Insurer obtains stay of execution of judgment, sort of

An insurer has partially succeeded in applying to stay execution of a High Court judgment against it, pending an appeal to the Court of Appeal: AAI v 92 Lichfield Street [2015] NZHC 2190. The judgment in respect of which the stay was sought had held that a statutory demand served upon the insurer by its insured would not be set aside. The statutory demand was based on an alleged agreement that the insurer would pay the insured a sum of money for property damage to the insured’s building, outside the scope of the insurance contract. The key issue in the stay decision was whether the insurer should pay to the insured a sum reflecting the indemnity value under the policy that would be ultimately payable to the insured in any event, irrespective of the outcome of the appeal, taking into account the fact that the insured was insolvent.

In March 2015, Lichfield served a statutory demand on AAI, its insurer, stating that AAI had agreed to pay it the sum of $6.5m in respect of a property damage claim arising out of the Canterbury earthquakes.  The statutory demand was based on an alleged agreement between Lichfield and AAI that AAI would pay this amount to Lichfield, and it was not based on a claim under the relevant insurance policy. AAI applied to the High Court to set aside the demand, saying that the parties had never reached binding agreement that AAI would pay Lichfield that amount. An Associate Judge of the High Court agreed with Lichfield, holding that AAI had agreed to pay the sum in question. AAI appealed that decision to the Court of Appeal. AAI applied to stay execution of the High Court’s judgment pending determination of the appeal.

The stay application was considered by Dunningham J. The crux of the case was that Lichfield was insolvent, and in receivership. It owed liabilities of approximately $9m, with most of that owing to a secured creditor, Equitable. If the judgment sum was paid to Lichfield, it would be distributed for the benefit of Equitable, and therefore later be irrecoverable in the event AAI’s appeal to the Court of Appeal succeeded. In other words, the appeal would potentially be worthless. Whether an appeal will become worthless is one of the factors considered by a Court in the context of a stay application of this kind.

Resisting the stay application, Lichfield submitted amongst other things that (i) AAI was contractually obliged under the insurance policy to pay at least the indemnity value of the property, and (ii) AAI itself had said that if there was no binding agreement between the parties it would pay the indemnity value of the building under the policy of $4,627,000 in order to close the claim. Lichfield contended that this meant that whatever the outcome of the appeal, AAI would only ever be entitled to recover the judgment sum of $6.5 less this indemnity value: an amount of $1,873,000.

Dunningham J analysed the relevant provisions of the policy. She concluded that AAI’s minimum obligation was to pay the indemnity value of the building regardless of whether AAI succeeds or not in its appeal and regardless of how Lichfield exercises its election under the policy to either accept payment of the indemnity value or choose to reinstate the building (an election open to it under the policy). The judge concluded that to protect AAI’s appeal rights, the judgment only needed to be stayed to the extent of the difference between the insurer’s assessment of the indemnity value and the judgment sum (plus costs). In other words, there was only a stay to the extent of $1,873,000 and conversely Lichfield was entitled to enforce the High Court judgment to the extent of $4,627,000, plus costs.  An order was made to this effect.

Comment

It is not absolutely clear from a review of the decision whether AAI had ever definitively committed to the indemnity sum being $4,627,000. Dunningham J noted that her decision did not determine the quantum of the indemnity value. She noted that in the event that AAI succeeds in its appeal, and the parties reverted to making an assessment of Lichfield’s entitlements under the policy, then the correct figure would still need to be determined. This reasoning is open to question because the effect of Dunningham’s decision was in effect to crystallise the amount of the indemnity sum. This is a consequence of the fact that from the time it is paid by AAI to Lichfield under the terms of the order, it will be irrecoverable.  On the face of it, this may sound like it has the potential to be unjust. However, based on the way the Court analysed the available evidence, it seems likely that if the indemnity value is not in fact $4,627,000 this amount is probably not too far of the mark. So, in the context of a stay of execution of a judgment, it was reasonable to conclude payment of at least this amount was appropriate in terms of the balance of convenience between the parties.

It is understood that AAI has not lodged an appeal against Dunningham J’s decision.

Steve Keall
Barrister

23 September 2015

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