Prattley Enterprises Limited v Vero Insurance New Zealand Limited

This dispute came out of the Christchurch earthquakes and a commercial building insurance claim. Prattley owned Worcester Towers in central Christchurch and used it mainly as an income-producing property. The building was insured with Vero under a material damage policy with earthquake cover, but the policy was written on an indemnity basis rather than a reinstatement basis.

After three relevant earthquakes in 2010 and 2011, the building was badly affected, then red-stickered, then ordered to be demolished. The parties eventually settled the insurance claim for $1,050,000 plus GST under a broad full and final settlement. Later, Prattley argued that both sides had misunderstood the policy and that, properly interpreted, it should have been entitled to much more.

Prattley said the settlement should be set aside under the Contractual Mistakes Act 1977 because both parties had entered it under the same mistake about the correct measure of indemnity. Its position was that the policy should have responded by reference to repair costs for the first two earthquakes and reinstatement costs for the third, each subject to the policy limit.

That argument mattered because it would have transformed the claim. Prattley said it could recover $178,000 for the first earthquake, $1,605,000 for the second because repair costs exceeded the cap, and another $1,605,000 for the third based on reinstatement costs after demolition. On that approach, the total claimed entitlement became $3,388,000, far above the settlement amount.

The core legal issue was whether the settlement could be undone because both parties were said to have misunderstood the policy. To succeed, Prattley needed to show a qualifying common mistake and that the mistake produced a substantially unequal exchange of values. That required the Court to decide what the policy actually promised.

The real fight was over the measure of indemnity. Did the policy pay the cost of repair or reinstatement up to the sum insured, without deductions for betterment or depreciation, and with a fresh cap for each earthquake event? Or was it a standard indemnity policy that only covered actual economic loss, with the sum insured operating as a ceiling rather than an automatic payout?

The Supreme Court dismissed the appeal. It held there was no common mistake of the kind Prattley alleged and that the settlement was actually favourable to Prattley. The Court treated the policy as a conventional indemnity policy. In that setting, the insurer’s obligation was to make good the insured’s actual economic loss, but not to leave the insured better off than before.

The Court rejected the idea that the words allowing indemnity by payment or, at the insurer’s option, by repair or replacement meant every cash payment had to be calculated by repair or reinstatement cost. It said that wording is standard in indemnity policies and does not convert them into reinstatement cover. The Court also said allowances for betterment or depreciation are part of the indemnity principle and do not need to be expressly written into the policy.

The Court was not persuaded by Prattley’s reliance on the policy’s Special Notes. Read in context, those notes limited how repair or reinstatement would be carried out if that happened. They did not change the policy into one that guaranteed reinstatement-style recovery where the building was not going to be repaired or rebuilt.

Prattley also argued that each earthquake should be treated as a separate event, with the policy cap effectively resetting after each one. It relied on wording that each loss or series of losses arising out of one event would be adjusted separately, and on earlier earthquake insurance case law.

The Supreme Court did not accept that this produced the larger cumulative payout Prattley wanted. The Court explained that even where successive losses can be considered separately, an indemnity policy still cannot be read to let the insured recover more than the actual value of what was lost. The policy insured the building’s indemnity value, not an open-ended right to stack repair and reinstatement figures across multiple events.

The Court distinguished the earlier Ridgecrest decision because that case involved unusual reinstatement-based insurance arrangements with a resetting liability cap. Here, by contrast, the policy was indemnity cover. That difference was decisive. The reset-cap logic from a reinstatement case could not be transplanted into this policy to create a payout beyond actual loss.

This case is most useful if your business owns premises, leases out commercial property, or carries material damage and earthquake insurance. The practical point is not that every claim will be valued by market value. The point is that the measure of loss depends on the policy wording, the nature of the property, and what is actually happening after the damage.

If a building is going to be repaired or replaced, repair or reinstatement costs may be highly relevant. But if the property is destroyed and not being rebuilt, especially where it is an investment property, market value may be the more obvious measure of indemnity. The Court also made clear that indemnity cover does not usually operate on a new-for-old basis unless the policy clearly says so.

Another business lesson is settlement discipline. Prattley had legal advice before settling. The settlement wording was broad. Once signed, it was difficult to revisit. If there is uncertainty about valuation method, code compliance costs, event-by-event treatment, or whether a special note changes the cover, those issues should be tested before the settlement deed is executed.

If your business is buying or renewing property insurance, use this case as a checklist for the questions to ask early. Many disputes start because the insured assumes the policy will fund rebuilding, while the insurer treats it as indemnity-only cover. That gap often appears only after a major loss, when it is expensive to fix.

If you are already in a claim, keep valuation instructions and assumptions clear. In Prattley, valuation assumptions became important to the Court’s view that the settlement was favourable to the insured. Hidden or optimistic assumptions can distort negotiations and create later disputes.