Bryant upheld - The Court of Appeal rules upon the assignment of full reinstatement
In its long awaited judgment in Xu v IAG New Zealand Limited 1, the Court of Appeal has upheld the decision in Bryant v Primary Industries Insurance Co Limited. 2 The Court has confirmed that, generally speaking, an insured can only assign the benefit of the indemnity value of an insured policy and not the right to be paid the cost of reinstatement.
IAG insured a residential property which was damaged in the Canterbury earthquakes. The policy required the insured to carry out reinstatement works to qualify for payment of those costs. The insured took no steps to reinstate but instead sold the property and assigned its rights under the policy to the purchaser.
The insurer subsequently declined to pay the purchaser the costs of reinstatement on the basis that the right to payment of reinstatement costs was personal to the insured and could not be assigned without the insurer’s consent, as required by the rule in Bryant.
The High Court found that:
- It was bound by Bryant as appellate authority; and
- Bryant could not be distinguished on the facts.
The Court of Appeal’s decision
The Court of Appeal was required to consider:
- Whether Bryant should be overruled; and
- If not, whether it was distinguishable due to a specific provision in IAG’s policy.
Bryant is still good law
The purchasers argued that Bryant was inconsistent with the general law of assignment of contractual rights, which would have allowed the vendor to assign reinstatement rights as they are not “personal” to the insured. This was on the basis that the relevant condition was merely a choice by the insured whether or not to do something – to reinstate the premises, or not. The purchasers argued that IAG was indifferent as to who satisfies that condition, or to whom it makes payment. The purchasers argued that this was supported by the passive language in the policy documentation. For example, the policy stated “what you can claim” and then changed to “we will pay” not “we will pay you”.
The Court of Appeal rejected this argument on the basis that insurance contracts are personal to the insured as the “moral risk” associated with the insured party is of critical importance to an insurer’s decision to place cover.
Therefore “an insurer should not be held liable to a stranger to the insurance contract”. 3 Furthermore, the insurer’s vulnerability is increased in reinstatement policies 4 as a stranger to the contract may seek to profit from that loss. Consequently, IAG could not be seen to be indifferent as to whom satisfies the reinstatement condition.
The only permissible assignment without the insurer’s consent therefore is the right to receive payment of an amount to which the insured is entitled under the policy at the time of assignment. The insureds had suffered the loss covered by the indemnity payment. However, the insureds never elected to reinstate the premises. Their correlative right to payment of reinstatement costs was therefore extinguished on the sale of the property as they would and could never incur those costs.
Bryant was therefore “directly on point”. 5 The Court did not consider that there was any compelling reason to overrule the decision, especially given the judgment had stood unchallenged for nearly 30 years.
Was Bryant distinguishable?
In the alternative, the purchasers argued that Bryant could be distinguished due to condition 2 of the IAG policy which provided that where a sale and purchase agreement had been entered into the purchaser was entitled to the benefit of the policy. The purchasers contended that this condition meant that, from the date of signing the agreement, they were entitled to the full benefits of the policy, including the reinstatement benefit.
The Court disagreed. This condition was titled “Insurance during sale and purchase” (our emphasis). It was therefore limited in application to the period between signing of a contract for sale purchase and settlement. The purchasers also argued that the clause would be unnecessary if it had this effect given the application of section 13 of the Insurance Law Reform Act 1985. The Court considered that this did not assist in interpreting the policy as many commercial contracts contained “superfluous provisions that merely relate the law”. 6
The effect of this decision
Absent an appeal to the Supreme Court, this decision provides finality to insurers regarding the assignability of reinstatement benefits without an insurer’s consent. It also provides a strong steer as to the Court of Appeal’s view of its own decision in Bryant.
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