The Supreme Court in Xu v IAG New Zealand Ltd has ruled by a 3:2 majority that, under an IAG house insurance policy, homeowners cannot assign their right to reinstate to a subsequent purchaser of the house. Homeowners must undertake the reinstatement themselves, and if they do not, the right to claim the cost of reinstatement under the insurance policy is lost.
The case concerned a house owned by the Barlows, which was damaged in the Canterbury earthquakes. The house was insured under a replacement policy underwritten by IAG, which provided for both indemnity and reinstatement cover. There was no dispute that the Barlows could assign their right to claim indemnity value under the policy to a subsequent purchaser.
The dispute instead related to reinstatement cover. The policy provided that:
If, following loss or damage, you restore your Home, we will pay the cost of restoring it...
The Barlows lodged a claim with IAG, but subsequently sold their house and assigned their insurance policy without undertaking any reinstatement. The subsequent purchasers claimed that they were entitled to claim from IAG the cost of reinstating the house to address the earthquake damage.
IAG rejected the claim, saying that the purchasers were only entitled to an indemnity payment. IAG's position was consistent with an earlier decision of the Court of Appeal, Bryant v Primary Industries Insurance Co Ltd, in which Justice Cooke ruled that the right to reinstate is personal and cannot be assigned to a subsequent purchaser.
The purchasers' claim failed in the High Court and Court of Appeal, and also failed in the Supreme Court, but by a close 3:2 majority decision.
Insurance and assignment
Generally, insurance cover is not assignable without the insurer's consent. This is because an insurer would otherwise be required to provide cover to a purchaser it might not have been prepared to cover. An accrued right to payment under a policy can, however, be assigned (absent a clause to the contrary).
As the right to indemnity accrued when the house suffered damage, it was agreed that this right could be assigned to the subsequent purchasers.
At issue, however, was whether the right to reinstate had accrued before the policy was assigned and whether the right to reinstate is sufficiently personal that it could not be assigned.
Majority: Reinstatement is not assignable
The majority (Justices William Young, O'Regan and Ellen France) ruled that the right to reinstate is not assignable. They said that Bryant is the leading decision in New Zealand, and that it has shaped insurance practice for decades. As a result, they said it would be “very destabilising" to overrule that case.
The majority also said that the policy only gave rise to an entitlement where “you" restore the house, and that “you" in that context is a reference to the insured (the Barlows) rather than an assignee (the subsequent purchasers). As a result, only the Barlows could reinstate under the policy, and their ability to do so was lost once they sold the house and assigned the policy.
That said, the majority accepted that if the policy had not specifically required reinstatement by the insured, the appeal would have been allowed. Accordingly, policies offered by other insurers will need to be reviewed closely to assess whether the reasoning in Xu also applies to those policies.
The majority also relied on moral hazard concerns in reaching their conclusion. They pointed to the potential for deception and fraud during the claims process for reinstatement, and ruled that it is reasonable for insurers to insist that the person with whom they contracted is also the person who must undertake the reinstatement.
Minority: Reinstatement is assignable
The minority (Justices Glazebrook and Arnold) considered that the right to reinstate accrues at the time of damage, with the reinstatement process itself merely quantifying the amount payable. As this right is an accrued benefit at the time of reinstatement, the minority considered it could be assigned even if it arose under a contract that is personal to the insured.
The minority also considered whether reinstatement was so obviously personal in character that the parties must have intended that it could be discharged only by the Barlows. The minority said that in their view, this was not the case.
Accordingly, the minority would have overruled Bryant on the basis that if an indemnity claim under a policy is assignable, then a replacement claim should be assignable too.
Insurers will be pleased with the majority's decision, which confirms the long understood legal position as set out in Bryant that a right to reinstate is personal and cannot be assigned without the insurer's consent.
It will be important for purchasers buying houses with outstanding claims to carefully consider their rights under the existing homeowner's policy, and in particular whether (in the absence of consent by the insurer) reinstatement by the existing homeowner is required for a reinstatement claim.
Finally, the decision turned on the particular wording of the policy at play. The majority had regard to alternative formulations in the United States that were similar but that produced the opposite result. Indeed, the majority effectively said that if the word “you" was removed from the clause at issue, they would have allowed the appeal. Accordingly, it will be important to closely review the particular policy wording at issue in each case.
If you need any further information on matters covered in this update, please get in touch with the contacts listed or your usual Bell Gully advisor .