Agreement to proceed on basis of rebuild binding on insurer

Gidden v IAG New Zealand Ltd [2016] NZHC 948. 

Mr. and Mrs. Gidden’s house suffered extensive damage during the Christchurch earthquakes. The couple lodged a complaint with the Residential Advisory Service (RAS) after a series of delays during which their insurer, IAG, assessed whether the house was a rebuild or a repair. To resolve the issues over the handling of the claim, the RAS arranged a meeting between the parties, the outcome of which was a typed and signed agreement whereby they agreed to “proceed in good faith on the basis of the house…being a rebuild” and to “reach agreement on costs.” The Court found that the outcome was intended to be legally binding.

Despite this agreement, and an offer of cash settlement having been made by a case manager from IAG, the Giddens were subsequently told that that the costs of rebuilding the home had exceeded IAG’s initial estimate and that a “cash settlement panel” were reassessing whether a repair would be more economical. IAG considered it an implied term that, notwithstanding their commitment to treat the house as a rebuild, the costs would still need to be fair and reasonable, and this could involve a reassessment of whether repair would be more economical, depending on the assessment of the rebuild costs.

At the High Court, the Giddens sued for summary judgment for the rebuild costs assessed by IAG. They argued that IAG were in breach of the agreement. In his judgment, Associate Judge Osborne did accept that it was an implied term that the rebuild costs must be fair and reasonable. However, he considered that the agreement already contained a “check to ensure a fair and reasonable assessment” of costs, as it stipulated that an “appropriately qualified” surveyor be appointed to make this assessment. While he accepted that a common “rule of thumb” within the industry is that a house is more economical to repair if the repair costs do not exceed 80% of a full rebuild estimate, there was no evidence of common understanding on this point between the parties. Thus, while this metric may have influenced IAG’s internal decision-making, it could not be considered part of the agreement.

IAG argued that they had signed nothing more than an “agreement to agree,” and that the agreement lacked sufficient certainty to be enforceable in law, being unspecific as to costs. This was rejected by AJ Osborne, who considered it sufficient that the agreement set out a mechanism for assessing costs in the future, “which allowed determination of outcome by objective criteria.”

Further, AJ Osborne was unwilling to imply any term that that left IAG room to resolve the claim on a repair basis, as this would contradict the express term of the house being a rebuild, with “clarity around the proposal to rebuild the house” being the principal issue as stated in the agreement itself. Thus, any such implied term would directly contradict the express terms of the agreement and defeat its entire purpose.

Insurers need to appreciate that an agreement to resolve a claim in a particular way can be viewed as having binding effect, and the fact that costs have not yet been agreed does not mean that insurers cannot be bound by an outcome they have already agreed to. If it is intended that a final determination of the way a claim is to be settled will only be made at a later point, for example, once final costings have been obtained, care needs to be taken to ensure the insured understands that the insurer is keeping all options open until that final assessment has taken place.

Read the full judgment here