In comparison to everything happening out there currently in the big wide world, conversely, give me a quite warm room, a good book, or heaven forbid to most people, a business periodical I can hide away & learn something new. I often reflect on some of the periodicals I receive & think to myself, I wonder how many people know these things…
Take for example, the Canterbury earthquakes which bought a number of insurance issues into sharp focus. The Supreme Court most recently considered what entitlements, & in what circumstances those entitlements, can be assigned. The circumstances on this occasion in the scenario presented, were quite extraordinary.
Reinstatement vs Indemnity Entitlements
Most property policies try to strike a balance between the actual costs of repairing a property as a result of an event (“reinstatement value”), & the costs of restoring the property to its condition before the event or reduction in value as a result of the event (“indemnity value”).
The reinstatement value typically exceeds the indemnity value, usually because building materials, methods, & standards have changed. So what if after an insured event you do not have the wherewithal to pursue a claim under the policy? Selling the property with an assignment of the claim is an option to realise some value.
But can you sell an entitlement to the reinstatement value, or will you have to settle for assigning only the entitlement to indemnity value? The differences between these values & what can be assigned will I suspect, affect sale price.
The Barlows’ family home was damaged in the Canterbury earthquakes. It was insured by a policy underwritten by IAG, covering reinstatement value conditional on the Barlows undertaking repairs, & if not, indemnity value. The Barlows’ lodged a claim but, after three years of no progress & no repairs done, ultimately sold the home. Why, one wonders they would do this is an excellent observation.
As part of the purchase, the Barlows assigned to the purchaser their claim against the policy. IAG declined cover for the reinstatement value, on the basis this entitlement could not be assigned. There was no issue indemnity value could be recovered.
The issue of whether the Barlows could assign entitlement to reinstatement value went all the way to the Supreme Court. The Court, in Xu v IAG New Zealand Limited  NZSC 68, decided in a 3 to 2 split that the Barlows’ could not in fact transfer this component of their cover.
Broadly, the majority was concerned & felt an entitlement to the reinstatement value is an exception to the indemnity principle – [& this is the extremely difficult part to comprehend], the principle of indemnity will make good the extent to which the insured is worse off by reason of the insured event.
Reinstatement value is of a different nature & might result in a net gain to the insured, in conflict with the indemnity principle.
The Court recognised this conflict might be managed by particular provisions or requirements of the policy, which if satisfied would mean a net gain could be recovered. Here, the relevant provision conditioned payment of the reinstatement value to the Barlows undertaking the repair. As this obligation could not be satisfied in the circumstances, reinstatement value could not be assigned.
Leaving analysis of the decision to one side, the judgment makes clear an entitlement to reinstatement value cannot be assigned & cannot be recovered where recovery of the value is conditional on the insured undertaking repairs [& the insured will not undertake this work].
The Court did, however, leave open the prospect for valid assignment of entitlements to reinstatement value in other circumstances. Whatever this means…
If the policy wording is not conditional on the insured undertaking the repairs, then the entitlement to reinstatement value could be assigned & recovered – a difference between “if you restore your Home” & “if your Home is restored” was considered significant.
So, What Does This All Mean?
Assignments of claims are always an option for an insured to realise the value of their claim where they might not otherwise have the means, resources, or interest in pursuing their claim.
The validity & value of any assignment may depend on the conditions to entitlements under the policy.
This is an extremely nominal difference in wording which as you can see, can make a huge impact, & something I suspect one should certainly have your legal people review in the event you were considering the purchase of property which may have some pre-existing damage.
Enquiries always welcome, Should you have any enquiries regarding these circumstances & developments, or just simply wish to check adequacy of your existing levels of cover, then please call us. We look forward to speaking with you all again soon.
With best wishes, Autumn here we come.