Background
Mr Degen’s house suffered earthquake damage in the Canterbury Earthquake Sequence, the house was insured by IAG. Mr Degen and IAG disputed whether the house could be repaired, or whether it was damaged so badly that it needed to be rebuilt. IAG said it could be repaired, and elected to pay the costs of the repairs rather than carry out the repairs itself, as it was entitled to under Mr Degen’s policy.
Mr Degen filed a claim in the Canterbury Earthquakes Insurance Tribunal. He argued that he should be paid the full costs of a rebuild upfront (rather than as those costs were incurred), as well as the costs of expert reports he incurred during the claims process and subsequent litigation.
IAG maintained that the house could be repaired, and that its repair strategy was reasonable. Mr Degen argued that if the house could be repaired, the required scope was broader than IAG’s proposed repair strategy.
Tribunal decision
The Tribunal agreed with IAG that the house could be repaired and that IAG’s repair strategy would meet the policy standard. However, the Tribunal found in favour of Mr Degen in terms of the scope of the repairs that were required.
The Tribunal also made two other findings which were of wider relevance to the way claims are settled under other contracts of home insurance.
First, the Tribunal held IAG had to pay all of the repair costs when Mr Degen entered into a building contract, rather than as they were incurred under that contract. This was because the dispute in relation to policy coverage had been ongoing for more than 10 years, and both parties deserved certainty and finality once the proceedings had concluded. The Tribunal suggested that this approach was permitted by the Court of Appeal in Medical Assurance Society of New Zealand Ltd v East.2 In that case, the Court said that the insured’s “right to settlement” is absolute once they incur a contractual obligation for the purpose of restoring the building.
Second, the Tribunal held that IAG owed a duty to Mr Degen to make an adequate assessment of the damage. The duty was said to be based on the Fair Insurance Code, which says that insurers should “settle all valid claims quickly and fairly”, and a previous decision of the Tribunal. The Tribunal further said that IAG had breached the duty because its assessments of the damage to the property were inadequate, and would not have resulted in Mr Degen being fully indemnified. IAG was therefore held liable to pay certain professional fees incurred by Mr Degen to scope the repairs even though some of those fees would not have been recoverable as professional fees under the policy.
IAG appealed these two findings of wider relevance to the High Court.
When is an insurer required to pay repair costs?
In the High Court, IAG argued that requiring payment up front was contrary to the terms of the policy. The policy said that IAG would “cover” the costs of repair, which impliedly involved an obligation to pay only when the costs were incurred. This is a standard limitation in reinstatement insurance, which is designed to reduce the risk of moral hazard for the insurer.
The Court agreed with IAG. Seeking to provide certainty and finality was not a basis for the Tribunal to make an order for upfront payment. The question was what the terms of the policy require, in light of the general principles of insurance law. As IAG argued, the obligation under the policy to “cover” the costs impliedly included a requirement that the costs have actually been incurred. The Court also said that the Tribunal had misapplied the Court of Appeal’s decision in East. When the Court of Appeal said that the insured’s “right to settlement” is absolute once they incur a contractual obligation for the purpose of restoring the building, the Court was referring to a contractual obligation to pay the contractor for the repair works – that is, once the work had actually been done.
Accordingly, the Court overturned the Tribunal’s decision, and held that IAG was only liable to pay the repair costs as and when they were incurred (and only if IAG was satisfied they were reasonable and related to the scope of work).
Does an insurer have a duty to assess damage adequately?
IAG argued that an insurer does not have a duty to accurately assess claims, whether arising under the Fair Insurance Code or otherwise. The Courts have not previously recognised any such duty, and it would be contrary to a fundamental principle of insurance law: the insured has the burden of proving the loss they have suffered, and the amount of that loss.
The Court agreed with IAG. The Fair Insurance Code was a code of practice that was designed to sit alongside the law. It did not give rise to a legal duty, and, in any event, it did not go so far as to say there was such a duty. While the High Court had previously said that there is an implied duty of good faith when handling claims, that would only require the claim to be processed within a reasonable time – and where there are reasonable grounds for disputing a claim (as in this case), that affects what time is reasonable to process it. As a result, the Court overturned the Tribunal’s decision on duty and breach.
Comment
The Court’s judgment provides important confirmation of the timing of the insurer’s obligation to pay repair costs (as and when incurred), and the extent of the insurer’s obligation to assess claims (within a reasonable time).
That said, the Court did leave the door open to future development in the scope of the insurer’s duty, saying “there may be an opportunity for the courts to consider imposing a duty on an insurer to accurately assess claims” in an appropriate case. However, it did not give any indication as to the type of case that it considered to be appropriate, and it remains to be seen whether this “never say never” approach is taken up by a Court in the future.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.
[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.