The High Court has recently confirmed that purchasers of an earthquake damaged house who took an assignment of the vendor's insurance claim can only claim the indemnity value from the insurer. The purchasers are not able to claim for the costs they may incur in repairing or rebuilding the damaged property.
It is common for residential properties damaged by the Canterbury earthquakes to be sold in their damaged ('as is where is') condition. Frequently, the vendor will agree to pass on (ie assign) to the new owners the vendor's claim under their insurance policy for the earthquake damage. These transactions often occur without insurers' consent.
Most home insurance policies contain terms that allow the insured homeowner to claim 'full reinstatement costs' in the event of damage ie the cost of repairing or rebuilding the house to the condition it was in when new. However, to claim these costs, the insured homeowner has to actually have the repair or rebuild work done, rather than simply getting a cash settlement. If the insured does not repair or rebuild the house, typically the policy will only allow the insured homeowner to claim their loss on an 'indemnity value' basis - usually a much lower sum than the cost to repair/rebuild.
Bryant v Primary Industries
Nearly 30 years ago, the Court of Appeal decision in Bryant v Primary Industries established that new owners who are assigned a vendor's insurance claim can claim for indemnity value but are not entitled to full reinstatement costs.
The rationale is that the right to claim reinstatement costs is personal to the named insured (ie the vendor). It is only the vendor who can trigger the right to claim reinstatement costs by repairing or rebuilding the house. If the vendor sells the house, the vendor no longer has any ability to trigger that right by repairing or rebuilding. The result is that the new owner is limited to a claim based on the indemnity value.
New High Court decision
This long established principle was recently tested in Xu and Diamantina Trust v IAG & EQC. In this case, new owners purchased an earthquake damaged property 'as is where is' for $217,000, took an assignment of the vendor's insurance claim, and sought full reinstatement costs from the insurer of $584,000.
The new owners accepted that the Court was bound by the Bryant decision, but argued that their case could be distinguished. This was on the basis that the IAG insurance policy contained a condition that specifically dealt with insurance for purchasers of properties:
Insurance during sale and purchase
2. 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 but to get this benefit the purchaser must
a. Comply with all the Conditions of the Policy, and
b. Claim under any other insurance that has been arranged before claiming under this Policy
The new owners argued that where a contract of sale and purchase had been entered into, this clause entitled the new owners to the full benefit of the vendor's home insurance, including the full reinstatement costs, even if the damage to the property had occurred before the contract of sale and purchase.
The High Court rejected this argument, and agreed with IAG that this clause should be interpreted so that the new owners could only claim for calamities that occurred between the date of the sale and purchase agreement and the date of settlement, so as to mirror insurers' obligations under section 13 of the Insurance Law Reform Act 1985.
The High Court also confirmed that in all other material respects, the circumstances were the same as in Bryant, and that it was bound by that decision. The decision recorded that the right to recover full reinstatement costs was personal to the named insured (ie the vendor).
The decision in Bryant is still good law. The new owners are prevented from recovering full reinstatement costs from IAG and are only entitled to indemnity value.
An appeal is likely. The Court of Appeal will determine whether the 1990s decision of Bryant should be upheld.