News for buyers of earthquake damaged houses
This article was written by Emily Park.
Many purchasers of property in Christchurch since the September 2010 earthquake will have taken an assignment of the previous owner’s earthquake insurance claims and become “assignees” of those insurance claims.
The Court of Appeal’s recent decision in Xu v IAG New Zealand Limited has confirmed that, subject to particular policy wording, such purchasers are only entitled to indemnity value under the assigned insurance claims. Indemnity value compensates for loss. It is the market value of what was lost or damaged, at the time the loss or damage occurred. For an insured home, indemnity value is limited to the market value of the property at the time of the earthquake damage.
This decision means that assignees of earthquake insurance claims are not entitled to replacement benefits, such as the cost of restoring the home to an “as new” condition; a rebuild on the same or a different site or buying a replacement property. This is the case, even if the insurance policy in place when the property was damaged is a full replacement policy.
Read More – Xu v IAG New Zealand Limited case
The case was brought by Mr Xu, who had bought a property in Christchurch that had been badly damaged in the earthquakes. The property was purchased from Mr & Mrs B, who owned the property at the time of the earthquake and had it insured with IAG. Under the policy, if the home was damaged, the insured could choose to restore the home to its “as new” condition and IAG would meet the reinstatement costs. If the insured decided not to restore the home, IAG would only pay indemnity value.
The B’s had lodged a claim for earthquake damage with IAG and the property was assessed as a “rebuild”. The B’s decided not to rebuild the property, but to sell it to Mr Xu. On the sale, the B’s assigned their earthquake damage insurance claim to Mr Xu. Mr Xu wished to rebuild the property, but IAG denied that it was liable to pay Mr Xu reinstatement cost. IAG said that it was only liable to pay indemnity value as the B’s had chosen not to reinstate their home. Mr Xu brought a claim in the High Court in July 2017, which found in favour of IAG. Mr Xu appealed to the Court of Appeal.
IAG relied on a 1990 Court of Appeal decision, Bryant v Primary Industries Insurance Co Ltd. This case concerned the sale of a farm property that burnt down in the early hours of the day the property was to be sold at auction. The sale went ahead and the purchaser took an assignment of the rights the vendor had as the named insured under the insurance policy.
Similar to the IAG policy in Xu, the policy in Bryant provided that if the insured did not choose to reinstate the property, then the insurer was only liable to pay indemnity value. The Court in Bryant held that the rights to replacement benefits are personal to the original insured and could not be assigned. In selling the property, the insured had chosen not to reinstate the property. So at the time of the assignment, the insured had lost the right to the replacement benefits and only had the right to indemnity value. The purchaser could acquire no more rights than the insured had at the time of the assignment, namely, indemnity value only.
Counsel for Mr Xu argued that Bryant was bad law and should be over-ruled and that the High Court was wrong to interpret IAG’s policy as not extending replacement benefit cover to assignees.
Mr Xu’s case was that there was no justification for replacement benefits to be personal to the insured, and therefore not capable of assignment, as it made no difference to the insurer whether they paid the insured or the assignee to restore the home. As there was nothing in the IAG policy preventing assignment of a claim and given that the policy was sold direct to the public and used non-legal language, phrases such as “we will pay you” and “the amounts you can claim”, where “you” was defined as the B’s should be interpreted as “you or your assignee”.
Further, Mr Xu argued that, if assignees are not entitled to replacement benefits, the insured is effectively deprived of the replacement benefits through lower on-sale value, unless they restore their home themselves. This is particularly unfair in a widespread disaster, such as the Canterbury earthquakes, where it takes insurers many years to resolve the huge number of claims. In such circumstances, the insured may lose the full protection of their insurance policy, if they do not have the resources to reinstate their homes themselves or the resilience to continue living in their unrepaired home, while waiting for their claims to be resolved.
The Court of Appeal rejected Mr Xu’s arguments on both points. It was established law, the Court noted, that insurance policies are personal to the insured and cannot be assigned without the insurer’s consent. The Court explained the reasoning behind the established position being that insurers face the risk of fraudulent and inflated claims, this risk is known as “moral hazard”.
The Court reasoned that some people pose a greater moral hazard to insurers than others. Insurers need the opportunity to assess the character of potential insureds, so that they can determine the level of risk involved before agreeing to provide cover. As claims can be assigned without the insurer’s consent, insurers do not have the opportunity to assess the character of an assignee, who may pose a greater moral hazard to the insurer than the original insured. To protect the insurer from being exposed to more risk than it bargained for, all that can be assigned, without the insurer’s consent, is the right to payment of a sum equal to the insured’s actual loss.
In this case, as the B’s had not actually incurred the cost of rebuilding their home, they had no entitlement to rebuild costs from IAG. The B’s could not assign to Mr Xu greater rights than they, themselves, had, so could not assign to Mr Xu the right to recover rebuild costs from IAG. Crucially, the Court of Appeal did not accept that it was a matter of indifference to the insurer whether replacement benefits were paid to the insured or the assignee. Rather, they referred to the Supreme Court’s decision in Tower Insurance ltd v Skyward Aviation 2008 Ltd, as support for the view that the moral hazard to an insurer is higher in relation to claims for replacement benefits than for indemnity value claims.
In short, the Court of Appeal held that the Bryant decision was not wrong and there was no reason to over-rule it, particularly as the judgment had been established law for nearly 30 years. Further, the Court agreed with the High Court that nothing in the wording of IAG’s policy took it outside of the scope of Bryant.
What does the Court of Appeal’s decision in Xu mean for you?
The decision in Xu centred on the particular wording of the IAG insurance policy concerned. While many policies are written in similar terms, it may be that your policy can be interpreted in such a way that the decisions in Xu and Bryant do not apply to it. Further, not all insurers have adopted IAG’s position in relation to assignees (Southern Response, for example, has not done so to date) and this may continue despite the recent decision.
Finally, the Court of Appeal’s decision is not necessarily the end of the story. Mr Xu has appealed the decision to the Supreme Court – watch this space!