Xu v IAG New Zealand Limited  NZHC 1964
In April 2011, the Barlows made a claim with their insurer IAG for earthquake damage to their Christchurch home. In December 2014, without having undertaken any work to restore the home, the Barlows sold the property to the Xus, the plaintiffs. Along with transferring the legal ownership of the property, the Barlows also assigned to the plaintiffs the rights and remedies in respect of their insurance claims lodged with EQC and IAG.
The Barlow’s insurance policy provided that if the insured restored their home, IAG would pay the cost of restoring it to a condition as close as possible to when it was new (the full replacement value). However, if the insured did not restore their home, IAG would only pay the amount of the actual loss or damage, or the estimated cost of restoring the home to the same condition it was in immediately before the loss or damage occurred, whichever was lesser (the indemnity value).
The plaintiffs purchased the Barlow’s home with the intention of restoring it and claiming the full replacement value under the policy. However, IAG argued that the plaintiffs were only entitled to the indemnity value of the home, not full replacement. The plaintiffs issued proceedings for rebuild costs said to total $584,000.
The question before the Court
Some 17 years ago, the Court of Appeal in Bryant v Primary Industries held that an insured could not assign any right he or she may have to replacement cover under the policy. The plaintiffs in this case invited the Court to come to a different conclusion than the Court did in Bryant.
The question before the High Court was:
“In light of the judgment of the Court of Appeal in Bryant v Primary Industries Insurance Co Limited, does the fact that the Barlows have not and will not restore the home by itself prevent the plaintiffs from recovering from IAG the replacement benefit?”
In Bryant it was held that the purchasers of a fire damaged farmhouse, who were also assigned rights under the vendor’s insurance policy, could not recover more than indemnity costs for the damage to the farmhouse - even if they incurred the cost of replacement. The rationale of this decision was that a contract of insurance of this kind is a contract of indemnity for the insured personally. The insured can never be entitled to more than his or her actual loss. It follows that the insured can only assign rights that have already accrued up to the time of the assignment; if they have not incurred the cost of reinstating or replacing the house prior to selling it, they can only assign the right to claim the indemnity value of the damage.
The High Court’s decision
Nation J accepted that in all material respects, but for the inclusion of Condition 2 of the IAG policy, the facts of this case were the same as in Bryant.
Condition 2 of the policy provided:
“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 plaintiffs argued that this case should be distinguished from Bryant, because unlike in Bryant Condition 2 of the IAG policy dealt specifically with situations in which a home is purchased. Their argument was that Condition 2 entitled the purchasers to the full benefits of the policy provided they comply with the conditions of the policy, in the same way as the Barlows would have been required to do had they remained owners.
Nation J did not accept the plaintiffs’ argument. He interpreted Condition 2 narrowly, and said it only extended the definition of the ‘insured’ to include a purchaser during the sale and purchase process, i.e. it covered a purchaser of the home in respect of an insured event that might occur between the time of entering into the contract and settlement. It would not be a reasonable interpretation, the Court concluded, to take Condition 2 to mean that the insurer would accept an assignment of the policy and its benefits relating to an event that occurred either before or after the sale process.
Therefore, the inclusion of Condition 2 in IAG’s policy ultimately did not affect the application of the principle in Bryant: that the right to recover replacement costs is personal to the insured named in the policy, and that the insured has to incur those replacement costs to be entitled to recover them.
While the Plaintiffs were not able to claim the full replacement value of the house, they were still able to claim the indemnity value of the earthquake damage. This is because the right to the indemnity value under the policy had already accrued at the time of the sale, so it was not an assignment of the contract of insurance, but of a debt arising under the policy.
Fran Darlow, Associate at Fee Langstone says
"There are strong policy reasons why an assignment of the “right” to reinstate a building from the insured to a stranger ought not to be allowed. The Xu decision provides useful confirmation that Bryant continues to represent the law, at least until it is revisited by the Court of Appeal."