Rights of assignees of rights in respect of earthquake claims - Xu
The Supreme Court Decision in Xu has finally been released. The majority have dismissed the appeal. This means that Xu was unsuccessful in arguing that, as an assignee of rights in respect of an earthquake claim, he was entitled to the replacement benefit as opposed to indemnity.
The appeal was decided by a majority of three Judges, with two Judges dissenting (ie the two minority Judges came to a different conclusion). The majority upheld the Court of Appeal decision in Bryant v Primary Industries Insurance Co. Limited.
At the time of the earthquakes, an insurance policy was held by Natalie Hall-Barlow and Matthew Barlow. The Barlows claimed under their policy but, about three years later, with their claim still unresolved, they transferred the property to a company under their control, which then, several months later, sold the house to the appellant, Ruiren Xu and Diamantina Trust Limited (collectively referred to as “Xu” from now on). As part of that transaction, the Barlows assigned to Xu their rights in respect of their claim under the IAG policy.
It was agreed as common ground that as at the date of the assignment to the purchasers, the Barlows had not restored, and did not intend to restore their home, and had not incurred, and would not incur, any actual costs of reinstatement of their home. The fact that the Barlows had transferred their property to a company under their control was ignored for the purposes of the appeal.
The policy with IAG stated:
“1. If, following loss or damage, you
(a) restore your Home, we will pay the cost of restoring it to a condition as nearly as possible equal to its condition when new using current materials and method plus any extra costs that are necessary for the restoration, to meet with the lawful requirements of Government or Local Bodies.
(b) do not restore your Home, we will pay the lesser of:
(i) the amount of the loss or damage; or
(ii) estimated cost of restoring your Home as nearly as possible to the same condition it was in immediately before the loss or damage happened using current materials and methods.”
While it was accepted that the assignment to Xu was effective to transfer to him the Barlows’ entitlement to an indemnity payment under clause 1(b), Xu also claimed to be entitled to the replacement costs under clause 1(a), if he restored the house. This was not accepted by IAG.
The primary issue in the Supreme Court appeal was whether the right under clause 1(a) can be assigned so it entitles the assignee to reinstate and be reimbursed for the full amount of the cost of reinstatement of the house to an as new condition.
The difference between having the right to the replacement benefit (which is a right to actual costs on a new for old basis where the insured has reinstated the property), and an indemnity payment for economic loss suffered (which is usually the lesser of the diminution value of the insured property and the cost of restoring it to its pre-event condition (i.e. old for old)), is often significant.
IAG relied on the decision of the Court of Appeal nearly 30 years ago of Bryant v Primary Industries Insurance Co. Limited, in which the Court of Appeal held that the entitlement to replacement benefits were conditional on reinstatement by the insured, cannot be assigned if that reinstatement has not occurred.
The majority stated that it was clear that in the absence of express words to the contrary in the policy, an accrued right to payment under a policy can be assigned. Therefore it is well established that this extends to the right to payments calculated on an indemnity basis, as such rights are in the nature of an existing debt (as they arose at the date of the event). Therefore, on that basis IAG accepted that the rights under clause 1(b) were vested in Xu. It was also accepted that if the Barlows had restored the house, they could have assigned what would have been their accrued right to payment for that restoration under clause 1(a).
One of the issues considered by the majority in the Supreme Court was the importance of the personal aspect of the relationship between the insurer and the insured, and therefore the greater scope for fraudulent claims in the event that a claim is assigned to an assignee that the insurer has not agreed to contract with (ie a moral hazard).
Another issue that was important was the actual wording of the policy. The majority gave an example of what they called non-standard replacement insurance policies, where the insuring clause is written in such a way that it refers to “Your Home” being restored, as opposed to “You” restoring your home. The majority said that if the policy wording was construed in that same way in this case, they would have had no problems in allowing the appeal. However, the policy in question referred to “You” restoring your Home.
The majority recognised that there were policy considerations which supported Xu’s argument. One of those arguments was that if replacement benefits are lost on the sale of the insured property, insurers may seek to sit out claimants who are time constrained and/or lack the money to reinstate first and sue later. This of course was exacerbated in the Canterbury earthquakes where there were hundreds of thousands of claims, and therefore the time taken to deal with those claims was longer. Therefore the conclusion that the entitlement to reinstate and being reimbursed is assignable, would produce better results from the point of view of claimants, and might also promote speedier resolutions of claims by insurers.
However, the majority concluded that in this case the entitlement to replacement benefits is conditional upon reinstatement having been effected by the Barlows, and therefore it was not an already accrued right which could be assigned to Xu. Their view was that the entitlement to replacement benefits is conditional on reinstatement by the insured. Given the moral hazard associated with replacement insurance cover, insistence by insurers on reinstatement by the insured they considered was at least rational.
The majority therefore held that Bryant is still correct to the extent that it stands for the proposition that the entitlement to replacement benefits conditional upon reinstatement by the insured cannot be assigned when no reinstatement has occurred. They considered that Bryant is a leading decision on the point and must have been influential as to the terms on which insurers have offered replacement insurance in New Zealand over the last three decades, so it would be very destabilising to, in effect, overrule it, a consideration which they saw as being of paramount significance. They noted that some insurers are now offering policies under which recovery of the replacement benefit is not legally dependent on personal reinstatement by the insurer.
In contrast, the dissenting minority considered that from the time when the house was damaged in the 2010 and 2011 earthquakes, the Barlows had a right to replacement benefit, albeit one that was conditional on reinstatement, and they considered that this was an accrued benefit. They therefore reached the conclusion that the policy did not require that reinstatement be effected by the Barlows.
Therefore, where a purchaser has been assigned the benefits of a claim and the insurance policy in question has similar wording to the Xu case, if the vendor (the insured) has not undertaken reinstatement, the assignee will be only entitled to indemnity costs, not the replacement benefits under the policy.
The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstances.
About Melissa Borcoski
Melissa is head of our Litigation Team and specialises in commercial and civil litigation. She has specialist expertise in insurance law having acted for both insurers and policyholders throughout her career.
About Tyler Brown
Tyler is a Senior Associate in our Litigation Team, focusing on commercial and civil litigation matters. He also has specialist knowledge in insurance law and has significant experience in dealing with insurance claims arising out of the Christchurch earthquakes.