Background
The Barlows were the owners of a house in Christchurch. It was damaged in the earthquakes on 4 September 2010 and 22 February 2011. The Barlows were insured under a policy which provided “indemnity” and “indemnity plus” (i.e. a replacement wording) in the event of insured loss. The indemnity element of the policy applied where the insured chose not to restore their home, in which case they were entitled to the lesser of the amount of loss or damage or the estimated cost of restoration as nearly as possible to the same condition it was in immediately before the loss or damage, using current materials and methods. The indemnity plus sum was available if “you restore your home”, the insurers then becoming liable to 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.”
The policy also stated in Condition 2, under the heading “Insurance during sale and purchase” that: “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 Barlows made a claim under the policy, but before the claim was settled or any attempt to restore the property had been made, the property was sold to a company controlled by them, which in turn sold the property to Mr Staples or his nominee. Mr Staples nominated Mr Xu and Diamantina Trust Ltd as purchasers. The result of these transactions was that on 9 February 2015 the purchasers obtained legal ownership and possession of the property. On the same day, the parties entered into a deed of assignment under which the purchasers became the assignees of all of the rights and benefits under the policy.
The insurers were successful in both the High Court and the Court of Appeal and so the purchasers brought an appeal to the Supreme Court.
The Supreme Court
The Supreme Court, in a split 3:2 decision (William Young, O’Regan and Ellen France JJ, Glazebrook and Arnold JJ dissenting) handed down on 3 July 2019, dismissed the appeal by the purchasers and held that they were not entitled to indemnity plus.
The majority relied on the decision of Cooke J in Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142, and regarded Cooke J’s ruling as a correct statement of the law both for policy and practical reasons. In terms of broad policy, insurance was a personal contract and there was force in the argument that an insurer faced moral hazard issues in the claims process when dealing not with the original policyholder but with an assignee.
The majority recognised that the effect of Bryant was, in the event of a natural catastrophe where there were numerous claims and delays were inevitable, to restrict the ability of the owner of a damaged property to sell it and to assign the full benefits of the policy to the purchaser. However, the majority view was that the consideration was ousted by the express wording of the policy whereby the entitlement to replacement value was conditional on reinstatement by the insured. That led to the practical reason for endorsing Bryant, namely that it was the leading decision on the point and must have been influential as to the terms on which insurers had offered property insurance over the three decades since it had been decided: the destabilising effect of overruling Bryant was “of paramount significance.” The majority here noted that it is perfectly possible for insurers to stipulate for a different outcome by express wording.
The minority approach focused on the settled principle that a claim under an insurance policy accrues when the loss occurs. On that reasoning, the insured had a contingent right to indemnity plus as of the date of the earthquakes, subject only to restoration actually taking place. Moral hazard issues could be disregarded, as the policy controlled the possibility of fraud by providing for direct payment to contractors, and in any event the insurers faced the same risk with a claim from the original insured. In the minority’s view, if the indemnity could be assigned then there was no reason to take a different approach to indemnity plus.
Discussion
The difference between the majority and the minority was a narrow one. All of the judges in the Supreme Court were of the view that the right to recover under a policy accrued at the date of the loss and that the right to recover indemnity plus turned upon satisfying the contingency that restoration was carried out. The majority held that the contingency could be satisfied only by the original policyholders, whereas the minority saw no reason why the contingency could not be satisfied by the purchasers.
As for Condition 2, the Supreme Court was unanimous in confirming the view of the lower courts that this was aimed at the same problem addressed by section 13 of the Insurance Law Reform Act 1985 and the presence of Condition 2 in the policy was not a ground for distinguishing Bryant. The minority were more amenable to an argument based upon the suggestion that the wording was ambiguous and ought to be construed in favour of the consumer policyholders, but ultimately agreed that the heading could not be disregarded and that the use of the word “during” was fatal to any argument that Condition 2 applied to give the purchasers the benefit of the policy for events that had occurred before the sale and purchase agreement had been entered into.
Key learnings from the Supreme Court’s decision
- A policy of property insurance is personal, and cannot be assigned without the consent of the insurers.
- The right to receive payment under a policy is freely assignable, as there is nothing personal about the payment of a sum of money. However, the policy may impose restrictions on that right, and policy wording of the type used in Xu – “if you restore your home” – limits the right to recover indemnity plus to restoration by the original policyholders.
- Different wording may produce a different result: if the policy does not impose a personal obligation on the insured to restore the property but simply grants indemnity plus where restoration is chosen, then the right to choose may be exercised by the purchasers. Insurers should therefore consider whether or not they have any objection to a claim for restoration costs by a purchaser and to draft their wordings accordingly.
If you have any questions about the judgment, please contact a member of our insurance team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
