In an important test case (Dodds v Southern Response Earthquake Services Ltd) the High Court ruled in August 2019 that government-owned insurer Southern Response engaged in misleading & deceptive conduct, and contractual misrepresentation. The case related to Karl and Alison Dodds’ entitlements under their AMI insurance policy, for which Southern Response is responsible. The Government has confirmed that it will appeal the decision and has offered to pay the Dodds’ legal costs to date and for the appeal. There is a clear incentive to appeal. Media reports indicate that, if the decision is not overturned, the Government may be liable for claims worth hundreds of millions of dollars from thousands of other insureds in the same position as the Dodds.
I summarise the background, and key aspects of the judgment, below. I also consider potential implications of the Government’s response for proposed new conduct law, and key lessons that businesses can draw from the case, regardless of the final decision.
This blog post was written jointly with Cygnus Law Legal Adviser Ken Ng.
Implications for Conduct Law Reform
Later claimants were able to recover the amounts the Dodds are claiming under the same AMI policy as the Dodds, following a Supreme Court ruling against Southern Response (Southern Response Earthquake Services Limited v Avonside Holdings Limited). What makes the Dodds’ case problematic is that Southern Response is continuing to argue that the Dodds are bound by the “full and final” settlement they reached with Southern Response before the Supreme Court decision confirmed the correct interpretation of the policy. While it seems rational for the Government to seek to overturn the decision in the Dodds’ case, in doing so it is sending inconsistent signals about how insurers should conduct themselves.
The Government has raised concerns about poor bank & insurer conduct. As a result the Government recently proposed law reforms to force improvements in insurer and bank conduct. Rob Everett, the Chief Executive of the Financial Markets Authority, in his speech at the Financial Services Council conference on 11 September 2019, stated that:
Our end goal, and I believe yours is too, is the fair treatment of customers. I can’t emphasise enough that the industry should be choosing to do this, rather than being made to do this.
Yet, in the Dodds’ case, the Government is seeking to rely on strict legal rights against consumers even though fairness clearly indicates that Southern Response should be complying with the judgment. Without the bailout the Dodds would likely have received much less under the policy. However, the Government agreed to underwrite the claims under the AMI policies and so placed itself in the same position as any other insurer. In appealing the decision the Government risks undermining the push the Government, and its agencies, are making to improve bank and insurer conduct.
Following a government bailout Southern Response assumed responsibility and liability for AMI’s policies for claims arising from the 2010/2011 Canterbury earthquakes. It has been reported that the bailout has cost taxpayers about $1.5 billion to date.
In 2011 the Dodds made a claim under their policy for their house, which was damaged beyond economic repair. The policy provided “full replacement cover”. Policy options included having a replacement house built on the same or different site, or receiving a payment to buy another house. The policy stated that payment under the “buy another house option” could not exceed the cost of rebuilding on the existing site. Southern Response obtained a report on the cost of rebuilding the Dodds’ house, which estimated the cost of materials and labour at $895,937. A further section of the report, under the heading “AMI Office Use”, included several additional costings including for internal administration, demolition, design, and project contingency. When these additional costs were factored in the total rebuilding cost on the existing site was $1,186,920.
Southern Response decided that, if the Dodds chose to buy another house, they were not entitled to the additional costs in the “AMI Office Use” section. Southern Response removed the “AMI Office Use” section from the report and sent the abridged version of the report to the Dodds, without telling the Dodds about the removal. Southern Response took the same approach with many other insureds.
The Dodds later entered into a full and final settlement with Southern Response under the ‘‘buy another house option” for the lesser amount in the abridged report. In the Avonside Holdings case against Southern Response, which was decided after the Dodds had settled, the Supreme Court ruled that some of the “AMI Office Use” costs needed to be added to the amount payable under the “buy another house” option. The key question in the Dodds’ case was whether they could overturn their full and final settlement to claim the additional costs the Supreme Court confirmed should be paid.
The High Court ruled that, by presenting the abridged report as the complete and only estimate document, and by representing the costs in the abridged report as the full cost of rebuilding the house, Southern Response had engaged in contractual misrepresentation, and misleading & deceptive conduct under the Fair Trading Act. The key factor wasn’t that the Dodds didn’t get the extra value, rather that they never got a chance to consider their options.
The High Court ruled that the full and final settlement did not prevent the claims by the Dodds, as settlements induced by misrepresentation, or misleading or deceptive conduct, can be set aside under the relevant statutes. The Dodds are therefore able to claim the costs on the basis set out in the Avonside Holdings case.
The High Court noted that there is a duty on Southern Response, as the insurer, to act with utmost good faith when performing the insurance contract, not just during the formation of the insurance contract. The High Court indicated that Southern Response had not complied with that duty (though that wasn’t relevant to the decision).
Key Lessons for Businesses
Draft Clear Contracts: The Court decisions in the Avonside Holdings case highlight that ambiguous drafting can create significant issues, including lengthy and expensive disputes. It is important that contract terms are carefully considered and clearly drafted, particularly with respect to the key subject matter of the agreement.
Have Effective Risk Management: Southern Response inherited contracts with inherent ambiguities in the meaning of the terms of “full replacement cost” in connection with buying another house. Given the complexities of even a fairly standard house rebuild, the issue of valuation was always likely to arise. Perhaps AMI saw this legal risk as acceptable, to help to ensure the insurance contracts were easy for insureds to understand. However, together with the commercial risk AMI assumed through its overexposure to particular geographic areas, the overall risk profile was significantly higher and tax payers have ended up bearing much of the cost of that risk. This highlights the importance of effective risk management that takes into account cumulative risks.
Draft Settlement Agreements Widely: The High Court found that the settlement agreement itself wasn’t wide enough to exclude the claims made by the Dodds. The agreement only excluded claims arising under the policy and claims arising “directly or indirectly out of the [earthquake] events or any subsequent aftershock”. The High Court found that the claims arose other than from the policy and earthquakes, including from Southern Response’s misrepresentations and misleading conduct, and its non-disclosure of material information. The High Court acknowledged the possibility that the settlement agreement might have been effective to exclude those claims, if the agreement applied to claims “in connection with” the policy. However, the tone of the judgment suggests that may not have been enough, in practice, to avoid liability for misleading conduct and contractual misrepresentation. This highlights the importance, for parties subject to a claim, of drafting settlement agreements sufficiently widely to also capture “in connection with” claims (though they should take care to avoid engaging in misrepresentation or misleading or deceptive conduct).