Background
Mr Degan (the insured) had his house insured under a policy with NZI, a division of IAG. The house was damaged during the Christchurch earthquakes.
The insured and IAG could not agree whether the house was so badly damaged it needed to be rebuilt or repaired – and if it could be repaired, to what extent?
The policy
The insurance policy stipulated that if damage was repairable, then IAG would be obliged to pay the reasonable cost of repair. IAG was able to choose whether to undertake the works itself or pay the costs to the insured.
It was the insured’s choice as to whether the repair works would be carried out or not. If the insured elected not to repair, then IAG would only have to pay the present value of the house plus any reasonable associated costs, including demolition if necessary.
CEIT finds that IAG had duties to adequately assess damage and accurately assess the claim
Following the impasse the parties went to CEIT, the designated body for insurance disputes stemming from the Canterbury earthquakes sequence. CEIT made a series of findings in favour of and against both parties. It found:
- The house was capable of repair.
- IAG should pay for reinstatement of the house in one lump sum once the insured entered into a building contract.
- IAG should pay the cost for certain professional reports obtained by the insured for the purposes of the claim against IAG. This was on the basis that IAG breached a duty to adequately assess the damage and adequately scope the repair strategy necessary.
Significant issues for the insurance industry
Under section 54(1) of the Canterbury Earthquakes Insurance Tribunal Act 2019, a party to a claim may appeal against a question of law or fact arising from CEIT’s decision. IAG appealed the decision at the High Court accordingly.
During proceedings, IAG suggested that the Court appoint a third-party expert on insurance law to help clarify the issues. The idea, initially rejected in the application for leave, was supported by the Court on the basis that the issues raised were significant to the insurance industry.
When does the insurer have to pay?
IAG first contended that CEIT was wrong to conclude that payment was required once the insured entered into the building contract. The Court also considered the practical reality of the obligation as it has been understood until the CEIT decision. In an uncertain financial market, a building contract for repair will very rarely be for a fixed sum.
Furthermore, the standard practice of insurers paying building costs on invoices as they are submitted has proven to be efficient. While it is true that this could theoretically impact an insured’s right to replacement value compensation, the legal and reputational consequences of an insurer deciding not to indemnify the costs would realistically prevent this scenario from occurring.
The expectations borne from good faith: a duty to accurately assess a claim?
- disclose all material information;
- act reasonably; and
- process the claim in a reasonable time.
The duty of good faith
IAG argued that it was always going to pay the sum, but in the meantime the parties were locked into a disagreement over the amount and purpose. In Young, the Court had observed that whether the insured was acting in good faith would depend on its behaviour during the settlement. This included whether the dispute itself was reasonable. While the Court did not directly comment on IAG’s conduct in this respect, it did emphasise that in circumstances such as these where there was disagreement, merely not paying the insured sum did not amount to a breach of good faith.
Just where exactly did CEIT get the idea of a duty to accurately assess claims from?
Might we see a duty in the future?
While the Court in IAG goes to lengths to stress the non-existence of the duty for the insurer to accurately assess claims, one comment stands out. Towards the end of the judgment, Justice Hinton seems to leave the door slightly ajar for the duty to be considered:[6]
While there may be an opportunity for the courts to consider imposing a duty on an insurer to accurately assess claims, this is not a suitable case for doing so.
The Court then seemed to expand on what about this case made it inappropriate. In this case, the insured had already paid the professional costs and the issue of a novel duty had not been raised. However, the Court did not elaborate on what exactly would amount to an appropriate situation to consider the duty.
Conclusion: the duty that wasn’t
The Court found that CEIT was wrong about the duty to accurately assess the claim.
The reduced scope of the duty meant that IAG were only ordered to pay repair costs once they had been incurred, once the corresponding invoices had been delivered to IAG, and once IAG was satisfied the costs were reasonable and related to the scope of the work.
In dismissing the findings of CEIT, the Court has potentially stopped a runaway train. Had the Court allowed the suggested duties to go unchecked, insurers may have found themselves in a position unfamiliar to them and burdensome beyond what the law has intended. While IAG was the successful party in this case, the spoils will be shared with the rest of the insurance industry.
About the author: Alexander Lyall is a Research Clerk in The ADR Centre’s Knowledge Management team, working with BDT. He gained his LLB from the University of Canterbury, and he also holds a BA in political science, media studies, and Te Reo Māori. His writing has previously been published by Radio New Zealand, the Kluwer Arbitration
