The Supreme Court overturns the Court of Appeal on fire service levies: Are you paying the right amount?

By David Friar*

For many years, the insurance industry has proceeded on the basis that fire service levies are calculated only on fire indemnity sums insured. No levies are payable on cover for any excess over indemnity value.

However, in a decision released this week, the Supreme Court has overruled the High Court and Court of Appeal, and said that levies must be calculated on the actual indemnity value of the insured property (or, if lower, on both the indemnity and excess of indemnity sums insured).¹

The Fire Service Commission has acknowledged that it will not apply the Supreme Court’s decision retrospectively. However, all new fire policies that are entered into should be reviewed to ensure levies are being paid in accordance with the Court’s decision.

What was the case about?

The Court considered an example policy in which the actual indemnity value of the insured property was $600 million. Under the policy, the indemnity sum insured was $300 million and excess of indemnity cover was $400 million. The issue was whether fire service levies were payable on the $300 million indemnity sum, or on the $600 million indemnity value.

This turned on the interpretation of section 48(6)(c) and section 48(7) of the Fire Service Act. In very brief summary:

• Section 48(6)(c) applies if a contract of fire insurance provides for a claim to be settled on a more favourable basis than the indemnity value of the insured property. If so, the levy is calculated on the indemnity value. If not, the levy is calculated on the sum insured.

• Section 48(7) says that no levy is payable in relation to a contract of fire insurance (or part of a contract) that is limited to an excess over the indemnity value of the property.

What did the Court rule?

The Supreme Court ruled that the example policy provided for a claim to be settled on a more favourable basis than the indemnity value of the insured property. This was because the indemnity value was $600 million, and the amount for which a claim could be settled under the policy is $700 million ($300 million indemnity sum insured plus $400 million excess of indemnity). As a result, the levy is calculated on the indemnity value of $600 million, and not the indemnity sum of $300 million.

What about section 48(7)? It provides that no levy is payable on excess of indemnity cover. It was argued that this means that the $400 million excess of indemnity cover cannot be taken into account in calculating the levy payable.

The Supreme Court accepted that its interpretation of the two sections made section 48(7) redundant. However, it considered that there would be a redundancy on any interpretation. Further, it said that s 48(6) should take precedence over s 48(7). The Court relied on a policy argument based “the universality of the service provided by the Commission”. It concluded from this universal service that section 48 should be “interpreted in a manner that enhances the universality of the levy”. The Court adopted this principle of “universality”, even though people who underinsure pay a reduced levy and people who do not insure pay no levy – but both still get the same universal service.

The Supreme Court also considered Justice Cooke’s comments in the AMP case in 1983 that no levy is payable on the excess of indemnity part of a policy. Insurers and brokers had relied on this, and the cases that followed it, to structure fire insurance policies. The Supreme Court said that, to the extent that the case supported the industry’s position, Justice Cooke’s comments were obiter (that is, not necessary to reach the conclusion in that case), and that in any event his comments were not binding on the Supreme Court.

What if the sums insured are less than the indemnity value?

The Court said that if the combined sum or sums incurred (including the excess of indemnity sum insured) do not exceed indemnity value, the levy is calculated on the basis of the combined sum or sums insured, and not on the basis of indemnity value.

What about composite policies?

The Court also considered the New Zealand Port Collective composite policy, in which eight port companies had joined together to insure their assets. The policy provided for a $250 million indemnity sum and a further $250 million excess of indemnity cover. The Commission argued that this policy consisted of eight separate contracts, and that as a result, the levy could be assessed eight times rather than once.

The Court considered a number of cases in which courts in England and Australia had ruled that you cannot scissor up an insurance policy into multiple separate contracts if there are joint obligations. However, it did not apply the cases here, ruling that they turned on their own facts – “the analysis of each of the cases cited to us reflects the context in which the case was decided and reflects the justice of the situation before the court and what the court perceived as best representing the commercial outcome”.

The Court concluded that the New Zealand Port Collective composite policy consisted of eight contracts rather than one, and that as a result, the levy needed to be assessed eight times, for each port company.

What is the effect of the decision?

The Commission has confirmed that it will not apply the Supreme Court’s ruling retrospectively. The Supreme Court recorded the Commission’s acknowledgement that “it will not seek to apply payment of levies for policies entered into before any decision that is favourable to it. It will treat any decision as prospective”.

However, for all new policies that are entered into, insurers, brokers and insureds should carefully review the structure of the policies to ensure that levies are being paid in accordance with the Court’s decision.

¹New Zealand Fire Service Commission v Insurance Brokers Association of NZ Inc [2015] NZSC 59.

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*David Friar is a partner at Bell Gully.
Bell Gully acted for the Insurance Brokers Association of NZ Inc and Vero Insurance New Zealand Ltd in the appeal.