Ruiren Xu and Diamantina Trust Limited v IAG New Zealand Limited  NZSC 68
As a final update, the Supreme Court gave their decision in the Xu saga, with the majority of the Supreme Court dismissing Mr Xu’s appeal. This decision confirms that the entitlement under an insurance policy to replacement benefits, conditional upon reinstatement by the insured, are personal to the original insured and cannot be assigned.
Mr and Mrs Barlow owned a house in Christchurch which was damaged in the earthquake sequence. On 27 April 2011, they claimed on their insurance policy with IAG. Their claim was still unresolved in 2014 and the Barlows sold the house to Mr Xu and Diamantina Trust Limited in its unrepaired state.
As part of the sale, the Barlows assigned their right to claim under their policy with IAG. The policy was a ‘standard replacement policy’ which allowed the insured to choose between: (a) recovery of replacement benefits, being the actual costs (on a new-for-old basis) of repair where the insured has reinstated the property; and (b) in default of reinstatement by the insured, an indemnity payment for the economic loss suffered by the insured.
Mr Xu argued that assignment of the claim under the insurance policy included assignment of the claim for replacement benefits. IAG continued to rely on the Court of Appeal’s judgment Bryant v Primary Industries Insurance Co Limited (Bryant), which held only the right to indemnity costs was capable of being assigned.
The Supreme Court decision
The majority recognised the long-standing nature and industry reliance on Bryant and that overruling it would likely have a “destabilising effect” on the insurance industry. The majority held that Bryant is still correct to the extent that it stands for the idea that entitlement to replacement benefits, which are conditional upon replacement by the insured, cannot be assigned where no reinstatement has occurred.
While the majority agreed that the ability to assign replacement benefits would likely produce better results for claimants, and likely expedite resolutions by insurers, they were unable to stretch the wording of the policy to support this course. The majority considered the policy wording contemplated the entitlement to claim for replacement benefits to be conditional on reinstatement of the property by the original insured.
The majority also recognised that it was rational for insurers to be concerned with the moral hazard of assignable replacement benefits. This is because replacement payments are generally higher than indemnity, creating a greater incentive to be dishonest. The minority did not agree, arguing the moral hazard is addressed by the conditions in the policy, requiring reinstatement before payment, and limiting costs to those necessary for reinstatement.
The minority saw Bryant as poorly reasoned and would have overruled it, arguing it failed to correctly acknowledge the timing of the loss to the insured. The minority considered that the rights to indemnity and replacement benefit had accrued at the date of loss, but payment of replacement benefits were still conditional on the Barlows actually reinstating the property. When the assignment was made, the Barlows were merely assigning the already accrued right and did not run afoul of the personal indemnity principle.
This decision provides clarity for insurers and policy holders regarding the assignment of claims for replacement benefits. This is especially useful in light of the number of insurance claims which have been assigned since the Christchurch earthquakes.
Check out Fee Langstone’s articles on the lower courts’ decisions: