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Simon Papa & Ken Ng argue that by appealing a judgment against Southern Response, the Government risks undermining the push it and its agencies are making to improve bank and insurer conduct

Simon Papa & Ken Ng argue that by appealing a judgment against Southern Response, the Government risks undermining the push it and its agencies are making to improve bank and insurer conduct
Picture: Southern Response.

By Simon Papa & Ken Ng*

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.

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).

*Simon Papa is director of Cygnus Law and Ken Ng is legal advisor at Cygnus Law. This article was first published here and is used with permission. 

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Just a plaintive note re SR's actual function. It is NOT an 'insurer' in any active sense of the word. It is the 'bad bank' of the former AMI, set up explicitly to oversee the orderly settlement of the liabilities left once the 'good bank' policies had been hived off to the active insurer (AMI, now part of IAG group). SR issues no new policies, has a sunset date (the point at which all liabilities are extinguished), and is 100% Government-funded to settle those liabilities. To repeat, it is not an insurer in any normal sense.

Quite right.
Perhaps all those complaining about the process would have prefered that the Government hadn't stepped in to rescue them - give them a hand - and left them to sort out their policies with failed AMI?
Whatever most of them get is probably better than what AMI would have dished out - ie: Nothing.

They shouldn't have stepped in, but they did. As such certain standards must be meet.

Could be South Canterbury Finance revisited. Perhaps too many 'important' people had too much to lose if the Government failed to resue them. It would be interesting to know who, exactly, the policyholders bailed out be Southern Response were/will be? But fundamentally, you're right "they shouldn't have stepped in'. As with the OBR in banking, all existing policyholders should have been 'bailed in'.

What I don't get is the good bank being sold off separately?

Did the National Government not get enough for this to cover the bad bank? Looks to me like another State Asset Sale, to reduce NZ competition even further.

Never trust a margin trader, who is now chairman of ANZ. Believe it or not.

Yep the then governments stepped in without any idea of the potential enormity of the problem. And thus treasury stepped in. Firstly EQC was required to slow down payouts fast. Secondly assessments of building & house damage was doctored and underestimated. The insurers were thus given the ideal pathway by the government. Eventually in Avonside Holdings the High Court decision set a precedent which Southern Response calculatedly ignored. The recent Dodd’s case has corrected that. Also The Court of Appeal has allowed the appeal of Ross against Southern Response for a class action along the same lines. It is all very well to say that Southern Response is not this or that and that claimants are more fortunate than they may have been otherwise. With respect, that is a highly undesirable attitude as it circumvents the fact that NZ has laws, including contract law. The High Court, The Court of Appeal and the Supreme Court (with Skyward for instance) have all had to intervene to correct mishandling verging on malfeasance at times, that has flowed directly out of the previous government’s hasty and ill conceived damage controls implemented at EQC.

To The Good People of Christchurch,
To date, & to my knowledge, which is not great I have to admit, the government of New Zealand & thereby all its citizen taxpayers, have got back into debt, internationally, to the tune of $20-30 billion NZ dollars directly because of what took place in your fair city recently. It might be more (indirectly I've heard $40 billion plus) I'm not sure, but my point is that the Great Southern Earthquakes have cost NZ Inc a small fortune. Half of what we (the state) still owe the rest of the world is a result of those earthquakes.
Okay, you say, the government behaved badly, & we want the extra quarter of a million dollars (or whatever) that we weren't told about. Spread this over many tens of thousands of claims & you could probably have another $10-$20 billion added to that.
Okay, the government behaved badly. The government has been behaving badly, for as long as they can get away with it. Look at IRD v Small Businesses for ever & ever. That's what governments do these days. That's par for the course in just about every govt enterprise there is. If you could name just one govt enterprise doing a great job you're a better person than me. Govt's & their proxies just don't do that anymore. Sorry.
So, my suggestion is this. You guys have been hammered. Hard. Bloody hard. I get it. I'm helping to pay for that from Tauranga, and will be for while I'm sure. You guys will eventually get it back, but it may not be as fast as you would like or as much as you would like. It may not even be legal as you would like, but somewhere along this f......g hard journey you are leading us all through, you are going to have to suck it up & be a little more patient, because if you are to continue with this hard headed approach, then you may actually be the straw that brakes the camels back. That is, if this govt has to turn around & borrow another $20 billion dollars, then that's not flash for all of us, not just you folk in Christchurch As a nation it hurts, not just Christchurch. Get it?
In fact, how about this. On behalf of the rest of New Zealand, we would appreciate it if you Hard Heads in the city named after one of the most famous & generous people to have ever trodden this earth, would start to behave in the manner that a city by such a name, might behave. The Christ His Church are both eternally giving in & by their very nature.
Perhaps you might like to consider being thus towards each other & one another & you may find that other things might change for the better as well. Just a thought.
I thank you for reading this.

LJM, some points perhaps? But think about this as well. Firstly how much $$$$$$$$$$$$ was squandered by the employment of sub standard & highly inaccurate damage assessing and the the ensuing doubling up, even trebling and still going in some cases, through botched work that was allowed to ignore the building act and suchlike, that is there to protect all of us? Secondly, and almost worse I am afraid to say. In the face of the devastation of the city what priorities were given to restoration? For example why was it a first priority to redesign the one way system $30mill and rising. Ditto for Victoria Park. Why was a brand new commercial post EQ building knocked down just to stuff up Manchester St.Why was no priority given to basic services, sewer, clean reliable water supply. Just not sexy enough one supposes compared to cycle lanes for non existent cyclists and statues in the Avon and maps in the library.So that is the real hurt. Bare faced stupid squandering of the public purse in the face of immense and hard pressed adversity! Now Christchurch has a council with debt per household of around $25,000.00, compared to a national average of $6000.00. Bloody Doomsday if you ask me! People with brains are leaving.

Not only that Pharos. Christchurch household rates are now 65% greater than Auckland. A$2.67 mill in St Heliers pays $3900.00 annually. In Sumner Christchurch a $1.35 pays $8000.00 & a $2.8mill pays $14,600.00. The Council is stripping money out of ratepayers pockets to waste on grandiose unwanted & useless projects while basic services for citizens , roading, water, sewerage, the port hills are long grassed and full of noxious weeds again, have been disregarded. If it wasn’t true it would be a bloody funny comedy.

Your numbers on earthquake related debt are ridiculous. Christchurch was substantially insured, and the insurers including EQC were substantially re-insured. The extra costs born by the government and taxpayers may even be up into the billions of dollars, but certainly not into the tens of billions, as that was covered by insurance. Google may find you more accurate information.

AMI had to be funded by our Government because that same Government had given it a licence to sell insurance and then did not audit it correctly or enough to ensure the public who innocently purchased premiums were going to get paid in the event of an insured event. Our government is responsible. The Government has tried to blame the victims here, we are only people who paid an insurance company for a policy. We are entitled to get paid for the full cover, rebuild as new etc policies that we paid for. The solution in future is for the regulators to strongly investigate the equity held in trust by banks, insurance companies and other companies selling to the innocent public. Gambling by these sort of entities caused the global financial crisis and we all had to pay for that too. In Australia the Royal Commission into Banking has shown the banks and insurance companies are almost all up to no good.

Hi Pharos. Yes squandering is a trait governments do oh so well, no matter where in the world you are. That & the inability to prioritise has let Christchurch (& NZ) down badly. That's poor leadership essentially. In a country that has earthquakes happen every year somewhere, you'd think our crisis management skills would be a bit better. To Max Fish. Do your research. And it hasn't finished yet.

With respect I have a different take on the Government rationale here. My read is not that the Government is seeking to overturn Dodds, but rather may be taking a heaven sent opportunity to clarify and firm up the law here, or as the last paragraph above refers, that the 'tone of the judgment' would be more specifically laid down in law. Thus coupled with the Ross ruling this week having established opt-out as an allowable class of group action, is it possible that all policyholders who have been disserved by their insurer in Christchurch may soon be handed a formidable legal weapon in the potential for multiple group class actions on an opt-out basis and all now hanging on a clear statement from the Appellate Court that misleading conduct and contractual misrepresentation is wholly unlawful. Reading the more recent decisions there does seem a clear signal from the Courts that the insurer has had their day and their comeuppance is nigh. This challenge by the Government could bring on the final act. Also surely IAG has to be the real target here as these guys must have shortchanged policyholders north of $3B at least and, unlike Southern Response, have yet to come to the party.