Trustees` insurer

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TO
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MAGAZINE FOR THE NEW ZEALAND INSURANCE MARKET
Editorial
Page 2
Trustees’ insurers
face exposure to
contribution claims
Page 4
When does the
clock stop for class
action plaintiffs?
Page 8
Statutory time limits
for Canterbury
earthquake claims
Page 10
Case update
Page 14
JUNE 2016 / ISSUE EIGHT
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Opening
the door?
The Supreme Court’s decision in
Hotchin, reviewed in this issue,
has quite wide implications for
professional indemnity insurers.
It opens the door to a wider scope
of contribution claims between
tortfeasors than permitted by the
Court of Appeal’s decision, which
the Supreme Court overturned. The
Supreme Court’s decision seems right:
It seems just for a defendant liable for
a plaintiff’s loss to be able to recover
a contribution or indemnity from
another person jointly liable for the
same loss, rather than bearing 100%
of the plaintiff’s loss simply because
the plaintiff chose to sue only one
of several potential defendants. The
implication for insurers is that there
are likely to be more contribution
claims to defend, but also more
contribution claims to bring on behalf
of insureds who are being sued.
In general it is likely to be prudent
to ensure, if possible, that such
contribution claims are dealt with at
the same time as the main action; or
at least that, if deferred, appropriate
protection is in place to avoid the
person bringing the contribution claim
having to prove that they would have
been liable in the main action if it had
gone to trial – not a pleasant prospect
for most litigants (or their insurers).
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We also discuss limitation
issues relating to class actions
and earthquake claims.
When does the limitation clock stop
running in representative actions?
Should the Supreme Court’s
decision in the Feltex litigation have
universal application? Arguably not.
Earthquake claims face uncertain
limitation defences, not least
due to a new Limitation Act
coming into force between the
two most significant Canterbury
earthquakes. We examine
the application of limitation
provisions to earthquake cases.
We hope you find the
articles in this issue relevant,
useful and interesting.
Please take a few moments to email
me at covertocover@minterellison.
co.nz if you would like to provide
any thoughts about this issue or
ideas for future issues. We have
no objection to bulletpoints!
Toby Gee
Editor
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Trustees’ insurers face exposure
to contribution claims
Supreme Court decision
T
he Supreme Court has
opened the door to
‘contribution’ claims against
trustees for directors’
liabilities. While significant
barriers remain, trustees and
their insurers face defence
costs and possible liabilities
for claims that previously
could have been struck out
without a trial.
Guardian Trust on the basis that,
as trustee for Hanover Finance,
Guardian Trust was obliged to
contribute to his $18 million
settlement payment. He argued
that the trustee was also liable
because it should have identified
his breach of duty and should
have prevented him from causing
further loss to investors. He
claimed that, as Guardian Trust was
also liable to the same investors,
he was entitled to a contribution
from them to the payment he had
made to settle his own liabilities.
Mr Hotchin’s
contribution claim
The High Court and
Court of Appeal decided
the claim must fail
In Hotchin v Guardian Trust [2016]
NZSC 24, former Hanover Finance
principal Mark Hotchin brought
a claim against Guardian Trust,
arguing that if he had breached
duties to investors, then so
too had Guardian Trust. Mr
Hotchin had agreed to pay $18
million to settle claims brought
on behalf of investors. He
sought a contribution to this
payment from Guardian Trust.
Originally, the Financial Markets
Authority brought an action against
Mr Hotchin claiming that he had
negligently approved an investment
prospectus containing misleading
statements. The claim was settled
for a payment by Mr Hotchin of
$18 million made on the basis
that he did not admit liability.
Having settled the FMA’s claims,
Mr Hotchin then claimed against
The High Court and subsequently
the Court of Appeal decided
that Mr Hotchin’s claim failed
to disclose an arguable case.
It was therefore bound to fail
and should be struck out.
At the core of their decision is the
meaning of the words ‘the same
damage’. A right of contribution
between defendants arises only
where the defendants’ wrongful
conduct causes the same
damage to the plaintiffs. The
claims against Mr Hotchin and
Guardian Trust relied on different
breaches of duty. The Courts held
that Guardian Trust had merely
provided an opportunity for the
loss to arise, and that, unlike Mr
Hotchin, the Trust owed no direct
duty to investors. This meant that
Mr Hotchin and Guardian Trust
were not alleged to have caused
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‘the same damage’ to investors.
Therefore Mr Hotchin’s claim for a
contribution could not succeed.
The Supreme Court has decided
that the claim could succeed
The Supreme Court overturned
the Court of Appeal decision
and held, by a majority of three
to two, that Mr Hotchin’s claim
should not be struck out.
In short, the Supreme Court took
the view that both claims arose in
respect of the same loss, i.e. that
suffered by Hanover’s investors.
The Court held that it would be
artificial to prevent Mr Hotchin
from seeking a contribution from
Guardian Trust merely because the
nature of its alleged liability was
not identical to that of Mr Hotchin.
What does this mean for
trustees and their insurers?
TheSupremeCourt’sdecisionbroadens
the circumstances in which directors
(and other defendants) may seek a
contribution from trustees and their
insurers on the basis that the trustees
were at fault in failing to identify the
directors’ own breaches. It will be
easier for directors to join trustees to
proceeding and compel them and
their insurers to incur defence costs
and account for potential liabilities.
Defence costs may be incurred even
where claims against the trustees
may have no real merit, because it is
more difficult to strike them out on
the basis that they cannot succeed.
“The High Court
and subsequently
the Court of Appeal
decided that Mr
Hotchin’s claim
failed to disclose
an arguable case.”
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The Supreme Court offered a
glimmer of hope for trustees and
their insurers, however. Justice
Glazebrook observed that it was
“highly arguable” that a director’s
claim for contribution from a
trustee would be contrary to the
statutory scheme, which places
emphasis upon directors’ liabilities.
As approving the prospectus
was Mr Hotchin’s responsibility
as a director, it was arguable
that compelling Guardian Trust
to contribute to a settlement
was contrary to the statutory
scheme, in that it allowed directors
to avoid some of the liability
resulting from their conduct.
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The difficulty with that argument
is that it would arguably apply
by analogy in other cases of joint
and several liability. So it remains
to be seen whether and, if so,
how other Courts will take up
Justice Glazebrook’s approach.
The Court also observed that, if
Mr Hotchin was to take his claim
to trial, it was not obvious how
it could be just and equitable
to compel Guardian Trust to
contribute, particularly where the
trustees relied on the director’s
own statements. Furthermore,
in order to succeed at trial, Mr
Hotchin would have to prove
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“The decision
opens the door to
contribution claims
against trustees
and their insurers,
but significant
challenges remain
for directors
wishing to do so.”
his own liability for negligence
which he had steadfastly refused
to acknowledge. The claim was
not so weak, however, that it
could be struck out as having
no prospects of success at all.
The decision highlights a problem
for defendants who wish to settle
a claim against them without
admitting liability and also wish to
seek contribution from a trustee or
other alleged tortfeasor. In order
to avoid being in the invidious
position – like Mr Hotchin - of
having settled and then having to
prove their own breach of duty in
order to obtain a contribution, it will
often be prudent, where possible,
for defendants to bring any
other tortfeasors into the frame
before settling with the plaintiff.
In summary, the decision opens
the door to contribution claims
against trustees and their insurers,
but significant challenges remain
for directors wishing to do so.
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Andrew Horne
Emma Wilkins
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When does the clock stop for
class action plaintiffs?
When is it unfair to stop a claim in its tracks due to its age, and when is it unfair
to allow it to proceed? This often vexed question can be crucial in litigating
difficult claims. Class actions are an example.
At the start of any litigation,
among the first questions any
defendant will ask is whether the
claims have been brought within
the limitation period, or whether
the plaintiff is out of time. Often,
this is a relatively straightforward
calculation. But not always.
Limitation periods are designed
to strike a balance between, on
the one hand, giving plaintiffs to
access to justice, and, on the other
hand, protecting defendants from
the unfairness of defending stale
claims. Defendants should have
sufficient information about a
claim to be able to investigate and
obtain the necessary evidence
before the age of the claim
makes it too difficult for them to
do so, rendering a trial unfair.
Complexities in calculating the
limitation period can arise in a
number of respects. For example,
the date on which the cause of
action accrued may be unclear. Or it
may be uncertain when the plaintiff
first knew enough about the cause
of action to start the clock ticking.
“At first blush, it
appears unclear
when the limitation
clock has been
stopped for members
of the class. ”
Outside the class action context,
however, it is generally clear when
a plaintiff has brought their claim,
for the purposes of assessing when
the limitation clock stopped: a
proceeding is commenced by the
filing of a statement of claim. It’s
as simple as that. But the stakes
get higher and the calculus gets
fuzzier when the claims are brought
by a representative plaintiff who
purports to represent a class of
persons with the same interest
in the subject matter of the
proceeding under High Court Rule
4.24. For insurers of defendants
facing a class action, this can lead
to difficulty in evaluating what a
claim is worth and the potential
liability the claimant faces – and
therefore the resources that
it is reasonable to expend on
investigating the merits of the
claim when it is first brought.
At first blush, it appears unclear
when the limitation clock has
been stopped for members
of the class. High Court Rule
4.24 requires a representative
to have either the consent of
those persons he purports to
represent or a representative
order from the Court before the
representative plaintiff can be
said to represent the class. So
if an erstwhile representative
plaintiff files a statement of claim
before obtaining consent or a
court order, ie before they can be
said to represent anyone else, on
whose behalf have they brought
the claims, thereby stopping the
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limitation clock for those claims?
Does it vary for each member of
the class according to when they
elected to opt-in to the claim? Is
it determined by the date of the
court’s representative order? Or is
it sufficient that a representative
plaintiff asserts to represent a
class of plaintiffs on the date of
filing the statement of claim?
The Supreme Court unpicked
this Gordian knot in the Feltex
litigation1 and determined that
the representative plaintiff
stopped the limitation clock for all
plaintiffs in the class, irrespective
of consent or court order, on the
date the statement of claim was
filed. The judgment was made in
the context of a discernible and
measurable plaintiff class – the
representative plaintiff brought a
claim on behalf of all purchasers
of Feltex shares in the initial
public offering. As a result, the
Supreme Court reasoned the policy
underpinning limitation periods
was upheld, ie, the defendants were
“fully informed of the nature and
potential extent of the claims at the
time the proceedings were filed”.
However, in other contexts, the
class of plaintiffs or the extent
of the claim will not be as readily
identifiable, and the approach
may lead to an unwieldy and
ill-defined class of potential
plaintiffs, each with specific and
unique circumstances surrounding
1 Credit Suisse v Houghton, Saunders et al,
[2014] SC 37
their claim to relief despite
a common interest in
the subject matter of the
claim. For example, in the
leaky homes class actions,
representative actions
brought on behalf of owners
of buildings with allegedly
defective cladding products
could extend the limitation
period for an indeterminate
class of plaintiffs who
own a variety of buildings
that potentially contain a
variety of products used in
a variety of applications.
The Supreme Court in
Feltex emphasised that the
class action mechanism
furthers the objectives of
securing the just, speedy and
inexpensive determination
of a proceeding. Yet
allowing plaintiffs to opt in
and take advantage of the
limitation clock stopped by
the representative plaintiff
may be unjust. It effectively
extends the limitation period
for those plaintiffs at a time
when the defendants may
not have enough information
to fully investigate the
potential claims; either
because the issues are
inadequately defined for
unknown plaintiffs, or
because the potential value
of the action is so unclear
that the defendants cannot
ascertain what resources
they should reasonably apply
to their investigations. For
insurers of defendants facing
a class action, this means that
the insurers’ exposure may
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change over time as plaintiffs
opt in or, as is often the
case, as the plaintiffs refine
their case and the classes
they purport to represent.
We are currently waiting for
the Supreme Court to make
its decision2 on whether the
10-year long-stop limitation
period applies to actions
relating to defective products
incorporated into buildings.
It seems clear that limitation
issues in class actions are
not going to go away. As
the Courts and others have
previously commented, the
introduction of a clearly
defined class action regime
would benefit all involved
in this complex area.
2 In the Carter Holt Harvey litigation.
Toby Gee
Molly Powers
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Statutory time limits for
Canterbury earthquake claims
The sixth anniversary of the
September 2010 Canterbury
earthquake is a few short months
away and the sixth anniversary of
the February 2011 event will occur
soon after. With many hundreds
of claims still unresolved, new
court proceedings continue
to be filed, albeit only at the
rate of about one per week
in the first quarter of 2016.
The Limitation Acts of 1950 and
2010 impose statutory time
limits on the issue of court
proceedings. Unless there are
special circumstances such
as concealment, which do not
normally arise in earthquake
claims, proceedings based on
insurance claims must normally
be issued within six years of
the date on which the cause of
action arose or the relevant act or
omission occurred, depending on
which statutory regime applies.
Concerns have been expressed
about whether earthquake
claimants may lose the right to
sue their insurers if they do not
issue proceedings before the
sixth anniversary of the relevant
earthquakes. Claimants who
anticipate issuing proceedings
will not wish to run the risk
that their claim may become
time-barred. This may lead to
uncertainty if proceedings are
not issued; or to proceedings
being issued prematurely and
unnecessarily where an insured
wishes to preserve its position.
When does the six-year
period begin to run?
The date of an earthquake is
the earliest date upon which
time may begin to run, but
the start date may be later.
The position is complicated by
the fact that a new limitation
regime came into effect on 1
January 2011, so the two most
significant earthquakes occurred
under different statutory regimes.
Under the 1950 Act, in most claims
based on contract or tort, time
began to run when the cause
of action arose. Under the 2010
Act, time begins to run at the
time of the act or omission on
which the claim is based. This is a
potentially significant difference.
Insurers and claimants have
expressed a range of views as
to when time begins to run for
an earthquake claim under an
insurance policy for limitation
purposes. The Earthquake
Commission has indicated that it
considers that time begins to run
on the date that a claim is denied,
which will be later than the date
of the relevant earthquake.
The English law approach is to
deem insurers to be in breach of
their obligations under the policy
as soon as an insured event occurs.
This results from a legal fiction that
treats insurers as having promised
to hold the insured harmless. This
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approach was initially adopted by
the New Zealand courts in two High
Court decisions in 2009, Arnold v
AIG Life and Sovereign Assurance
v Scott (a decision on a strike-out
application brought by the insurer).
However, in Sovereign the Court of
Appeal overturned the High Court
decision, holding that the cause
of action arose when all of the
necessary events had occurred that
would entitle the insured to sue.
The court held that time would
begin to run once a claim on the
policy had arisen and the insurer
had declined to meet it. On appeal,
the Supreme Court declined to
strike out the claim, holding that
it was necessary to explore the
factual position at trial to identify
when the relevant events had
occurred. While Sovereign was
not an earthquake claim the same
principles are likely to apply.
Time for limitation purposes may
therefore begin to run on different
dates for different earthquake
claims, depending upon their
particular circumstances. It is
possible that time will not begin
to run for some claims until the
insurer breaches a duty, which
may occur months or years after
the earthquake. Furthermore,
insurers’ breaches may occur in
a number of ways, from denial of
cover to unreasonable delay. It
is possible that an insured may
have several claims for different
breaches, some of which become
time barred while others do not.
“It is possible
that an insured
may have
several claims
for different
breaches,
some of which
become time
barred while
others do not.”
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ICNZ’s response to
limitation concerns
In December 2015, the Insurance
Council of New Zealand (ICNZ)
reported that its members,
who are AA Insurance, FMG, the
IAG brands, MAS, Tower and
Vero, wished to reassure their
customers that they would not
rely upon limitation defences
for residential claims arising out
of the Canterbury earthquakes
provided that proceedings were
filed before 4 September 2017.
This means that customers of
those insurers may be confident
that they will not need to
issue proceedings before 4
September 2017, irrespective
of when their own limitation
dates may have expired. This
allows them a further year to
negotiate with their insurer or
proceed with their repair or
rebuild, without being concerned
that time to issue proceedings
(if required) will expire.
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How insureds
should deal with
possible time bars
Insureds who are concerned
that their claims may become
time-barred should approach
their insurers for confirmation
that they will adopt the ICNZ
approach and agree not to rely
upon limitationsfor proceedings
filed before 4 September 2017
or another appropriate date.
Extensions may be requested
if necessary. If insurers will not
agree, it may be prudent to issue
proceedings to protect claims.
The ICNZ insurers’ agreement
not to rely upon limitation in
proceedings filed before 4
September 2017 only affects
claims that would otherwise have
become time barred before that
date. It does not extend time for
other claims. For instance, a claim
that would become time-barred
in December 2017 will not be
extended under the current ICNZ
offer. The benefit of this approach
is that it avoids the need to
identify when time begins to run
for individual claims, as any claim
may be issued before 4 September
2017 irrespective of when it arose.
Andrew Horne
Nick Frith
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Under the microscope:
Recent cases of interest
In this section we comment on recent Canterbury earthquake decisions
and other selected recent developments in New Zealand insurance law
Case study one:
Residential lessor
cannot claim insured
losses from lessee
The Court of Appeal recently
decided that an insured lessor of
residential premises cannot claim
the cost of repairs from a lessee,
where the damage was caused
by an event for which the lessor
is insured. This decision signals a
departure from the widespread
understanding that there is
no immunity for residential
tenants who cause damage
to a premises in breach of the
Residential Tenancies Act 1986.
Holler and Rouse v Osaki
The appellants owned a house
insured by AMI. They entered into
a residential tenancy agreement
with Mr Osaki, who lived in the
house with his wife and children.
In 2009, Mrs Osaki left a boiling
pot of oil unattended, and a fire
broke out causing substantial
damage to the house.
AMI indemnified the appellants
for the repairs, but exercised its
rights of subrogation and issued
summary judgment proceedings
to recover the fire repair costs
from the Osakis. The grounds
of appellants’ claim were that
the fire was caused by the
Osakis’ negligence, which put Mr
Osaki in breach of the tenancy
agreement, and sections 40-41
of the Residential Tenancies
Act 1986 (the RTA), which state
that tenants must not carelessly
damage the premises. After the
High Court found in favour of the
Osakis, the appellants appealed.
the risks in insuring tenanted
residential properties. Landlords
may be required to pay higher
premiums, which could (in light
of the fact that this cost cannot
be recovered from tenants)
result in higher residential
rents around the country.
The Osakis argued that sections
268-269 of the Property Law
Act 2007 (the PLA) barred the
appellants’ claim. Sections
268-269 of the PLA provide that
an insured lessor cannot claim
the costs of repairing a damaged
or destroyed premises from
a lessee, where the damage
was caused by an event for
which the lessor is insured.
Patricia Green
The Court found in favour of the
Osakis, holding that sections
268-269 of the PLA were not
inconsistent with the tenant
obligations under the RTA
and therefore were applicable
to residential tenancies. The
effect of this decision is that the
owners (and their insurers) are
prevented from claiming the
repair costs from the tenants.
Isabelle McKay
Before this decision, insurers may
have relied on an understanding
that residential tenants are
liable to compensate landlords
for the cost of damage they
cause to a premises. However,
the Court’s decision departs
from this position, and may
have a significant impact on
insurers’ considerations of
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Case study two:
Court of Appeal
rejects mistake as a
basis for challenging
settlement agreement
Prattley Enterprises Limited v
Vero Insurance New Zealand
Limited [2016] NZCA 67
Vero has successfully resisted
an appeal by Prattley against the
High Court’s decision in Prattley
Enterprises Limited v Vero Insurance
New Zealand Limited [2015] NZHC
1444, which we described in a
previous issue of Cover to Cover.
Background – Prattley sought
to reopen settlement on
the grounds of mistake
Prattley settled with Vero
following earthquake damage to
its Christchurch building. In the
settlement agreement, the parties
agreed that Vero’s payment was
made in final settlement of all
claims arising out of the policy or
the earthquake damage. Prattley
subsequently sought to reopen
the settlement agreement, alleging
that when it settled both parties
were mistaken about the measure
of its entitlement under the policy.
The question:
Did Prattley assume the
risk of a mistake?
The primary question on appeal
was whether Prattley had
assumed the risk of mistake in
the settlement agreement. If so,
then the court would not reopen
the settlement, because the
Contractual Mistakes Act 1977
precludes relief where a contract
“expressly or by implication makes
provision for the risk of mistakes” and
then assigns that risk to a party.
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Settlements can validly
include unknown issues
The Court had to interpret the
settlement agreement, and
specifically whether it extended
to facts or law about which the
parties were mistaken or ignorant.
In doing so, the Court was seeking
to ascertain the parties’ presumed
intention and give effect to it.
“The primary
question on appeal
was whether Prattley
had assumed the
risk of mistake
in the settlement
agreement. ”
The court gave the
following guidance:
• A party may enter a binding
compromise of a claim or right
of which it knows nothing.
Releases are routinely written
to cover all claims known
or unknown. The objective
of such language is closure.
Courts will readily give effect
to this language and recognise
that finality facilitates
settlements.
• However, where the
circumstances demand, a
court may read down the
general language of a release
to exclude claims about which
the party granting the release
knew nothing and could not be
expected to know anything.
No justification for reading
down the release
The Court held that in the
settlement, Prattley had assumed
the risk that there could be
future unknown claims in
connection with the damage, the
earthquakes and the policy.
The Court assumed that any possible
common mistake could only be about
the measure of Prattley’s entitlement
to indemnity under the policy. Even
if there was such a mistake, there
was no justification for reading down
the general words of the release,
which plainly extended to any
unknown claim under the policy for
earthquake damage to the building.
Comments
This decision demonstrates the
Courts’ desire to respect and
protect the finality of settlements,
and reinforces the difficulties in
challenging release clauses in
settlement agreements. However,
it may leave the door open a chink
for litigants who subsequently
discover claims they could not
previously have known about,
depending on the wording of
their settlement agreement.
Other issues:
(1) Partial expert evidence
may be inadmissible;
(2) basis of indemnity was depreciated replacement
cost, not market value.
The Court warned that any
failure to comply with the duty
of impartiality is a breach of the
Expert Code of Conduct and
the evidence is presumptively
inadmissible under section 26(2)
of the Evidence Act 2006.
Secondly, the Court discussed
whether the appropriate
measure of indemnity under the
sum-insured reinstatement clause
following destruction is market
value or depreciated replacement
cost. Prattley’s policy wording
reflected the character of the
building and the Court concluded
that depreciated replacement
costs were consequently a more
suitable measure of indemnity
than a realistic market value.
Andrew Horne
John Fowler
The Court also considered
two secondary issues.
First, the Court discussed the
unhelpfulness, and potential
inadmissibility, of evidence from an
expert who had a financial interest
in the outcome of the litigation.
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Andrew Horne
Partner
Neil Millar
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Zane Kennedy
Stacey Shortall
Partner
Partner
Partner
Partner
Lloyd Kavanagh
Jeremy Muir
Oliver Meech
Toby Gee
Kara Daly
Partner
Partner
Special Counsel
Special Counsel
For more information, please contact us:
E: [email protected]
w: www.minterellison.co.nz/insurance
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MINTERELLISON.CO.NZ/INSURANCE
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