3. Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2014] NZCA 483.  The Supreme Court subsequently upheld the Court of Appeal’s decision.  See Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2015] NZSC 110.

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