A majority of the Supreme Court has ruled that it is not possible to assign replacement benefits in an insurance policy: Xu v IAG New Zealand Limited [2019] NZSC 68 (3 July 2019). In the view of your humble correspondent, the minority view is to be preferred. The case presents an opportunity to review some of the underlying principles. This review is useful because these ideas may resurface if a later Court picks up the minority opinion. You can read a summary of the case prepared by the Court/ its staff here. In this article, editorial views are put forward.The principal issue in Xu was whether the entitlement to replacement was capable of being assigned where the customer, as assignor, had not incurred the cost of replacement at the time of the assignment. The assignment occurred at the time of a sale and purchase of the property between the assignor and assignee.The subject was considered in Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA) which held that a right to replacement benefits was conditional on the insured incurring the cost of repair could not be assigned where the insured party has not incurred that cost.Under an classical insurance policy the insurer indemnifies the insured in respect of the loss or damage. The insured is put in the position it would have been in if the loss or damage had not occurred. Where property is involved, generally, this form of cover requires the insurer to indemnify the insured for the indemnity value of the property. Often that will be less than the cost of purchasing the property new at the time of the loss.Commentators have said previously, as has your humble correspondent, that replacement type insurance is a different beast altogether. In the event of an accepted claim, it represents a boon to the customer, who receives something new for something old. If this involves a one-hundred year old mansion being rebuilt as-new then the difference is significant by an order of magnitude. A premium of $600 may result in building costs in the millions.This is not betterment because betterment by its nature is not covered. Betterment is an uplift on an indemnity where doing what is necessary under the policy necessarily results in an increase of value of the property. It sits to the account of the insured.By contrast, replacement as-new may involve the insured receiving from the insurer something significantly more valuable than it otherwise would have obtained under a traditional indemnity policy. It is not an indemnity at all. From the insurer's point of view, it is closer to a gamble. In individual cases the insurer writes the risk without having specific information about the total replacement costs for a building if it is destroyed. (The market value is not a point of reference.) Put differently, the amount required for replacement is not solely an incident of the loss. It is the function of a contractual commitment to be liable for certain costs, whatever they happen to be, if a certain thing happens and other criteria are met.There is a principle of insurance law that an insurance policy is not capable of being assigned by the insured without the consent of the insurer. The reason for this rule is that an insurance policy is personal to the insured. The insurer has had the opportunity to assess the risk of the individual being insured. It cannot make this assessment of the new person who takes its interest under an assignment. That person might have a bad claims history. It might be a customer the insured does not wish to deal with. (Insurers may transfer policies to other insurers under a legislative scheme which required Court approval.)So much for insurance law principles. Then there are the classical laws of property, including rules of law regulating assignments. A chose in action may be assigned. On the face of it, a claim under an insurance policy--certainly an outstanding claim for an indemnity only--is a chose in action, like a debt. It is a thing capable of being assigned, as a matter of law.How then to treat an assignment of a replacement type policy? This question draws together rules of insurance law and rules of property law. It is also useful to understand the economics of the situation.Until the time of the Canterbury earthquakes, competition in the retail insurance sector led to insurers offering unlimited replacement cover for property. This risk was passed on to reinsurers. Insurers made money on the margin between the reinsurance premium and the premium charged to the customer, less their costs. These margins have always been, and remain, tight.Since the time of the earthquakes, market practices in New Zealand have changed. Generally, cover of this nature is not offered. This change is linked to the cost of reinsurance. The cost of reinsurance for full replacement cover means that the insurer could not make an adequate margin. This means they could not operate prudentially: they would not have enough premium income to pay claims and make a surplus.So, opposition by insurers to moving away from the Bryant approach is understandable. There will also be a more immediate issue about a cohort of similarly affected people wishing to advance assigned claims on the same basis. Even if there are only about one hundred claimants, complete replacement in every case could presumably add up to tens of millions across the sector.The present case will not have been one that invoked a great deal of sympathy for the claimant. The Courts will have proceeded on the reasonable assumption that the claimant-purchaser-assignee received legal advice on the possibility that he would not receive the replacement benefit he received under the assignment, on the basis of Bryant. Presumably the claimant was not counting on a change of law by an appellate Court.Replacement is often expressed in the insurance policy to be dependent on the customer having already paid for the reinstatement. In reality, this is generally not what happens because almost no one has sufficient surplus funds to pay for those works and then wait to be reimbursed. The actual concept in play is a little different. This requirement represents a commitment to pay for replacement works that are planned and then implemented. Generally, that process is coordinated by the insurer and its representatives. This way, it is in control of the cost. All of this is subject to the specific terms of the insurance policy.These are reasons to read down this requirement. This kind of reading-down occurs where a provision in an insurance policy conflict with its basic purpose. I say that this occurs because an insurance contract is not an ordinary commercial agreement, it is one that is intended to effect the transfer of a particular risk.For example, Courts have read down a requirement on an insured to take reasonable care and stipulations about "alteration of the risk" during the currency of the policy. You cannot agree to deliver 10 widgets and then say you have a discretion to deliver 8. The Court will require you to deliver 10. So, you cannot insure someone against their own negligence and then except cover when they are negligent. The minority approached this issue on the basis that by the time of the agreement for sale and purchase of the property, the right to claim replacement under the policy had accrued. This analysis is preferable because regarding the right as having accrued reflects the reality that building works are not generally carried out and then reimbursed. The right to require performance of a contractual commitment arises in accordance with the terms of the contract--in this case, upon the occurrence of loss or damage covered by the policy. The identity of the claimant should not matter because by that stage, the subject-matter is not personal.Reinstatement of this kind cannot be described as personal. While there are many decisions to be made, they are capable of being resolved objectively and so are not dependent on the whims of the person requiring the works to be carried out or paid for. Neither the person nor the property need to be assessed for risk. The damage has already occurred.In summary, I consider that the better approach is to regard the right to obtain reinstatement as purely contractual in nature. It is not an indemnity. All talk of the indemnity principle should be jettisoned. As a contractual right, it is capable of being assigned on ordinary principles. The minority achieved this outcome by regarding the rights as having accrued at the relevant time. For the issue to resurface, market practices must change once again. That is likely to be a while away. By then, a differently composed Court may take the opportunity to revisit Bryant.Steve KeallBarrister4 July 2019
Concerning causes in insurance law
This article was first published in Law Talk on 1 November 2013pdf :- Concerning causes in insurance lawInsurance law has its own way of thinking about causation. Anyone instructed in respect of an insurance coverage dispute would be well-advised to gain awareness of this perspective.Mention of an insurance company relying on an exclusion of liability to decline a claim sometimes meets a knowing nod and a sigh from members of the general public. Anyone who believes they had a valid insurance claim, in circumstances where in fact they do not, deserves sympathy. However, it pays to understand that this expectation may be based on a misconception about how insurance policies work, and the specific effect of the language used, particularly with reference to exclusion clauses. The “missing link” in people’s understanding is sometimes the requirements of causation, as it is reflected in the language of the policy. This is a needy concept that deserves more care and attention than it generally receives.Insurance companies are in the business of earning premium and paying claims. How this fits together in a way that works commercially is a matter of underwriting. This should enable the company to pay all eligible claims and at the same time make a profit by investing the difference between all of the premium collected from customers less the amounts it must pay in claims. A properly conducted underwriting analysis should set the premium at a level which makes into account the probability of a particularly event occurring giving rise to an eligible claim, and also taking into account other factors. The relevant probabilities are a matter of actuarial analysis.This analysis is reflected in the language used in an insurance policy. Some risks will be met, others will not. In respect of risks which are excluded, it is not necessarily the case that there needs be a direct causal link between that risk and the loss or damage the customer seeks to cover. That is a product of the language used in the agreement. This language will usually be selected deliberately to reflect that, from an actuarial perspective, it is difficult or perhaps impossible for an insurer to gauge the likelihood of the risk occurring. It is not generally reflective of a desire by an insurance company to shirk its responsibilities.The lesson to be learnt is that wording of the policy is absolutely central to a properly conducted analysis. A view of the world that an insurer has deep pockets and a customer is being hard done by where a claim is excluded will not greatly assist the client. As set out below, in an insurance context, causation is dominantly a matter of contractual analysis. A judge will generally not be moved to depart from this analysis without good reason.When does one thing can be said to have caused another is a question of almost universal application in civil litigation practice. At law school we are raised on a steady diet of common law tort, where the purpose of the inquiry is to identify who is - and who is not- at fault. This attribution of responsibility is the key area of interest. This sometimes leads to a subtle blending of causation and duty/ breach of duty concepts. Further, the characterisation of causation may sometimes be motivated by considerations of fairness and public policy.On the other hand, an insurance coverage dispute by its nature is concerned with an insurance contract where the key terms are contained in an insurance policy. The Court will therefore ordinarily limit its inquiry to what the policy says about causation.These different approaches may produce different outcomes. Consider the case of Miss Jay Jay [1987] 1 Lloyd’s Rep 32. If a yacht has been negligently designed or built, and then breaks up while at sea, in calm waters, the tort lawyer is interested in whether a breach of duty by either the designer or the manufacturer, or both, can be said to have caused the damage. In Miss Jay Jay the Court was required to address causation in the context with insurance against perils of the sea. Once the Court had located a proximate cause – the incursion of seawater (being the relevant peril), the inquiry ended.To what extent the Court was required to keep searching depending on the provisions of the policy. So, where there are a range of potential causes “if one of these causes is insured against under the policy, and one of the others is expressly excluded from the policy, the insured will be entitled to recover” (an extract from Halsbury, quoted with approval in Miss Jay Jay at 36 and 40). It followed that “where there were no relevant exclusions or warranties in the policy the fact that there may have been another proximate cause did not call for specific mention since proof of a peril which was within the policy was enough to entitled the plaintiffs to judgment” (Miss Jay Jay, page 37). On this view of things, any negligence by the designer or manufacturer does not make any difference to the policy analysis.So far so good. But in fact “causation” is not always a term that is expressly identified in a policy, rather, it is a concept implicit in the words used and the approach towards interpreting them.In the past, occurrence based insurance policy would helpful listed out the “perils” to which the policy would respond if one of those perils caused accidental damage: fire, tsunami, a plague of locusts and so on. Such a policy may have also contained a list of exclusions. So, the inquiry included a consideration of whether something was “in” (ie there was a listed peril which was the proximate cause of the damage) or “out” (excluded). Nowadays, an occurrence based insurance policy is more likely to be formulated on an “all risks” basis for accidental loss or damage. That is to say something should be covered, other things equal, unless the loss or damage is caused by something that is excluded. The causation focus is therefore more on exclusions.The causation focus also tends to be more on exclusions with regards to liability policies. Liability policies ordinarily respond to claims made during the policy period (and are subject to other terms and conditions outside the scope of this brief paper). Other things equal, either there is a claim to which the policy responds or there is not. Any causation issues are more likely to focus on whether the claim is excluded.All of the above is most usefully demonstrated by example, with reference to the recent case of IAG v Jackson [2013] NZCA 302. According to the judgment, a Christchurch couple, the Marchands, engaged an insurance broker, Mr Jackson, to arrange insurance cover for their home and contents, motor vehicles and a medical practice. Mr Jackson placed business interruption cover for the medical practice, but he arranged none of the other insurance. This was initially an oversight. On several occasions he assured the Marchands he had placed cover with NZI whereas he had not. The Marchands’ home was badly damaged in the 4 September 2010 Canterbury earthquake. Mr Jackson then attempted to arrange cover with NZI by submitting an application form which he dated 30 August 2010.The Marchands sued Mr Jackson for their uninsured loss. Mr Jackson joined IAG, his professional indemnity insurer. IAG applied for defendant’s summary judgment relying, amongst other grounds, on an exclusion for dishonesty. The Marchands succeeded at trial against Mr Jackson. IAG did not participate. An Associate Judge declined IAG’s application for summary judgment, concluding that dishonesty would need to be decided on the facts at trial. IAG appealed against that ruling resulting in the present judgment.The IAG policy contained an exclusion which provided that Mr Jackson was “…not insured for civil liability in connection with any dishonest, fraudulent, criminal or malicious acts or omissions by you…”.The Court of Appeal was required to decide what “dishonest” meant in this setting and what the connection needed to be shown between the insured’s dishonest conduct and his civil liability.On the evidence, the Court concluded that Mr Jackson had no case to answer to IAG’s allegation that he acted dishonestly.The next question was whether Mr Jackson’s dishonest acts or omissions were “in connection with” his civil liability to the Marchands. The question arose because it was apparently common ground that Mr Jackson did not act dishonestly when he first incurred a liability to the Marchands by failing to act on their instructions to secure cover for their home, contents and vehicles. The relevant dishonesty occurred later.The Court stated that IAG was required to establish a nexus or relationship between dishonest conduct and civil liability. It noted that the dishonest act “did not need to be the direct or proximate cause of the civil liability, and it need not precede the liability in time” (para 29). However: ‘“in connection with” does demand some causal or consequential relationship between the two things in this setting” (para 29).The Court considered whether IAG has discharged that burden. It had been agreed that Mr Jackson had acted honestly when he first failed to place cover. He incurred a liability for breach of this retainer at that time. However, the trial judge held that had Mr Jackson not hidden the truth from the Marchands, they would have secured cover before the earthquake. That being so, the required nexus was established. The exclusion therefore applied. The Court therefore permitted the appeal (the procedure aspects warranting separate consideration).POST SCRIPT (added 30 December 2013): nzinsurancelaw is aware that Mr Jackson has requested leave to appeal in the Supreme Court.