In Xu v IAG  NZSC 68, the homeowners had purchased a property which was subject to an unresolved insurance claim with IAG by the previous owners. The previous owners assigned their rights to claim under the insurance policy to the current owners.
The policy provided that, in the case of damage to the property, the insured may elect to receive either:
the actual costs of repairing the property where the insured has reinstated the property (“reinstatement rights”); or
where the insured has not reinstated, an indemnity payment for the economic loss suffered by the insured as a result of the damage (“indemnity payment”).
Reinstatement rights allow the insured to recover the actual costs of repairing and reinstating the damage, as those costs are actually incurred by the homeowner. On the other hand, an indemnity payment under this policy wording would be quantified as the lesser of the diminution in value of the insured property and the cost of restoring it to its pre-event condition.
The issue for the Supreme Court was whether the current homeowners, as assignees of the claim, were entitled to receive reinstatement rights under the policy, or whether they were only entitled to receive an indemnity payment. The Court recognised that reinstatement rights were normally more financially preferable to the insured than indemnity payments.
Ultimately the Supreme Court upheld longstanding authority, finding that reinstatement rights under the policy were personal to the original policy holder. It found that reinstatement rights could not be assigned where no reinstatement had been effected by the original policy holders. Accordingly, subsequent purchasers could only be entitled to an indemnity payment.
This case is intended to cover policy wording where cover is conditional on reinstatement being effected by the insured, and where failure to reinstate would lead to indemnity payment.
The decision adds to the many considerations that vendors and purchasers of earthquake damaged homes must bear in mind when assigning insurance claims. These include:
Purchasers of properties should consider whether they are able to be assigned reinstatement rights, or whether indemnity is the best they can get, in light of the Xu decision;
Vendors of properties should take care in representing what rights purchasers will be entitled to upon assignment;
Purchasers are reminded to be wary of conditions on assignment in the insurance policy. Often assignment requires the consent of the insurer. This should be considered in the due diligence period.
If you need advice on your rights under an assigned policy, don’t hesitate to contact one of our insurance experts in our litigation team.