A sum insured in an insurance policy often applies not only to a single loss, but also to a series of losses. This means that an insured may not be able to claim the full amount of a loss if that loss can be grouped with other losses which together exceed the sum insured. But just when should losses be grouped together?
The Court of Appeal recently considered this issue in Moore v IAG New Zealand Limited  NZCA 319. It ruled that losses arising from two earthquakes were not a series of losses under an aggregation clause, and that the clause therefore did not apply.
Mr Moore owned a house in Christchurch that was insured by IAG. The house was damaged in the February 2011 earthquake and again in the June 2011 earthquake. Mr Moore claimed that the repair cost for the February earthquake was $2.08 million, and that the repair cost for the June earthquake was an additional $2.77 million. He said that the total repair cost was therefore $4.85 million.
However, the sum insured under his policy was $2.5 million. That sum insured applied to any single loss. In addition, an aggregation clause provided that the sum insured also applied to:
Any series of losses caused by a single event, and
Any series of losses caused by a series of events which have the same cause.
This raised three questions for the Court:
Were the losses in February and June a “series of losses"?
If so, were those losses caused by a “series of events"?
If so, did that series of events have “the same cause"?
If there was a series of losses caused by a series of events with the same cause, Mr Moore's claim was capped at $2.5 million. If not, he would be entitled to claim the full $4.85 million.
Was there a series of losses?
The Court of Appeal rejected the High Court's finding that a “series" of losses simply meant “repeated" experiences of losses during the period of insurance.
Instead, the Court of Appeal said that the word “series" required a “linked sequence" of losses that occur “proximately in time". It ruled that the earthquake damage in February and June was “separate and distinct", and that the four months' separation was not sufficiently proximate. Accordingly, as there was no series of losses, the aggregation clause did not apply. The insurer's argument failed at this first stage.
We would question whether the clause envisaged such a restrictive interpretation of “series". Although a series usually requires events to be linked, the required linkage here is supplied by the remainder of the clause—which requires a series of events with the same cause—rather than by any additional requirement to be read into the word “series".
In addition, the Court of Appeal did not explain why a separation of four months disqualifies two events from being a series. Indeed, a decision of the High Court of Australia cited by the Court of Appeal appears to envisage that any two events that occur within the period of insurance would constitute a series.
Was there a series of events?
The Court of Appeal accepted that if there is a series of events, it is permissible for each event to separately cause each loss. The series of events need not act together to cause the series of loss.
However, it ruled that, even if there was a series of losses, the two earthquakes were “clearly" not a series of events. Again, it said that there must be a “proximate temporal sequence", which it said was not the case here.
Again, we would question this conclusion. Indeed, the four major earthquakes in Christchurch in 2010 and 2011 are often described by experts as the “Canterbury earthquake sequence". We would expect that, in common usage, many people would describe the earthquakes in Canterbury as a series of earthquakes.
Was there a common cause?
Finally, the Court of Appeal said that, even if there was a series of losses and a series of events, that series of events did not have the same cause.
IAG led expert evidence that the February and June 2011 earthquakes were significantly more likely to have been aftershocks of the earlier, September 2010 earthquake. Mr Moore led expert evidence that the September 2010 earthquake was neither necessary nor sufficient to cause the later earthquakes.
The Court of Appeal preferred Mr Moore's expert evidence, which it said was not challenged. It ruled that the September 2010 earthquake did no more than “set the stage" for the later earthquakes, and that therefore it was not a proximate cause of the later earthquakes.
What does this mean for insurers and insureds?
The Court of Appeal was concerned to limit the scope of the aggregation clause, even going so far as to describe the clause as “subordinate" to the “primary" rule that the sum insured applies to each individual loss. That concern clearly drove its conclusion that Mr Moore should not be limited in his claim for each loss arising out of each of the earthquakes.
The Court's decision will provide guidance to both insurers and insureds in interpreting aggregation clauses, which are common in many insurance policies. As well as allowing an insurer to apply a sum insured across a series of events or losses, an aggregation clause may also allow an insured to group together a number of small losses so that they exceed the deductible in the policy. In addition, similar phrasing is often used to extend policies to claims made or events occurring after the expiry of the policy period, if those claims or events are related to claims made or events occurring during the policy period.
However, there is no standard wording for aggregation clauses. Any differences in wording between clauses may be critical. As a result, insurers and insureds should carefully review the particular wording of any clause at issue before seeking to apply the Court of Appeal's decision to that clause.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.