Xu v IAG Assignment of Reinstatement Rights

The entitlement to replacement benefits is conditional on reinstatement by the insured and cannot be assigned.

The Barlows owned a property in Christchurch which was damaged by the 4 September 2010 and 22 February 2011 earthquakes.  They made a claim with the insurer IAG.  In 2014 they sold the property and assigned their rights under the policy to Xu.

There was no issue that the indemnity payment under the policy was assignable.  The question was whether the replacement benefit was assignable.

The High Court and Court of Appeal both followed the outcome in Bryant.¹ Key findings in Bryant were:

• Assignability of the right to the replacement benefit would infringe the indemnity principle.
• The entitlement to reinstate and be reimbursed for the cost was personal to the insured.

The Supreme Court dismissed the appeal in a majority decision (3:2).  The majority referred to general insurance principles concerning assignment as follows:

• An entitlement to cover under an insurance policy in respect of future events is generally not assignable without the consent of the insurer. Underpinning this notion is the ability of an insurer to evaluate the moral hazard of a particular insured when assessing the likelihood of loss at the time of contract.
• In the absence of express words to the contrary in the policy an accrued right to payment under a policy can be assigned.
• Only the benefits and not the burden of a contract can be assigned.

The majority found that the entitlement to replacement benefits is conditional on reinstatement by the insured.  It supported that conclusion by reference to the moral hazard associated with replacement insurance.  It also found that Bryant had been influential as to the terms on which insurers offered replacement insurance for three decades and it would be very destabilising to overrule it.

Finally, the majority rejected the appellant’s argument regarding condition 2. At face value the wording of condition 2 did support the appellant’s argument.  It said:

Where a contract of sale and purchase of your Home has been entered into the purchaser shall be entitled to the benefit of this Section.

The Court examined the background to the inclusion of that condition, in particular the enactment of s 13 of the Insurance Law Reform Act 1985.  It also referred to the heading to that condition which read  “insurance during sale and purchase”.  It found that this clause was intended only to operate for events occurring prior to settlement and did not apply to events which occurred some years after the policy had expired.

The minority started by pointing out that IAG would have to pay nothing if its obligations were limited to indemnity value as the loss would be covered by the EQC cap. They found that the replacement benefit had accrued at the time of the assignment and that the incurring of replacement costs merely quantified IAG’s payment obligations.  They found that an accrued benefit can be assigned, even in personal contracts.  The minority reasoned that as the replacement benefit had accrued, it was the same as the indemnity value which no-one questioned was assignable.

The minority reasoning that the replacement benefit had accrued and was therefore the same as the indemnity value is questionable.  The indemnity value measures the loss which had accrued at the time of the assignment.  Although the insured had a right to the replacement value at that time of assignment that was conditional on reinstatement work being undertaken and costs being incurred.

Both the majority and the minority referred to the risk that insurers may seek to sit out claimants who are time constrained, forcing them to sell on an “as is/where is” basis and therefore forego the reinstatement benefit.  In our experience, insurers have not adopted such tactics.  Should they do so, the Court would no doubt find the insurers in breach of obligations sounding in damages to measure the lost reinstatement benefit.

Finally, the Court’s approach to condition 2 was encouraging for insurers.  It looked at the plain meaning of the words.  But when examined in light of the background and full context, it was apparent that the meaning advanced by the appellants was not correct.

1. Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA)