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Supreme Court decision on assignment leaves the door slightly ajar

July 03, 2019

Contacts

Partners Helen Smith

Insurance

The Court decides, on the policy wording before it, that a right to reinstatement cannot be assigned

The Supreme Court has delivered its judgment in the appeal of Xu & Diamantina Trust Ltd v IAG [2018] NZCA 149: see judgment: Xu Supreme Court Decision.

Facts

The facts of the case are fairly straightforward:

  • The Barlows owned a house that was damaged in the Canterbury earthquakes.
  • At the time of the earthquakes, IAG insured the house and the Barlows made a claim.
  • The Barlows did not restore or intend to restore the house.
  • Before the claim was settled, the Barlows sold the property to Bryan Staples who then nominated Ruiren Xu and Diamantina Trust Limited as purchasers.  
  • As part of the sale, the Barlows assigned their earthquake claims (including what they considered as the right to reinstatement) to the purchasers.
  • IAG did not consent to the assignment.

Key Issue

Whether the right of reinstatement under an insurance policy is capable of being assigned.  

Decision

The Court decided (with a 3:2 majority):

  • An insurance policy is personal to the insured and cannot be assigned without the insurer’s consent. 
  • A claim is not, however, personal and can be assigned.
  • The claim for and entitlement to an indemnity payment can be assigned, but the right to the costs of reinstatement cannot.
  • A purchaser can acquire no more than whatever assignable rights had accrued to the vendor before the assignment.
  • The right to reinstatement is contingent on the costs of repair or replacement being incurred.  Here, as the Barlows had not incurred these costs, they did not form part of the assignable rights.

Comment

This will not be the end of the matter. The Court has made it clear that the decision applies to the Policy wording before it. Other policies may allow a different interpretation, as will instances where insurers have agreed to an assignment of reinstatement rights. There may also be other arguments between insurers and insureds, based on insurers’ conduct in the claims process. Of course, others insurers also can and do take a different approach to assignment of claims. 

For some insureds, the decision also won’t make a difference, particularly for those with newer buildings where the difference between the indemnity and replacement cover could be nil or very small. This could arise where the indemnity payment is calculated by reference to the cost of repairing or rebuilding, with relatively new materials, and replacement cover is calculated also by reference to repairing or rebuilding with new materials.

The Canterbury Earthquakes produced thousands of claims. In the aftermath, people bought and sold property. The reasons they did so are too many to mention, but included those who were worn down by the earthquakes and, in some cases, the claims processes. Many of those sales and purchases included an assignment of insurance claims. Although a number of those claims will have been resolved, there are many claims still to be resolved and this decision may impact some of those claims. However, it is important that insureds consider their policy wording and the conduct of their insurer before thinking they have not received the right to reinstate.

The decision will have an impact on the claims process, but may also have a wider impact on sale and purchase of property in future, particularly after a natural disaster. Many purchasers buying property with earthquake damage may pay less for a property if they know that they will get the benefit of indemnity only, rather than full reinstatement rights.