Court of Appeal Reaffirms Non-Assignability of Replacement Benefits in Insurance Policy
Xu & Anor v IAG New Zealand Ltd  NZCA 149
The Court of Appeal has upheld the decision of the High Court in Xu & Anor v IAG, in a decision that will provide further certainty to insurers in respect of the entitlements of an assignee under an assigned insurance claim. Following the Court’s decision, it remains the case in New Zealand that replacement benefits in an insurance policy are personal to the original insured, and are incapable of being assigned.
The Barlows owned a house that was damaged in the Christchurch earthquake sequence. The house was insured by IAG at the time, and the Barlows lodged a claim with IAG for the earthquake damage. Before the claim was settled, the property was sold to Mr Xu and Diamantina Trust Ltd in its unrepaired state. The Barlows assigned their claims for earthquake damage under their policy with IAG to Mr Xu and Diamantina Trust Ltd. The policy provided that the insured was entitled to the cost of restoring the home, or if it did not restore the home, an indemnity payment.
Mr Xu argued that, as all of the Barlows’ rights under the policy had been assigned to him and his family trust, this included the right to claim reinstatement costs. IAG’s position was that in light of the judgment of the Court of Appeal in Bryant v Primary Industries Insurance Co Limited, only the right to indemnity costs was capable of being assigned.
In August last year, the High Court found in favour of IAG. Xu appealed, inviting the Court of Appeal to overturn Bryant, which the High Court lacked the power to do.
Arguments and Analysis
Counsel for Xu argued that, as a general matter of contract law, contractual rights can be assigned to others unless this is expressly prohibited in the contract itself. They argued that there was nothing specific about an insurance contract to suggest that the general rules of assignment should not apply - from IAG’s perspective, it should not matter who elects to reinstate and to whom IAG makes payment, as either way IAG is under an obligation to pay money in respect of a particular loss.
The Court of Appeal did not accept that an insurance contract did not have unique features that needed to be taken into account. Importantly, the “moral risk”associated with the particular party insured is a key factor influencing underwriters’ decisions on which risks to accept and what terms they are willing to provide. The Court accepted IAG’s submission that insurers’ vulnerability would be increased if an insured was able to assign more than indemnity value to a stranger who may attempt to profit from the loss.
It is, of course, a fundamental principle of insurance that an insured is not entitled to recover more than they have actually lost. In this case, therefore, it was necessary for the Court to consider what the Barlows’ loss really was at the time of assignment (and accordingly, what rights it had to assign to Xu). The Court found that the Barlows’ loss at the time of the assignment was no greater than what would have been covered by the indemnity payment. It could not have been any greater than that, as the Barlows had not incurred the cost of reinstating the house. It followed that Xu, as an assignee, could have no greater rights than the Barlows had when they assigned those rights. If this were the case, Xu would have profited from the Barlows’ insurance, in that they would have paid less for the house as it was damaged, and then recovered the full costs of reinstatement from IAG.
The Court of Appeal found that the decision in Bryant was directly on point in this case, and they were not persuaded that the Court’s analysis in Bryant was wrong.
Xu argued, in the alternative, that the current proceeding could be distinguished from Bryant, as the IAG policy contained a condition that expressly entitled purchasers of the insured property to the benefits of the policy. The Court concluded, however, that the intention of this clause was only to provide cover to purchasers for loss suffered between the time the contract for sale and purchase was entered into and the time the insurance claim was settled. Any loss prior to that was a loss the vendor had sustained, not the purchaser.
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 Court of Appeal’s decision in Xu provides useful clarity to insurers and policy holders, particularly in light of the increased number of assigned claims seven years on from the Christchurch earthquakes.