In a judgment delivered on 3 July 2019, the Supreme Court affirmed the decisions of the High Court and Court of Appeal that purchasers of an earthquake damaged house who took an assignment of the vendor's insurance claim cannot claim the reinstatement benefit, which is personal to the insured under the policy.
DLA Piper acted on this industry test case on behalf of the successful party, IAG New Zealand Ltd. The Supreme Court decision will enable insurers and homeowners to resolve a significant number of residential earthquake insurance claims, including many proceedings which have been adjourned awaiting this decision.
A number of earthquake-damaged properties in Canterbury have been sold in an "as is, where is" condition - with the damage unrepaired and the vendor having lodged claims under their insurance policy. Often the agreements for sale and purchase require the vendor to assign these claims to the purchaser. The question for the Supreme Court was whether the assignee is entitled to claim the cost of reinstating the property under the vendor's policy, or only the loss based on indemnity value.
This issue had previously been considered by the Court of Appeal in Bryant v Primary Industries Co Ltd1. In Bryant the Court held that the right to recover full reinstatement costs was personal to the original insured and could not be assigned without the insurer's consent.
In this case, the new owners/assignees purchased the property for $217,000, took an assignment of the insurance claim, and sought full reinstatement costs of $584,000.
The crucial clause of the policy read:
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 methods 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.
High Court and Court of Appeal
The High Court considered itself bound by the decision in Bryant and concluded that the new owners were not entitled to the full reinstatement costs2.
The Court of Appeal affirmed the High Court decision and agreed with IAG's submission that the extent of the rights assignable to the new owners can only be as great as the insured/assignor's actual loss covered by the policy as at the date of the assignment3. If the insured/assignor has not suffered the loss of incurring the cost of reinstating the property, there can be no right to payment of reinstatement costs under the policy. Instead, the only right that can be assigned is the insured/vendor's accrued right to claim the indemnity value.
A majority of the Court, comprising Justices William Young, O'Regan and Ellen France, affirmed the decisions of the courts below. Justices Glazebrook and Arnold dissented.
The majority held that under the policy, payment of the reinstatement benefit is conditional on reinstatement being effected by the named insured. On a proper interpretation of the policy, entitlement to the benefit can only accrue upon the condition being fulfilled by the insured named in the policy, not by some other party. If as in this case the insured never incurred the reinstatement cost, the insured never had an accrued right to receive payment of the reinstatement costs and so could not assign that right to a purchaser.
The majority emphasised that Bryant had been the leading case on this issue for the past three decades and formed the basis on which insurers offered replacement cover in New Zealand. To overrule it would have a destabilising effect.
This case will have wide-ranging implications for property owners and purchasers of damaged properties. It is the final word on the assignability of claims for full reinstatement costs. The Supreme Court affirmed the personal nature of insurance contracts, emphasising the importance of moral hazard for insurers in deciding to offer terms to specific insureds.