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
Recent insurance case: Prattley v Vero
Here's my take on a recent NZ Supreme Court decision about the nature of insurance cover in a contested Canterbury earthquake claim (Prattley v Vero [2016] NZSC 158):http://www.insurancebusinessonline.co.nz/nz/news/breaking-news/supreme-court-calls-it-on-prattley-228230.aspx
Steve KeallBarrister11 December 2016
NZ Supreme Court news: Canterbury earthquake cases
It is understood that Skyward Aviation 2008 Ltd v Tower Insurance Ltd is being heard in the Supreme Court tomorrow (Wednesday 5 November 2014). To refresh your memory, I wrote about the Court of Appeal case here. You can read the Court of Appeal decision here.In other news, a review of the "Case Summaries" list on the Supreme Court website shows that applications for leave to appeal have been filed in the Supreme court respect of QBE Insurance (International) Limited v Wild South Holdings Limited and Maxims Fashions Limited (SC 106/ 2014) and Certain Underwriters at Lloyds of London and Sirius International Insurance Group Limited v Crystal Imports Limited (SC 107/ 2014); two of the three "conjoined" proceedings dealt with in the Court of Appeal in QBE Insurance (International) Limited v Wild South Holdings Limited [2014] NZCA 447 (10 September 2014) which I mentioned briefly here after the decision was delivered. Noticeably absent from this line up is the third of the three proceedings; Marriott v Vero Insurance New Zealand Ltd. One assumes that the insurer in this latter case was content not to push the issues further.In further news, it is understood that the insurer has filed an application for leave to appeal to the Supreme Court in Avonside v Southern Response, which I wrote about here. One has to wonder about the utility of New Zealand's highest Court potentially opining on specific line items in a replacement cost analysis, and as it relates to a "notional" rebuild only. Of course, only the insurer knows how many properties fall into that category. The bench addressing the leave application will need to decide what number of affected dwellings makes it a truly significant case, in the circumstances. One would have thought that would have to be a very high number.
Steve KeallBarrister4 November 2014
Will Ridgecrest v IAG analysis impact on automatic reinstatement cases?
Some interesting analysis of the NZ Supreme Court's recent decision in Ridgecrest v IAG can be found in this recent Bell Gully article.In the policy in question in Ridgecrest v IAG, there was a per "happening" (ie event) limit of liability. The Supreme Court held that the policyholder holder could claim up to this full limit for each event, subject to the proviso that it could not claim in respect of the same damage twice by dint of the indemnity principle.In contrast to the IAG/ Ridgecrest provision, many relevant material damage policies instead have an aggregate limit for all damage caused by all events during the policy period. On the face of it, this may suggest the Ridgecrest reasoning can be confined. However, these latter policies also tend to contain a provision reinstating the limit after each loss. The authors note that various High Court cases, the subject of a recent conjoined appeal to the Court of Appeal (Wild South Holdings Ltd v QBE Ltd, Maxims Fashions Ltd v QBE Ltd, Marriott v Vero Insurance Ltd and Crystal Imports Ltd v Certain Underwriters at Lloyd’s of London & Anor, 5 August 2014, in respect of which it is understood a decision is still awaited) have held that these reinstatement provisions mean that a policyholder is able to claim a sum in excess of the stipulated aggregate limit if there are multiple losses during the policy period.The authors state:
It remains to be seen whether the courts will apply the Supreme Court’s analysis of the Ridgecrest policy to material damage policies with aggregate limits and automatic reinstatement clauses. If so, the Ridgecrest decision will be of much broader significance in interpreting and applying material damage policies.
This is an interesting question, and it is suggested the initial answer will lie in the Court of Appeal's anticipated decision mentioned above. Presumably the learned judges will take into account the Supreme Court's decision in Ridgecrest while preparing their judgment. Watch this space.
Steve Keall8 September 2014
NZ Supreme Court rejects doctrine of merger in successive losses EQ case
The New Zealand Supreme Court has delivered its decision in Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 117 (27 August 2014, delivered by William Young J), holding, amongst other things, that the doctrine of merger does not apply to successive earthquake losses.The doctrine of merger is a marine law concept recorded in s 77 of the Marine Insurance Act 1908 which states:
Successive losses(1) Unless the policy otherwise provides, and subject to the provisions of this Act, the insurer is liable for successive losses, even though the total amount of such losses may exceed the sum insured.(2) Where under the same policy a partial loss which has not been repaired or otherwise made good is followed by a total loss, the assured can only recover in respect of the total loss.…
In the present case, the insurer, IAG, contended that that the marine insurance principles should apply with the result that Ridgecrest’s partial loss claims in respect of earlier earthquakes were merged in the total loss claim resulting from the final earthquake.The Supreme Court determined that there were a number of differences between the policy in question in this case to the marine insurance policies in issue in the merger cases considered:(a) The policy provided for both indemnity and replacement cover. It wastherefore possible for an insured to make a profit, in the sense of recovering (on a replacement basis) more than the actual (that is the indemnity) value of the building;(b) The policy did not operate on the basis of a loss assessed at the end of the risk period. Rather, it applied happening by happening;(c) Under the relevant operative provision, clause C1, the insurer was required to pay before any repairs were effected and the liability to pay was unaffected even if such repairs were not effected;(d) A cause of action in respect of the losses caused by each of the earlier earthquakes accrued immediately;(e) The liability limit is reset after each happening.In the conclusion section of the judgment, the Supreme Court noted that the rights of Ridgecrest under its policy with IAG were subject to three limits:
- There could be no double counting;
- Each happening gave rise to a separate limit in respect of which the contractual limit of $1,984,000 applied;
- The total of all claims could not exceed the replacement cost of the building.
CommentThis brief note makes reference to the merger issue and concluding remarks of the decision only, a longer note will follow later which examines the entire judgment. In the meantime, it is refreshing to see the Court overtly acknowledge that "replacement" insurance - sometimes known as "new for old" - may in fact create what may be characterised as a windfall, or profit, to the policyholder. Replacement insurance does not offer indemnity, if offers something more.
NZ Supreme Court grants leave to hear Canterbury earthquake appeal
The New Zealand Supreme Court has granted leave to Tower Insurance to appeal the Court of Appeal's adverse judgment against it: Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 93.We provided commentary on the Court of Appeal's judgment in an earlier edition of nzinsurance law: read it here. Or alternatively listen to it on your smartphone while driving by following this link. We have received constructive feedback on this podcast; your correspondent's vocal manner being described as either robotic or monotonous. Your correspondent is investigating the cost and utility of vocal coaching.On a more serious note, we earlier noted that, in its reasoning, the Court of Appeal referred to the policyholder's ownership interest, which included a "legitimate interest" in retaining a neighbourhood link to the existing location of the property, in contrast to the insurer's "strictly economic" interest. The suggestion that, in an insurance policy, language must be unequivocal in order to leave unaddressed a policyholder's legitimate interest in the property was a very interesting one and will most likely be the focus of some attention in the Supreme Court hearing.
Steve Keall23 July 2014
NZ Supreme Court grants leave in insurance policy interpretation case
The Supreme Court (McGrath, Glazebrook and Arnold JJ) has granted leave to appeal in Firm PI 1 Limited v Zurich Australian Insurance Limited [2014] NZSC 19.The question is whether the sum insured for buildings under the material damage section of the contract of insurance is inclusive or exclusive of sums payable to the insured by the Earthquake Commission under the Earthquake Commission Act 1993 for natural disaster damage to the insured’s buildings from the 22 February 2011 earthquake.
ICNZ Earthquake case heading to Supreme Court
In University of Canterbury v Insurance Council of New Zealand and Ors [2014] NZSC 13 the Supreme Court has granted leave to appeal on the following issue:
"Where a building is an earthquake-prone building in terms of s 122(1) of the Building Act 2004, is a council entitled under s 124(1)(c)(i) of the Act to require the building to be strengthened to an extent greater than is necessary to ensure that the building will not have its ultimate capacity exceeded in a moderate earthquake (as defined in reg 7 of the Building (Specified Systems, Change the Use and Earthquake-prone Buildings) Regulations 2005)?"
Supreme Court allows appeal in Steigrad case
On 23 December 2013, the Supreme Court delivered what was presumably its last civil decision of the year: BFSL 2007 Limited & Ors and Bridgecorp Ltd & Ors v Steigrad, Houghton v AIG Insurance New Zealand Limited & Ors [2013] NZSC 156 (mercifully shortened to "Steigrad" for easy reference) .In short, the Supreme Court allowed an appeal from the decision of the Court of Appeal. Sandy versions of this decision are no doubt being consulted by members of the profession on beaches all around New Zealand. Some will be whooping for joy, others may feel more like flinging the document into the ocean. Longer analysis to follow shortly.Read the full decision here:- Steigrad Supreme Court judgment.