IAG New Zealand Ltd v Degen [1] is a case in which the High Court heard an appeal from a decision of the Canterbury Earthquakes Insurance Tribunal (CEIT), which was set up to resolve disputed Canterbury Earthquake insurance claims not yet settled by agreement or by the courts. The decision is a reminder of the importance of fundamental principles of insurance law, and that there are limits upon the flexibility of the approach afforded to tribunals such as the CEIT.

The case involves a dispute regarding earthquake damage to a house. The CEIT found against the insured, Mr Degen, on the issue of whether the house could be repaired, deciding that IAG’s proposed repair strategy was sufficient to restore the house to the policy standard. However, the CEIT made other findings in Mr Degen’s favour, with potentially significant implications for the insurance sector. IAG appealed those findings to the High Court.

The challenged findings were the following:

• That IAG should be required to pay repair costs upfront upon the building contract being concluded, not pay costs as they were incurred.
• That IAG should reimburse professional fees incurred by Mr Degen, on the basis that IAG breached a duty to adequately assess the damage and adequately scope the necessary repair strategy.

In its decision, the High Court reiterated the importance of fundamental legal principles in interpreting insurance contracts. The Court confirmed that, absent specific terms, insurers are not required to pay repair costs upfront, but only as they are incurred and as invoices from builders and other providers are received. Most importantly, there is also no general duty on insurers to assess the damage and scope the necessary repairs; the obligation to prove loss remains with the insured.

Costs are payable as incurred

The High Court set aside the CEIT’s decision on the first issue, finding that IAG was obliged to pay repair costs as they were incurred by Mr Degen, not upfront. The CEIT’s finding to the contrary was in fundamental conflict with established principles relating to insurance contracts, which recognise that the insured must incur legal liability for costs before an insurer is obliged to cover them. This assists in preventing any misuse of funds received from the insurer, which would undermine the intent of the insurance policy. As such, that obligation to indemnify does not arise when the contract is entered into, contrary to the CEIT’s finding. In making this finding, the High Court followed the approach of the Court of Appeal in Medical Assurance Society of New Zealand Ltd v East [2] an insurer’s promise to cover costs of repair is synonymous with a promise to indemnify the insured, which means paying the costs of repair as they are incurred.

The Court held that to require an upfront payment would ignore the realities of the building process, which involves fluctuating costs in an uncertain market. This would create uncertainty, as the actual cost of repair will not be known until the work is completed and invoices are submitted to the insured and subsequently claimed from the insurer.

No duty to assess and scope the repair

The Court found that the CEIT had also erred in finding that IAG owed and breached a duty to assess the damage and scope the necessary repair adequately. The Court held that such a duty would conflict with the fundamental principle that the insured bears the burden of proving its loss. Imposing the suggested duty would reverse this burden and require the insurer to assess the full loss and scope a repair strategy instead. The Court confirmed the traditional view that the insurer’s role is to indemnify the insured based on evidence of insured loss provided to it, not undertake these inquiries itself.

Fair Insurance Code does not impose relevant duties

The insured argued that the Fair Insurance Code imposed additional relevant duties that were enforceable in the CEIT. The High Court was careful to note that the Fair Insurance Code, despite setting out various voluntary obligations in respect of handling claims, did not impose a duty at law on insurers to adequately assess damage and scope repair works. The Code only requires insurers to process valid claims in a timely manner, which aligns with the obligations placed on insurers under the duty of good faith developed in decisions such as Young v Tower Insurance Ltd [3]  Such a duty, whether under the Code or case law, does not include an obligation on insurers to conduct independent assessments of damage for insureds.

The High Court also held that it would be an over-reach to determine that such a novel duty existed without sufficient submissions or evidence before it, so this finding was set aside.

A return to fundamental principles

The High Court’s decision should be of comfort to insurers, as it affirms longstanding, established principles of contract and insurance law which must apply in a specialist tribunal determining insurance claims. While the CEIT has a strong focus on allowing insureds to exercise their rights to be heard, the High Court emphasised that traditional legal principles remain determinative.

This case also serves as an important reminder that insurers who are unsuccessful in the CEIT have recourse to the Court. Under section 53 of the Canterbury Earthquakes Insurance Tribunal Act 2019, the CEIT also has a discretion to refer questions of law to the High Court for determination before the full matter is heard at the CEIT. The CEIT will be bound by the High Court’s determination on those questions. As this is discretionary, however, options of appeal to the High Court and other appellate Courts will likely be the primary remedy for insurers. 

With the Government’s interest in potentially cheaper and more streamlined court processes in the face of increasing backlogs, we may see new specialist tribunals created in the consumer context along the lines of the CEIT. The decision in Degen sends a clear message to any other tribunals that their decisions must be grounded in traditional legal principles. 

The decision should reassure insurers, as it serves as a strong reminder of the primacy of traditional insurance law concepts, which support certainty and predictability.

Footnotes

[1] IAG New Zealand Ltd v Degen [2024] NZHC 397
[2] Medical Assurance Society of New Zealand Ltd v East [2015] NZCA 250, (2015) 18 ANZ Insurance Cases 62-074. Disclosure – MinterEllisonRuddWatts acted for the insurer in this case.
[3] Young v Tower Insurance Ltd [2016] NZHC 2956, [2018] 2 NZLR 291