The dangers of indemnity
Richard Lang and Stephanie Grieve, of Duncan Cotterill Lawyers, are working closely with homeowners over the many vexed insurance issues stemming from the earthquake.
The property market in Christchurch has been a rollercoaster ride for buyers, sellers, and property professionals alike since the earthquakes.
The recent announcement by IAG and Vero about the effect of the transfer of insurance claims from a seller to a buyer of property has far-reaching implications - both for people who have bought property in Canterbury in the past 18 months and for people wanting to buy or sell a property now.
Property transactions post- earthquake are very different from previously. Virtually all properties sold since the earthquakes have some degree of related damage, with the seller usually still waiting on settlement of their insurance and EQC claims when the property changes hands.
The property industry has adapted as a result. Most properties are now sold for a price that reflects their value if the earthquake damage were fixed, and the seller assigns or transfers their insurance and EQC claims to the buyer as part of the deal.
The buyer can then pursue the seller's EQC and insurance claim with EQC and the seller's insurer to make sure the property is repaired, or if it is seriously damaged, replaced.
The problem now is that IAG and Vero say they are not obliged to repair or replace properties for buyers who have taken an assignment of the seller's insurance claim. Instead, the insurers will pay the buyer the indemnity value.
This is compensation based on the value of the property at the time of the damage, not based on the cost to fix the damage now. Often this is calculated as actual cost to replace or fix, depreciated for wear and tear.
The indemnity value of an insurance claim is usually significantly less than the value of actual replacement or repair of the property, leaving buyers financially worse off.
Insurance policies are a special type of contract that are personal to the insured person and cannot be assigned or transferred by the insured person to another person (just like employment contracts). This issue does not concern the assignment of an insurance policy, but the assignment of an existing insurance claim from the seller to a buyer.
In contrast to the insurance policy itself, an insurance claim is not personal to the insured person - it is just a right to have the insurer pay compensation or repair or replace a damaged property. Unless the insurance policy states that insurance claims cannot be assigned (as some do), the insured person has the legal right to assign that right to anyone they want.
Which rights in relation to the insurance claim can be assigned?
The question is which rights in relation to the insurance claim can be assigned. Simply put, IAG and Vero view the right to have a damaged house repaired or replaced as different from the right to an indemnity payment.
This is because most insurance policies state that the insurer will repair or rebuild the policyholders' house. So the insurers have taken the view that the right to have a damaged property rebuilt or replaced is personal to the policyholder and cannot be assigned. There is case law from the 1990s supporting this, although the context of the current insurance claims is quite different. A court might take a different approach in the current circumstances.
Other benefits such as the right to accommodation expenses and loss of rents may be covered under the vendor's contents policy - but may also be considered as personal to the original policyholder. Again, the policy wording differs between insurers.
One of the most difficult aspects of this change in approach is that it is effectively retrospective. This means that people who bought properties on the basis that the insurance claim they were taking over would give them the same rights to reinstatement as the original owner will be caught out.
So what do you do if you have purchased a house since the earthquake?
? Assess if this change in approach by IAG and Vero will affect you. In our experience, many of the houses that have changed hands since the earthquake are only mildly or moderately damaged. Most of these houses will be under the EQC cap, and there is no sign to date that EQC will take the same approach as the insurers. This only affects you if you have bought a house which requires a repair over the EQC cap, or needs replacement, or where there is damage outside the scope of the EQC claim, such as damage to driveways or fences.
? Check what approach the specific insurer of your property is taking - not all insurers are taking the same approach as IAG and Vero.
If this does affect you, you (or your lawyer) will need to review the wording of the seller's insurance policy relating to the claim that you took over when you bought the house. Some policy wordings may not necessarily support the approach the insurers are taking. You also need to review what due diligence you did in relation to the earthquake damage and insurance claim when you purchased the property.
Where insurers have consented to the assignment of an insurance claim, or undertaken to complete the repairs or replacement work for you as the buyer of the property, they should honour that undertaking. You'll need to be able to prove that, of course. There may be circumstances where the insurer has been advised of the assignment of the claim and has, by silence or otherwise, led the parties to believe the rights of the buyer would be no different to those of the seller. A buyer may have full rights under the claim in those cases.
A buyer may also have a statutory right to cancel an existing purchase contract under the Contractual Mistakes Act 1977.
Unfortunately it is not possible to get the seller to pursue the insurance claim with their insurer for you, because once they have been paid a purchase price reflecting the full value of their house, they no longer have any loss to claim.
What do you do if you're looking at buying or selling a property?
Sellers and real estate agents must be careful, when they agree to assign their insurance claim on the sale of a property, that they are not promising the buyer that they will be able to get the property repaired or replaced by the insurer under that claim.
? Buyers first need to check that the seller's insurance claim is able to be assigned under the terms of the seller's insurance policy.
? They should then do careful and thorough due diligence on how badly the property has been damaged by the earthquakes and exactly what the insurance claim covers.
? They should obtain written confirmation from the seller's insurer that they will do any repair or replacement work for that buyer if they purchase the property. It is possible that insurers may agree to that in individual cases.
In cases where the insurer confirms any assigned claim will be limited to indemnity value, the buyer may want to offer a lower price to reflect the uncertainty or the lesser value of the assigned claim.
The clauses in property agreements regarding assignment of insurance claims have to change to protect both parties. Sellers will need to exclude warranties in relation to the insurance claims being assigned to buyers. Buyers should insist on conditions in property agreements allowing them to pull out of the purchase if they are not happy with the insurance claim, as well as if they cannot secure insurance cover.
It cannot be stressed enough that the specific wording of each individual insurance policy must be considered in each case. This issue could easily cause more and more property transactions to be cancelled, particularly as more seriously damaged properties come onto the property market.
In short, take care, get really good advice, and don't fall into the latest trap of the Christchurch property market.