The Supreme Court has released its highly anticipated judgment in Xu & Anor v IAG  NZSC 68. This case centred on the assignment of insurance claims, in particular, the right to receive full replacement value (reinstatement) under an assigned policy.
In a 3:2 split decision the Supreme Court ruled against the homeowner, upholding the longstanding principle that an insured’s entitlement to reinstatement value is not assignable without the insurer’s consent.
This judgement will be felt particularly in post-earthquake Canterbury where many homeowners are still dealing with their insurers, over eight years on from the earthquakes.
The Barlows owned a property that was damaged in the Canterbury earthquakes. Under their policy the Barlows were entitled to:
(i) be paid the cost of repairing their home to the same condition as when new, if they reinstated the property; or
(ii) If they did not reinstate their home, the lesser of the indemnity value or the estimated cost of restoring their home to its pre-loss condition.
The Barlows made a claim, but sold the property three years later without resolving their claim. As part of the sale process the Barlows assigned any rights in respect of their claim under the policy.
The new owner sued IAG claiming they were entitled to the reinstatement value under option (i) above. IAG rejected this, saying that the right to reinstatement was personal to the insured at the time of the earthquakes. As the Barlows had not reinstated the home and had no intention of ever doing so, the right to reinstatement had not accrued and was therefore not assignable without IAG’s consent.
IAG argued the new owner was only entitled to the indemnity value under option (ii) because the right to indemnity accrued when the damage occurred and was therefore assignable. An accrued right to payment under a policy can be assigned if there is no clause in the policy to the contrary.
It goes without saying that the monetary difference between the two options is substantial.
The High Court, Court of Appeal and Supreme Court all agreed with IAG. The Supreme Court held by a majority of 3:2 that, under the policy, the right to replacement value was conditional on reinstatement by the insured and therefore could not be assigned without the insurer’s consent. In doing so the Supreme Court confirmed, at least until the law is changed or there is another Supreme Court decision, that the right to reinstatement cannot be assigned.
The primary reason underpinning the Supreme Court’s decision is the ‘moral hazard’ associated with replacement insurance. One of the key principles of insurance law is that an insured is entitled to receive a full indemnity for his or her loss, no more and no less. A replacement insurance policy does not fit easily with this principle because the property may be worth more reinstated than in its original state.
If an assignment of this benefit was permitted, the insurer would be required to provide cover to a purchaser it knows nothing about and might not have been prepared to insure in the first place. The Court noted that given this moral hazard, “insistence by insurers on reinstatement by the insured is at least rational.”
The Court also mentioned that the insurance industry had been operating on the basis that the right to reinstatement is not assignable.
Insurers will be pleased with this decision, which affirms the long standing principle of assignment. It confirms that a purchaser of an “as is where is” property cannot claim the full reinstatement value that the original insured was entitled to.
This decision will also affect properties that have defective EQC repairs. If a purchaser purchases a property thinking that the repairs have been done properly only to discover later the cost of the damage exceeds the EQC cap, they will be left in the same position as the new owner in this case. The right to reinstatement cannot accrue because the insured at the time of the earthquake cannot reinstate the property themselves (having sold it).
It is important for any prospective purchaser of a home in Canterbury to do their due diligence. Even if repair work has been done, purchasers should still consider getting an independent building report to ensure they don’t end up out of pocket. If there are any outstanding claims on the property purchasers should consider the wording of the Vendor’s insurance policy very carefully before signing any Agreement for Sale and Purchase.
If you are thinking of purchasing a home and you have concerns regarding the repairs or the EQC claim, please do not hesitate to contact Chris Egden, Associate
(DDI 03 343 8584 / firstname.lastname@example.org).
By Joshua Hitchcock, Solicitor (DDI 03 343 8588 / email@example.com)