XU AND ANOR v IAG NEW ZEALAND LIMITED [2018] NZCA 149

XU AND ANOR v IAG NEW ZEALAND LIMITED [2018] NZCA 149 [11 May 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA517/2017[2018] NZCA 149BETWEEN RUIREN XU ANDDIAMANTINA TRUST LIMITEDAppellantsAND IAG NEW ZEALAND LIMITEDRespondentHearing: 15 February 2018Court: Asher, Clifford and Gilbert JJCounsel: N R Campbell QC and J Moss for AppellantsM G Ring QC and C M Laband for RespondentJudgment: 11 May 2018 at 11.30 amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellants must pay the respondent costs for a standard appeal on aband A basis and usual disbursements. We certify for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Gilbert J)Introduction[1] The owners of a house in Christchurch that was damaged in the earthquakes on4 September 2010 and 22 February 2011 held insurance against loss caused by suchdamage under a policy underwritten by IAG New Zealand Ltd (IAG). The policyprovides for claims to be settled on the basis of either an indemnity payment or byIAG meeting reinstatement costs in the event the insured elects to restore the home(the replacement benefit):The amounts you can claim1. If, following loss or damage you(a) restore your Home, we will pay the cost of restoring it to acondition as nearly as possible equal to its condition whennew using current materials and methods plus any extra costscosts that are necessary for the restoration to meet with thelawful requirements of Government or Local Bodies.(b) do not restore your Home, we will pay the lesser of(i) the amount of the loss or damage, or(ii) estimated cost of restoring your Home as nearly aspossible to the same condition it was in immediatelybefore the loss or damage happened using currentmaterials and methods.[2] The owners made a claim under the policy but then sold the property before theclaim was settled. They did not restore the home and will not now do so because ofthe sale. They assigned to the purchasers their rights in respect of their claim underthe policy. There is no dispute that their right to receive an indemnity payment underthe policy was an accrued right at the time of the sale and has been validly assigned tothe purchasers. The question on this appeal is whether the new owners can nowreinstate and claim the replacement benefit under the policy.[3] A similar issue was considered by this Court nearly 30 years ago inBryant v Primary Industries Insurance Co Limited.1 In that case, an old house on afarm was destroyed by fire in the early hours of the morning on the day the farm wentto auction. The house was insured with Primary Industries Insurance Co Ltd (Primary)for an indemnity value of $14,060 and an excess of indemnity sum of $48,101(replacement benefit). The policy provided that if the insured was unable or unwillingto effect reinstatement or replacement of the house then Primary would be under noliability to pay the excess of indemnity. The farm sold at auction and the purchasertook an assignment of the insured's rights under the policy. This Court held that the1 Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA).right to reinstate and claim the excess of indemnity payment was personal to theinsured and could not be assigned. Cooke P, who gave the judgment of the Court,reasoned:2The assignment after the fire could not make the purchasers retrospectivelythe insured at the time of the fire. They could acquire no more than whateverassignable rights had accrued to the insured before the assignment. But theright to replace under the excess of indemnity clause was personal tothe insured. As stipulated in special condition (ii), if the insured was unableor unwilling to effect reinstatement or replacement of the property, the insurerwas under no liability in respect of this item of insurance.[4] In view of the judgment in Bryant, the parties to the present appeal agreed inthe High Court that the following issue should be determined as a preliminary questionbefore trial:In light of the judgment of the Court of Appeal in Bryant v Primary IndustriesInsurance Co Limited, does the fact that the [insured homeowners] have notand will not restore the home by itself prevent the [new owners and assignees— the appellants] from recovering from IAG the replacement benefit?[5] The appellants sought to distinguish Bryant, relying on a condition inIAG's policy (condition 2) which confers a benefit directly on them as purchasers:Conditions of Home InsuranceInsurance during sale and purchase2. Where a contract of sale and purchase of your Home has been enteredinto the purchaser shall be entitled to the benefit of this Section but toget this benefit the purchaser must(a) comply with all the Conditions of the Policy, and(b) claim under any other insurance that has been arranged beforeclaiming under this Policy.[6] In a judgment delivered on 17 August 2017, Nation J answered the preliminaryquestion "yes" thereby determining the issue in IAG's favour.3 The Judge noted thathe was bound by this Court's judgment in Bryant and the appellants could not succeed,2 At 145.3 Xu v IAG New Zealand Ltd [2017] NZHC 1964, (2017) 19 ANZ Insurance Cases 62–160[High Court judgment].at least not in the High Court, unless Bryant could be distinguished on the basis ofcondition 2.4 However, the Judge found that condition 2 did not assist the appellantsbecause it only provided cover to a purchaser for insured damage occurring betweenthe time of contract and settlement.5 Condition 2 was therefore inapplicable in thepresent case because the damage occurred well before the contract was entered into.[7] The appellants appeal. Their primary submission is that as assignees they areable to satisfy the condition for payment of the replacement benefit. They contendthat Bryant was wrongly decided and should be overruled. Alternatively, they arguethat they are entitled to recover the replacement benefit in reliance on condition 2 solong as they incur the reinstatement costs.Agreed facts[8] The preliminary issue was determined on agreed facts.Natalie Hall-Barlow and Matthew Barlow (the Barlows) were the registered ownersof the house at the time it was damaged in the earthquakes. The Barlows are namedas the "Policy Owner" in the schedule and are the "Insured" under the policy:The Insured is the person (or persons) shown in the Schedule ("you/your").This also includes any person you are married to or with whom you are livingin the nature of a marriage.[9] The Barlows made a claim with IAG for the earthquake damage on27 April 2011. On 16 July 2014, they transferred the property to M&N Property Ltd,of which they were (and are) the shareholders and directors. On 9 December 2014,M&N Property Ltd entered into an agreement to sell the property to Bryan Staples ornominee. Mr Staples subsequently nominated Ruiren Xu and Diamantina Trust Ltd(the appellants) as purchasers under the agreement. On 9 February 2015,M&N Property Ltd transferred legal ownership and possession of the property tothe appellants. On the same day, the Barlows (as Insured), M&N Property Ltd(as vendor) and the appellants (as purchasers) entered into a deed of assignment interms of which the Barlows assigned absolutely to the appellants all their rights and4 At [32].5 At [62].remedies in respect of any claims lodged by the Barlows with IAG under the policy inrelation to the earthquake damage. On 5 May 2016, the appellants gave written noticeof the assignment to IAG.6[10] The following facts were also agreed. As at 9 February 2015, the date ofthe assignment, the Barlows had not restored and did not intend to restore the home,and had not incurred and will not incur any actual costs of restoration of the home.However, the appellants do intend to restore the home and will incur the actual costsof restoring the home.The assignment[11] The operative clause in the assignment reads:2.1 In consideration of the settlement of the purchase of the property bythe Purchaser and at the request of the Vendor, the Insured herebyassigns absolutely to the Purchaser all their rights, title and interest inthe Benefits.[12] "Benefits" are defined as follows:"Benefits" means all of the rights and remedies of the Insured with respect to:(a) The EQC claim and the IAG claim including without limitation:(i) The right to pursue the claims;(ii) The proceeds of the claims including repair or reinstatementof the property;(iii) The power to give a good discharge with respect to the claims;and(b) Any other actual or potential claims against EQC and/or IAG withrespect to loss or damage to the property.6 IAG does not take any technical point arising out of the transfer by the Barlows to their companyM&N Property Ltd. That feature of the transaction can be ignored for present purposes.Should Bryant be overruled?[13] Mr Campbell QC submits that the appellants are able to satisfy the condition andclaim the replacement benefit under the policy. Mr Campbell's argument in summaryis this. Under the general law of assignment contractual rights are assignable exceptwhere there is a prohibition on assignment (not the case here) or it is apparent fromthe terms of the contract that the right's correlative obligation is personal. A conditionwill be "personal" only where it makes a difference to the counterparty (here, IAG)whether the condition is satisfied by the original party or by an assignee.The condition for a claim for reinstatement costs is not promissory and does notinvolve the provision of any value to IAG. It should make no difference to IAGwhether the original insured or an assignee restores the home. He says this is reflectedin the language of the insurance contract.[14] Mr Campbell relies on the long-standing statement of principle as tothe assignability of the benefit of a contract set out by Collins MR in Tolhurst vAssociated Portland Cement Manufacturers (1900) Ltd:7On the other hand, it is equally clear that the benefit of a contract can beassigned, and wherever the consideration has been executed and nothing moreremains but to enforce the obligation against the party who has received theconsideration, the right to enforce it can be assigned, and can be put in suit bythe assignee in his own name after notice.[15] Mr Campbell acknowledges that most insurance contracts are regarded aspersonal to the insured because the personal attributes and claims history of an insuredwill be relevant to an underwriter's decision to accept the proposed risk on the giventerms.8 However, this does not mean the right to recover under such an insurancecontract in respect of a loss is not assignable without the insurer's consent.9Mr Campbell argues that the critical issue is whether the correlative obligation ispersonal. He says that the relevant condition for payment of the replacement benefit7 Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660 (CA) at 668.The Court of Appeal's decision was affirmed by the House of Lords in Tolhurst v AssociatedPortland Cement Manufacturers (1900) Ltd [1903] AC 414 (HL) and applied in C B PeacockeLand Co Ltd v Hamilton Milk Producers Co Ltd [1963] NZLR 576 (CA) at 583.8 Peters v General Accident Fire & Life Assurance Corporation Ltd [1938] 2 All ER 267 (CA)at 269.9 Holmes v National Fire and Marine Insurance Co of NZ (1887) 5 NZLR SC 360 at 366;Schneiderman v Barnett [1951] NZLR SC 301 at 306.is simply a choice whether to do something the insured has no obligation to do — it isnot a promissory condition. The correlative obligation is to pay money in respect of aparticular loss and the insurer is indifferent as to who satisfies the condition or towhom it makes payment.[16] In the absence of any provision in IAG's policy preventing assignment andtaking into account that this was a policy sold directly to consumers, Mr Campbellsubmits that while "you" in the policy is defined as the Barlows, the words"[t]he amounts you can claim" should be interpreted as meaning "[t]he amounts youor your assignee can claim". There are five numbered clauses in the policy listing"the amounts you can claim". Mr Campbell points out that in three of these clausesIAG's promise is expressed as "we will pay", not "we will pay you". The other twoclauses state "you can claim" but he submits that this should be read as meaning"you or your assignee can claim" because IAG is indifferent as to who it pays.Mr Campbell submits that this interpretation is supported by Note 1 to these clauseswhich states "[i]f your Home is totally destroyed it may be restored at another site butonly if we agree" — he argues that the passive language used in this note is a furtherindication that it is unimportant to IAG who restores the home.[17] Finally, Mr Campbell argues that the interpretation he urges is consistent withthe purpose of the contract as a whole which is to protect insureds against lossesincluding those caused by widespread disasters such as the Canterbury earthquakes.He contends that the interpretation adopted in the High Court would render one of thebenefits of the contract precarious. This is because more than 100,000 homes weredamaged by the earthquakes. As a result, the insurance claims have taken many yearsto assess and resolve. Indeed, many claims remain unresolved now, some seven yearslater. He argues that if the High Court's interpretation is right, many insureds willeffectively be forced to forego the replacement benefit because they do not have theresources to reinstate their homes or the resilience to continue living in their unrepairedhomes while waiting for their claims to be resolved.[18] While we can well understand why insured vendors of unremediated propertiesmight wish to transfer the benefit of replacement cover to purchasers, the argumentthat they can do so confronts insuperable difficulties which cannot be overcomedespite Mr Campbell's careful submissions to the contrary.[19] The indemnity provided under a fire policy has always been regarded aspersonal to the insured. The policy insures the named insured against his or herpersonal financial loss, not the loss suffered by a third party such as an assignee.10 It iswell settled that the right to be indemnified under such a policy is not assignablewithout the insurer's consent because the moral risk associated with the party insuredis of critical importance to the insurer's decision to provide cover.11 An insurer shouldnot be held liable to a stranger to the insurance contract whose moral character it hasnot been able to assess and who may seek to profit from the loss. Here, we are referringto the right of the insured to be indemnified for its loss covered by the policy ratherthan the insured's right to assign its entitlement to payment for that loss.[20] There is also force in Mr Ring QC's submission for IAG that an insurer'svulnerability is increased where the particular policy allows recovery of more thanthe indemnity value of the damaged property. The Supreme Court accepted thisproposition in Tower Insurance Ltd v Skyward Aviation 2008 Ltd, observing thatinsurance covering reinstatement costs creates a heightened moral hazard of a partyseeking to profit from the loss.12 We emphasise that this general observation is notdirected at the appellants whose particular circumstances are not before us.However, it explains why we do not accept Mr Campbell's submission that the insureris truly indifferent as to who incurs the cost of reinstating the home and whom it pays.[21] The only permissible assignment without the insurer's consent of a policy of thistype is the right to receive payment of an amount to which the insured is entitled underthe policy (an accrued debt) or may become entitled on the happening of a contingency(a contingent debt). In either case, the right to receive the payment will only ever10 Minucoe v The London & Liverpool & Globe Insurance Co Ltd (1925) 36 CLR 513 (HCA) at 524citing authority dating back to the 18th century including Lynch v Dalzell (1729) 4 Bro Parl Cas431, 2 ER 292 (HL); and Ocean Accident & Guarantee Corp v Williams (1915) 34 NZLR 924(SC) at 927–928.11 Peters v General Accident Fire & Life Assurance Corporation Ltd, above n 8, at 269–270affirming Peters v General Accident Fire & Life Assurance Corporation Ltd [1937] 4 All ER 628(HC).12 Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 185, [2015] 1 NZLR 341 at [26].reflect the insured's loss covered by the policy. If the insured does not suffer the lossand it can be shown that it will never suffer the loss, there can be no right to paymentunder the policy (accrued or contingent) and accordingly no payment right to assign.[22] The Barlows have suffered the loss covered by the indemnity payment.They suffered that loss prior to the sale and their right to receive the indemnitypayment for it had accrued and was validly assigned, as IAG accepts. However, theBarlows have not reinstated and will not reinstate. It is an agreed fact that they willnever incur the loss occasioned by doing so. Their contingent right to payment ofreinstatement costs was extinguished by the sale. It follows that they could not assignthe right to receive such a payment. It is trite that the appellants as assignees can haveno greater rights than the Barlows as assignors.[23] IAG's policy is entirely consistent with this analysis. The insured is defined asthe Barlows, not the Barlows or their assignees. The replacement benefit is expressedto be payable if "you restore your Home" — in other words, it is conditional onthe Barlows restoring their home and incurring the cost. It does not indemnify anassignee for the cost it may choose to incur in restoring what has become its homefollowing purchase. The general conditions include that "you" must not incur anyexpenses in connection with a claim without the insurer's prior agreement.This reinforces that the benefits are personal to the insured and an assignee would notbe entitled to incur reinstatement costs in connection with a claim and then seekreimbursement. IAG's policy also contains a general condition confirming that allpolicy conditions, where applicable, apply to "your" legal personal representative.Had there been an intention to confer benefits on an assignee, one would expect thescope of this condition to have been extended to assignees.[24] This Court's decision in Bryant is directly on point. Cooke P expressed someattraction to the view that the contractual right to receive reinstatement costs ought tobe able to be assigned to a purchaser who wishes to rebuild. However, the Courtconcluded that the non-assignability of such a right was firmly settled as a matter oflaw and to depart from it in New Zealand could not be justified:1313 Bryant v Primary Industries Insurance Co Ltd, above n 1, at 145.There is some attraction in the view or interpretation that the insured shouldbe able to assign this contractual right to a purchaser of the property whowishes to rebuild. After all the insurer has accepted premiums for replacementinsurance and the risk of destruction by fire has eventuated. Why should itmake any difference that instead of the insured himself rebuilding and thenselling, he sells to a purchaser before a rebuilding? But in the end we aredriven to the conclusion that there is a difference and that the interpretation ofassignability runs counter to a principle of insurance law from whichthis Court would not be justified in departing.This is the principle that a contract of insurance such as for fire insurance isno more than one of indemnity for the particular insured, who can accordinglynever be entitled to more than his actual loss. The assignment after the fire could not make the purchasers retrospectivelythe insured at the time of the fire. They could acquire no more than whateverassignable rights had accrued to the insured before the assignment. But theright to replace under the excess of indemnity clause was personal tothe insured. The principle appears to be firmly settled in other jurisdictions, and weconsider that to depart from it now in New Zealand would wrench the commonlaw too far without solid justification. There is nothing in the facts of this caseto persuade us that the principle works real injustice in the kind of situationwith which this case is concerned.[25] We are not persuaded that this Court's analysis in Bryant was wrong. In anyevent, we do not consider it would be right to overrule it given the judgment has stoodfor nearly 30 years and we are not aware of any subsequent decision in which itscorrectness has been questioned. This is not one of those rare cases where it would beappropriate for this Court to overrule one of its earlier decisions.14Is Bryant distinguishable?[26] Mr Campbell argues that Bryant is distinguishable because of the cover providedto a purchaser under condition 2 of the IAG policy (quoted at [5] above). There wasno equivalent provision in the Primary policy considered in Bryant.[27] Mr Campbell submits that the effect of condition 2 is that where a contract forsale and purchase of the home has been entered into, the purchaser is entitled to thebenefits provided under the policy subject to complying with all policy conditions that14 As to the limited circumstances in which it may be appropriate for the Court to overrule one of itsearlier decisions in a civil case, see R v Chilton [2006] 2 NZLR 341 (CA) at [83]–[90].otherwise would fall to be performed by the insured. He says this must include theability to restore the home and therefore satisfy the condition for recovery of thereplacement benefit. These submissions are uncontroversial. The question is whethercondition 2 has a temporal limit and applies only to damage occurring betweencontract and settlement. Nation J found that this was the correct interpretation of theclause. Mr Campbell argues to the contrary that there is no temporal limit on itsoperation.[28] Mr Campbell's first submission is that the Judge was wrong to rely on theheading of condition 2 — "Insurance during sale and purchase" — as an aid to theinterpretation of the provision. He says that the heading can be nothing more than arough guide to the text. Accordingly, any temporal limitation indicated by the headingcannot be relied on by a sophisticated insurer such as IAG to imply a limitation oncover which it has not spelt out in plain language in the text.[29] Next, Mr Campbell criticises the Judge's apparent reliance on conditions in thesale and purchase agreement which he considered were consistent with hisinterpretation of the policy. We agree with Mr Campbell that the agreement forsale and purchase, which was entered into well after the policy and between differentparties, cannot assist with the interpretation of the policy.[30] The Judge considered that s 13 of the Insurance Law Reform Act 1985 formedpart of the relevant background when interpreting condition 2.15 The relevant part ofthis section reads:13 Purchaser of land entitled to benefits of insurance between dates ofsale and possession(1) Subsection (1A) applies during the period beginning with the makingof a contract for the sale of land and all or any fixtures on that land,and ending on the purchaser taking possession of the land and fixtures,or final settlement (whichever occurs first).(1A) During the period specified in subsection (1), any policy of insurancemaintained by the vendor in respect of any damage to or destructionof any part of the land or fixtures enures, in respect of the land andfixtures agreed to be sold and to the extent that the purchaser is notentitled to be indemnified or to require reinstatement of that land and15 High Court judgment, above n 3, at [61].those fixtures under any other policy of insurance, for the benefit ofthe purchaser as well as the vendor.(1B) In particular, the purchaser is entitled to be indemnified by the insureror to require the insurer to reinstate that land and those fixtures in thesame manner and to the same extent as the vendor would have beenso entitled under the policy if there had been no contract of sale.(1C) However, nothing in subsections (1A) and (1B) obliges an insurer topay or expend more in total under a policy of insurance than it wouldhave had to pay or expend if there had been no contract of sale.[31] He thought it supported IAG's submission that the purpose of the clause was tospell out the statutory consequence that insurance against damage or destruction to theland or fixtures the subject of an agreement for sale and purchase enures for the benefitof the purchaser as well as the vendor during the period beginning with the making ofthe contract and ending on the date of possession or settlement, whichever occurs first.Mr Campbell submits that consumers like the Barlows would be unlikely to be awareof this statutory provision and therefore it should not have been taken into account asan interpretive guide.[32] We are satisfied that the Judge was correct to find that condition 2 provides coverto a purchaser for loss suffered after a contract for sale and purchase has been enteredinto and before settlement. Self-evidently, any loss caused by an insured event priorto the date of the agreement will be sustained by the vendor, not the purchaser. It isonly after an agreement for sale and purchase is entered into that the purchaseracquires an insurable interest in the property and becomes vulnerable to loss causedby an insured fortuity. We consider that the purpose of condition 2 is to provide coverto a purchaser for this risk. The text of the clause makes this clear by stating that thecondition applies "where a contract of sale and purchase of your home has beenentered into". The contract marks the commencement of the operation of the clause.Following settlement, the property is no longer "your home" and the vendor no longerhas an insurable interest in it. This marks the end of the relevant period of insurancebecause the insured is no longer vulnerable to the insured risk after that date.[33] It is not necessary to rely on the heading to reach this interpretation but theheading supports it — "Insurance during sale and purchase". The headings in IAG'spolicy are not merely rough guides to interpretation and in many instances they formpart of the text — for example, "You are insured for", "You are not insured for" and"The amount you can claim". We see no reason why the headings should be ignoredwhen discerning the meaning of a particular clause. The headings form part of thedocument which should be considered as a whole when interpreting any part of it.16[34] We see the existence of the statutory provision as being a more neutral factor.If both parties are to be taken as having been aware of the provision, why did theyinclude condition 2? On the other hand, it is common for contracts to containsuperfluous provisions that merely relate the law. Further, the provision in the policydoes not mirror the statutory provision. For example, it does not differentiate betweenpossession and settlement.Conclusion[35] For these reasons, we agree with Nation J that the answer to the preliminaryquestion quoted at [4] above is "yes". The appellants, as strangers to the policy, arenot entitled to claim the replacement benefit from IAG. The appeal must accordinglybe dismissed.Result[36] The appeal is dismissed.[37] The appellants must pay the respondent costs for a standard appeal on a band Abasis and usual disbursements. We certify for second counsel.Solicitors:Canterbury Legal, Christchurch for AppellantsDLA Piper, Auckland for Respondent16 See Farmers Mutual Group Association Ltd v Watson (2001) 11 ANZ Insurance Cases 61–510(CA) at [30], [34] and [48].