Tag Archives: subrogation

Insurers lose ability to bring certain subrogated claims


The High Court has interpreted the lessee immunity provisions of the Property Law Act 2007 to extend to residential tenants under the Residential Tenancies Act 1986 in respect of property damage: Holler & Rouse v Osaki [2014] NZHC 1977 (20 August 2014, Justice Keane).

The issue is significant to the residential tenancy investment industry, including general insurers insuring such properties. Specifically, the decision prevents such insurers from pursuing subrogated claims against residential tenants who are believed to be liable for causing damage to the property.

Parties to such claims would be well-advised to put them on hold until the resolution of the anticipated further appeal to the Court of Appeal.

The case also raises an issue about the role of the judiciary in interpreting legislation.

Factual background

Mr Holler and Ms Rouse owned a residential dwelling which was occupied by Kenji Osaki under a residential tenancy agreement, and also occupied by Mr Osaki’s partner, Teiko Osaki. On 19 March 2009, there was a fire at the property causing property damage. AMI Insurance Ltd indemnified Mr Holler and Ms Rouse for the cost of repair, which was $216,413. It is alleged that the fire was caused by Ms Osaki carelessly leaving a pot of boiling oil on a stove while she was distracted by their children.

Mr Holler and Ms Rouse sought to recover the cost of repair from Mr and Mrs Osaki (presumably at the behest of AMI exercising its rights of subrogation).

Procedural history

Mr Holler and Ms Rouse brought a summary judgment application in the High Court. The Osakis opposed the application, contending that the claim was barred by ss 268 and 269 of the Property Law Act 2007 (the “PLA”), which exonerate lessees from liability for fire damage caused by their negligence or that of their licensees. The Osakis also entered a protest as to jurisdiction on the basis that the Tenancy Tribunal had exclusive jurisdiction. Associate Judge Abbott stayed the summary judgment application and determined that while the claim exceeded the Tenancy Tribunal’s $50,000 limit, the Tenancy Tribunal retained the ability to decide whether the claim was barred by ss 268 and 269. It decided that ss 40 and 41 of the Residential Tenancies Act 1986 (the “RTA”), which make tenants liable for the damage they or their licensees cause, applied unaffected by ss 268 and 269.

The Osakis appealed successfully to the District Court. Mr Holler and Ms Rouse obtained permission to appeal to the High Court which is the subject of this note.

The immunity issue

Historically, the lessor insured the property against accidental loss and damage, and either directly or indirectly passed on the insurance premium to the lessee. This often resulted in a mistaken assumption by the lessee that the lessor’s insurance policy also covered the lessee in the event of accidental damage. This mistake was often uncovered when the lessee found itself the recipient of a subrogated claim by the lessor’s insurer to recover the cost of repair following damage to the property where the lessee was believed to be liable. The existence of such actions was generally considered to be unjust[1] where the lessee had either directly or indirectly paid the premium but was not a contractual beneficiary of the insurance. The deeper thinking behind this concern was that if the lessee had in effect been a co-insured, or treated as one, the insurer would not ordinarily be able to bring a subrogated claim because it would involving causing common parties to an insurance contract to sue each other, which is generally prohibited.

Sections 268 to 272 of the PLA were enacted to address this issue. The combined effect of ss 268 and 269 is that a lessor must not require the lessee to pay the cost of repairs necessitated by destruction or damage to the property except where the damage was cause deliberately by the lessee or its agent or where the conduct constituted an offence. The provisions apply to specifically named perils: lightning, storm, earthquake or volcanic activity, or any other peril for which the lessor has actually obtained insurance or agreed with the lessee to be insured. The provisions apply where the damage was caused or contributed to by the negligence of the lessee or its agent.

On the face of it, and subject to the analysis which follows below, ss 268 and 269 stand in contrast to the provisions of the RTA which deal with a residential tenant who has caused damage to the rented property. Section 40(2)(a) states:

the tenant shall not intentionally or carelessly damage, or permit any other person to damage, the premises.

Section 40(4) states:

where any damage (other than fair wear and tear) to the premises is proved to have occurred during any tenancy to which this Act applies, it shall be for the tenant to prove that the damage did not occur in circumstances constituting a breach of subsection (2)(a) of this section.

The effect of these provisions is to make a tenant responsible for the cost of repairing property damage where he or she is at fault.

The principal issue in the High Court appeal: application of PLA immunity to RTA tenants

There is no issue that the immunity provided by ss 268 and 269 applies for the benefit of commercial tenants. The issue that arose in this case is whether it also applies for the benefit of residential tenancies under the RTA.

Appellant’s submissions

The appellants’ position was this. Before the PLA was enacted, any tenant who caused fire damage and did not have the benefit of the lessor’s insurance was liable. That remained the case after the passage of the PLA. Sections 268 and 269 of the PLA only apply to commercial tenancies because s. 142(1) of the RTA states that Part 4 of the PLA (which includes ss 268 and 269) does not apply to the RTA. Section 8(4) of the PLA makes the RTA paramount. Further, s 142(2) may require the Tribunal, in exercise of its jurisdiction under s 85, to look to Part 4 of the PLA as a source of general principles of law. But that can only be when the RTA itself is silent. When it is not silent, the RTA displaces the PLA. In essence, the appellants contended that ss 40 and 41 of the RTA trump ss 268 and 269 of the PLA. Section 40 provides that the tenant shall not carelessly damage the property. Section 41 makes the tenant responsible for the conduct of someone at the property with the tenant’s permission.[2]

Legislative background to law reform

In papers published in 1991 and 1994 the Law Commission referred to the unjustness referred to above and suggested law reform to make lessees immune to claims by lessors (generally, if not always, subrogated claims by the lessor’s insurer) for property damage. The 1991 paper suggested the RTA be amended to reflect this for residential tenancies under the RTA. In 2006, the Residential Tenancies (Damage Insurance) Amendment Bill was tabled in Parliament to require landlords to insure, and to render tenants immune from claims by their landlords or by their landlords’ insurers. This bill did not progress. The relevant parliamentary committee envisaged that any such reform would be incorporated into a contemplated general review of the RTA. In 2008, the Residential Tenancies Amendment Bill (No 2) was tabled. One of its key aspects was limiting a residential tenant’s liability for property damage to four times the weekly rent. The government changed and this reform was not pursued. The RTA was amended by the Residential Tenancies Amendment Act 2010, which did not, in the event, include this amendment. In the meantime, the PLA was enacted, replacing the Property Law Act 1952. The PLA contained ss 268 and 269 set out above. Accordingly, the PLA was amended to reflect the desired law reform, and the RTA was not. However, as developed in the section below, that is not necessarily the end of the story.

The High Court decision

His Honour Justice Keane described the background facts, statutory framework and law reform history summarised above. The building blocks of his decision are as follows.

Section 85 of the RTA: jurisdiction

The RTA created the Tenancy Tribunal as a forum to resolve residential tenancy disputes. The manner in which the Tribunal’s jurisdiction is to be exercised is set out in s. 85 of the RTA, which states:

(1) Subject to the provisions of this Act and of any regulations made under this Act, the Tribunal shall exercise its jurisdiction in a manner that is most likely to ensure the fair and expeditious resolution of disputes between land lords and tenants of residential premises to which this Act applies.

(2) The Tribunal shall determine each dispute according to the general principles of the law relating to the matter and the substantial merits and justice of the case, but shall not be bound to give effect to strict legal rights or obligations or to legal forms or technicalities.

The Court cited Welsh v Housing New Zealand Ltd which stated that s. 85(2)[3]:

does not create a licence for the Tenancy Tribunal to impose its views on the substantial merits and justice of the case upon one or other disputant unless its determination is based on general principles of law relating to the dispute. (Italics added).

The Court also cited Ziki Investments (Properties) Ltd v McDonald[4] which stated that s. 85(2) specifically provides for that each dispute shall be determined “according to the general principles of law applying to the matter” (italics added). Keane J referred to this as “the paramount principle.” Citing Ziki he noted that although the Tribunal can decide according to “the substantial merits and justice of the case”, that is only “where possible” under the law applying[5]. This analysis of s. 85 contributed to his later analysis of s. 142, as developed below.

Section 142: application of Part 4 of the PLA

Keane J put the focus squarely on s. 142 of the RTA, which was amended in 2007[6]. This section states:

(1) Nothing in Part 4 of the Property Law Act 2007 applies to a tenancy to which this Act applies.

(2) However, the Tribunal, in exercising its jurisdiction in accordance with s 85 of this Act, may look to Part 4 of the Property Law Act as a source of the general principles of law relating to a matter provided for in that part (which relates to leases of land).

It should be reiterated that s. 268 and 269 form part of Part 4 of the PLA. So, the effect of s. 142(1) of the RTA, if it were to stand alone, is that ss 268 and 269 do not apply to any residential tenancy under the RTA.

Keane J considered the purposes of the RTA in light of the Interpretation Act 1999 and cases decided under it. He analysed the legislation as having a number of attributes, one of which was references in the RTA to other statutes. This particular attribute had three categories: (i) those that defined or enlarged the jurisdiction of the Tribunal. For example, s 14(4) confers jurisdiction on the Tribunal under the Minors’ Contracts Act 1969, (ii) those that enlarge or restrict the “statutory matrix”. For example, s. 16B of the RTA imports into residential tenancies operational rules made under the Unit Titles Act 2010, (iii) machinery provisions. For example, s. 94 confers standing on a manager appointed under the Protection of Personal and Property Rights Act 1988.

Keane J observed that s. 141(1) remained substantially the same in the 2007 amendment. However, the previous version of s. 141(2) stated (bearing in mind Part 8 of the 1952 act dealt with leases as Part 4 does):

The provisions of Part 8 of the Property Law Act 1952, so far as they are applicable to any fixed-term tenancy or service tenancy immediately before the commencement of this Act, shall continue to apply to that tenancy, but shall be read subject to the provisions of this Act.

The effect of s. 141(2) in this form was to permit Part 8 to apply to residential tenancies under the RTA, but subject to the provisions of the RTA.

Keane J held that the former s. 141(2) made clear that much of Part 8 (now Part 4) had no application to residential tenancies. Further, it was implicit in the former s. 141(2) that the Tribunal was required to take into account, and comply with, the relevant general principles of law.[7] Although he does not say so, it is implicit in his reasoning that these principles could then be located in Part 8 (now Part 4).

Keane J went on to hold that the new s. 141(2), in distinction to the former wording of the provision, aligns itself expressly with the manner in which the Tribunal is to exercise its jurisdiction in accordance with s. 85. He stated:

Section 142(2), as it now is, also qualifies s 142(1), just as its predecessor did, but with that critical shift of focus [to s. 85]. For these reasons I conclude that s 142 lies in the first of the three categories I identify. (square brackets added for clarity).

This category consisted of the kind of provision that defined or enlarged the jurisdiction of the Tribunal. The Court concluded the s. 142 does not exclude ss 268 and 269 from creating residential tenant immunity.

Comment

There does not appear to be any valid reason why there should be any distinction between commercial and residential tenants from the point of view of the immunity (leaving aside the issue of whether there should be any immunity at all which may well be a concern for insurers).

If Keane J’s analysis is correct, both the Residential Tenancies (Damage Insurance) Amendment Bill, tabled in 2006 when presumably the PLA was available in its unenacted state (inclusive of s. 364, and Schedule 7 which referred to the wording of the proposed amendment of s. 142(2)), and the Residential Tenancies Amendment Bill (No 2), tabled in 2008 after the enactment of the PLA, were not necessary. All that was needed was s. 142(2), as amended in 2007. As noted in the decision, the absence of the desired reform in the 2010 amendment act was lamented. On Keane J’s analysis, such lament was not necessary because the law had already in fact been changed. Such a situation warrants close scrutiny of Keane J’s reasoning.

The reasoning is, indeed, complex, and the use of what might be described as a taxonometric analysis- dissecting the legislation into attributes having sub-categories- can make it difficult to follow. But what it seems to boil down to is. Part 4 of the PLA contains general principles of lease law, many of which will not apply to residential tenancies, but where they do, they are the general principles which the Tribunal must apply in accordance with s. 142(2), which expressly refers to the manner in which the jurisdiction is to be exercised as set out in s. 85. One of those principles is the tenant immunity contained in ss 268 and 269.

This reasoning is valid. However, the decision does not going on to explain how ss 40 and 41 of the RTA, which make a residential tenant liable for property damage, continue to remain in force, and how they reconcile with this analysis. Bear in mind that the RTA was subject to a general review, followed by an amendment in 2010. There was therefore an opportunity to amend or repeal ss 40 and 41. This did not happen. It is hard to describe this as an error or oversight when some lawmakers officially lamented the failure of the 2010 amendment act to contain the desired law reform. On Keane J’s analysis such lament was misplaced: Romeo was not dead, just sleeping. History is rewritten, and he awakes.

That said, the logical and moral force of the position being unified for both commercial and residential tenants is overwhelming. Keane J provides a roadmap, of sorts, for achieving this, and a bold Court of Appeal may well continue to build the road.

It is understood that the parties are in the process of resolving the necessary leave to appeal to the Court of Appeal. In the circumstances, it seems highly likely that such permission will be granted. It is an important issue for both the residential property industry as well as the general insurance industry. Moreover, the map leads to a clear fork in the road about the role in of the judiciary in interpreting legislation. One that may be considered by our Supreme Court, in time.

Steve Keall
Barrister
2 October 2014

 

This case note is not subject to copyright. I assert my moral rights to be identified as the author. Microsoft Word version available on request.

[1] See, for example: Murdoch v Air Pacific [1994] DCR 46.

[2] There was a secondary contention about whether Ms Osaki was a tenant who should enjoy immunity in light of the fact she was not a party to the relevant tenancy agreement. This issue falls outside the scope of this note.

[3] HC Wellington AP35/2000, 9 March 2001 at [29].

[4] [2008] 3 NZLR 417 (HC) at [69].

[5] Ziki at [70].

[6] By s 364(1) of the PLA with reference to Schedule 7, Consequential Amendments.

[7] At paragraph [46].