Overview


Re-opening settlement for alleged mistake, expert witness impartiality and measure of indemnity value.

Key Points


The settlement agreement should not be re-opened as the mistakes alleged by Prattley were the kind contemplated by the parties and therefore covered by the release clause.

The evidence regarding depreciation of loss adjuster and claims advocate George Keys of Risk WorldWide was not helpful, reliable or impartial and could have been ruled inadmissible in its entirety.

The appropriate measure of indemnity value in this case was depreciated replacement cost.

Background


Prattley1 owned a commercial building in Worcester Street, Christchurch that was insured for indemnity value only with a sum insured of $1,605,000. It was damaged in the 4 September 2010, 26 December 2010 and 20 February 2011 earthquakes.
In August 2011, Prattley settled with Vero for $1,050,000 plus GST subject to stated exceptions, eg the calculation of excess.

In the High Court Dunningham J2 found against Prattley. She declined to re-open the settlement agreement and said the appropriate measure of indemnity value was market value.

In the Court of Appeal the primary question was whether Prattley assumed the risk of mistake so as to preclude relief under the Contractual Mistakes Act 1977. Secondary questions were whether the appropriate measure of indemnity value was market value or depreciated replacement cost and whether any weight should be attached to the evidence of an expert witness who the trial Judge found unhelpful and who the Court of Appeal considered partial.

Mistake


Interpretation of the release clause required consideration of the following propositions from authorities:

  • The object of interpretation is to ascertain the party’s presumed intention and to give effect to it;3
  • A party may enter a binding compromise of a claim or right of which it knows nothing;4
  • The Court may read down general language of a release to exclude claims of a type about which the releasor knew nothing and could not be expected to know anything;5
  • Where the state of the law is changing the parties may be taken to have understood that the law on which they relied when settling the claim might be declared wrong with retrospective effect.6

The Court considered whether there was any mistake. The pleaded mistake was that the market value was the full measure of indemnity under the policy. That had two components. The first was that cover was capped at the sum insured and cover did not reinstate automatically after each earthquake. The second was the market value was the correct measure of indemnity value. The Court did not accept either was a qualifying mistake. It found both parties knew that market value was not the only measure of indemnity value. It also found that the indemnity value of the building was up to $1.4 million, which was less than the sum insured meaning automatic reinstatement could not have allowed the insured multiple claims up to the sum insured.

Expert evidence


George Keys was a director of Risk WorldWide which had a financial interest in the outcome of the Prattley case, and many others like it. He described himself as a claims advocate. He was giving evidence as a loss adjuster in relation to the appropriate application of depreciation. The High Court Judge accepted he could give evidence concerning depreciation but found his evidence was not helpful or reliable.7 The Court of Appeal said his roles as an advocate and as an expert were incompatible.8 It found Mr Keys had not established his methodology (depreciating each element of the building) was orthodox or otherwise accepted within a relevant community of experts.9 It favoured the valuation evidence which depreciated the building as a whole. The Court concluded the trial Judge could have ruled Mr Keys’ evidence inadmissible in its entirety as it was not helpful, reliable or impartial.

Measure of indemnity value


The High Court had preferred market value as the measure of indemnity for two reasons. First, there was no question of the building being reinstated. Secondly, Prattley held the building for income that it generated and not for its character.10
The Court of Appeal found that the appropriate measure of indemnity in this case was depreciated replacement cost. The primary reason for that conclusion was that the policy reflected the special character of the building by expressly referring, in the material damage section, to an equivalent appearance and original design.

The Court said that the policy must inform the approach to indemnity value. However, it appeared to acknowledge that the insured’s intentions for the building may have some relevance. If the building had been for sale, market value may have been the appropriate measure.


Comment


There are strong public policy principles supporting the upholding of settlement agreements. So it is reassuring that the Court found there were no reasons to read down the release clause. In order to expressly protect a settlement agreement from attack under the Contractual Mistakes Act insurers could include words such as “regardless of any mistake” in the release clause.

Mr Keys was always highly compromised as an expert witness. Whether his evidence was admitted and given little weight or excluded entirely it was unlikely to affect the outcome. But the decision contains a useful analysis of expert evidence legal principles which is worth experts reviewing.
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The correct measure of indemnity value remains open to interpretation with the measure depending on policy wording and, to a lesser extent, the insured’s intentions for the building. The appropriate measure is likely to be a continuing source of dispute. The obvious solution is for policies to expressly define the measure of indemnity value.

  1. Prattley Enterprise Ltd v Vero Insurance NZ Ltd [2016] NZCA 67
  2. Prattley Enterprise Ltd v Vero Insurance NZ Ltd [2015] NZHC 1444 Dunningham J
  3. [62]
  4. [63]
  5. [65]
  6. [68]
  7. [91]
  8. [104]
  9. [102]
  10. [124]
  11. [126]

For any further information regarding this please contact Andrea Challis, Peter Hunt or Kiri Harkess.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.