A case of bad timing
/Wellington City Council v Local Government Mutual Funds Trustee Limited [2017]
A leaky apartment building in Wellington has resulted in a $10m pay-out by the Wellington City Council, due to the Council’s failure to notify its insurer within a reasonable time frame.
The scheme
At the time when the Lofts Apartments complex in Wellington was found to be a leaky building, the Wellington City Council was a member of the New Zealand Mutual Liability Riskpool Scheme. The scheme was established exclusively for local authorities as an alternative to conventional insurance and members were entitled to apply for cover in relation to civil claims and liabilities. The Board of Trustees of Riskpool would then decide whether or not to indemnify the local authority. The discretionary nature of the rights meant that it was not a contract of insurance.
A case of bad timing
The Council became aware of a potential leaking issue at the Lofts Apartments in 2004 and promptly alerted Riskpool to the potential for a future claim. In August 2011, the owners of the Lofts Apartments lodged proceedings against the Council and others seeking $9.2m in damages for repair costs. However, in what proved to be an expensive oversight, the Council did not bring the Lofts proceedings to Riskpool’s attention until 2013.
Meanwhile, assuming that the Council would have notified it of any further developments, Riskpool closed its file on the Lofts Apartments . Then, in October 2011, Riskpool decided to commute its reinsurance policies with Swiss Re for the fund years between 1999 and 2007. Riskpool received $12m in full and final settlement of all claims against its reinsurance policies for the period, meaning that it no longer had applicable reinsurance cover for the fund year in which the Council’s claim fell.[1]
When the Council sought indemnification for the Lofts proceedings in 2013, the Riskpool Board declined the application, pointing to the Council’s delay in notifying it of the proceedings. The Scheme Rules stated that a member must “as soon as practicable” give written notice of any occurrence, circumstance, claim, summons or proceeding which may subsequently give rise to a claim covered by the Scheme.
Not happy with this result, the Council sued Riskpool on the basis that Riskpool’s decision breached the terms of the contract between Riskpool and the Council and/or breached its fiduciary obligations to the Council.
The ruling
The High Court ruled that the Council was obliged to notify Riskpool as soon as practicable of the Lofts proceeding in accordance with the Scheme Rules, and failure to do so breached a condition precedent to indemnification. In the context of this proceeding, this meant that the Council ought to have notified Riskpool before Riskpool agreed to commute its reinsurance policies in October 2011.
The Court further ruled that Riskpool was materially prejudiced by the Council’s delay in notifying it; had Riskpool known of the Lofts proceedings, it either would have sought a higher settlement sum or not proceeded with the commutation of the reinsurance.
The Court held that section 9 of the Insurance Law Reform Act 1997 did not apply because there was no contract of insurance between Riskpool and the Council. Upon receipt of a claim, Riskpool had an obligation to exercise its discretion to accept or reject the claim fairly. The Council had no right of indemnity, as recognised by a contract of insurance. Had the section applied, the Court would have found Riskpool prejudiced by the Council’s failure to notify it promptly.
The Court concluded that Riskpool’s decision to reject the Council’s application for indemnity was carried out lawfully. The Council argued that Riskpool wrongly took into account various irrelevant factors, such as that the Council had ceased to be a member of Riskpool in 2008 and that the Council had received more in benefits than it had paid in contributions, and that if it accepted the claim it would have to seek further contributions from members.
The Court accepted that these factors were irrelevant, but that they were only ‘minor considerations’, and did not influence the Board’s decision in any significant way. What drove Riskpool’s decision was the (relevant and proper) consideration that the Council had failed to notify Riskpool of the proceedings before Riskpool had agreed to commute its reinsurance policies, thereby causing material prejudice.
Comment
Philippa Fee, partner at Fee Langstone, says that while the Court was not considering a contract of insurance, the obligation to notify placed by the terms of the mutual scheme on the Council is similar to the obligation on insureds found in most insurance policies. She considers that “the heart of the decision is consideration of whether there was material prejudice to Riskpool from the breach. This is, in turn, dependant on a nuanced factual question; what difference would notification have made to Riskpool’s negotiations with the reinsurers. In the unique circumstances of this case, Riskpool satisfied the Court that there was specific and substantial prejudice as a result of the Council’s breach.”
[1] In his judgment, Collins J defined commutation as an agreement between an insured and a reinsurer under which the reinsurer settles in advance, for an agreed sum, all reinsurance claims by the insured for the period of the commutation.
