By: Matt Booth, Peter Leman and Isaac Black

At a glance

Lady Hale of the United Kingdom Supreme Court once warned that while the common law is a “dynamic instrument” able to develop and adapt, this too invites a “danger of unbridled and unprincipled growth to match what the court perceives to be the merits of the particular case”.1 So, judges must remain cautious. The recent High Court decision of IAG New Zealand v Degen2 overturning a Canterbury Earthquake Insurance Tribunal decision reflects this; that perceived merits of a case must not invite aberrations from well-founded principles of the common law.

This case reconfirms two basic principles:

  1. An insurer’s obligation to “cover” repair costs is an indemnity which means that the obligation to pay only arises once these costs have been incurred, and
  2. An insurer does not owe a duty to accurately assess a customer’s insurance claim. The insured bears the burden of proving loss, including its actual quantum.

Background

Mr Degen’s (D) house was damaged during the Canterbury Earthquake Sequence. A dispute arose as to whether the damage to D’s house could be repaired or whether the house needed to be rebuilt.

The Canterbury Earthquake Insurance Tribunal gave a decision in 2022 agreeing with IAG that D’s house could be repaired. However, the Tribunal also made two subsidiary findings that:

  • IAG was obliged to pay the estimated costs to repair D’s house in one upfront lump sum upon D’s entry into a building contract, and
  • IAG should pay D back for the costs of various expert reports he had obtained on the basis that IAG breached a novel duty to adequately assess the earthquake damage to D’s house.

IAG appealed these two findings to the High Court.

Timing of payment of reinstatement costs

The Tribunal held that D’s right to be paid for repair work was absolute once D entered into a contract for repair. The Tribunal reached that conclusion on the basis of its interpretation of a decision of the Court of Appeal in Medical Assurance Society of New Zealand Ltd v East and/or on the basis that such a finding was in the interests of certainty and finality for the benefit of both parties.

Hinton J held that the Tribunal erred in ordering payment upfront. Instead, the Tribunal should have ordered that IAG fulfil its obligations under the policy by paying the relevant contractors, or D himself, the reasonable costs of repairs as they were actually incurred. This was on the basis that the courts have recognised that there are “moral hazards” associated with replacement insurance which persist even where an insured enters into a fixed price contract, as contracts can be varied or terminated by agreement, and not performed. These moral hazards are why an insurer’s reinstatement promise is usually qualified expressly or impliedly by a requirement that the insured has first incurred the cost of reinstating their house. This was the case for D’s insurance policy.

The Tribunal was found to have misinterpreted a statement in the Court of Appeal’s decision in East that an insured’s right to be paid the reinstatement benefit is “absolute once they incur a contractual obligation for the purpose of restoring the building”. The Tribunal took this to mean that an insured is entitled to payment immediately upon entering into a building contract. However, Hinton J found that when the Court of Appeal’s decision was read in context, it is clear that “contractual obligation” is a reference to an obligation to pay which will generally only arise when a contractor carries out the work and issues an invoice. Hinton J also echoed the Court of Appeal’s observations in East that the approach of an insurer paying build costs on invoices submitted as work progresses works efficiently and effectively in practice. This practice does not fetter an insured’s right to replacement value compensation because an insurer’s failure to indemnify after being presented with a valid invoice would carry serious legal and reputational consequences.

The Tribunal’s Imposition of a Duty to “accurately assess” insured’s claim is rejected by the High Court

The Tribunal found that IAG had breached a duty to adequately assess the damage to D’s house and therefore ordered IAG to pay D back for the costs of various expert reports he had obtained to establish his loss. In finding IAG owed such a duty, the Tribunal relied on the Fair Insurance Code provision requiring insurers to “settle all valid claims quickly and fairly”, Young v Tower Insurance Ltd and the Tribunal’s own decision (by its Chairperson, Christopher Boys) in LS v Medical Insurance Society Ltd (not appealed).

Hinton J found the Tribunal erred in finding that an insurer has a duty to adequately assess the damage sustained by an insured. Rather, it is a fundamental principle of insurance law that the insured bears the burden of proving loss, including its actual quantum. As to the Tribunal’s rationale for the imposition of the duty, Hinton J also found:

  1. The Fair Insurance Code requirement to settle all valid claims quickly and fairly goes to the promptness of consideration, not whether there is a duty on an insurer to undertake their own investigations to discharge a contractual burden of proof which falls on the insured. It is only when an insured submits a “valid” claim that an insurer must settle it quickly and fairly. However, where there is a dispute about the validity of the claim (which there was in D’s case) then the insured bears the burden of proving the claim.
  2. Young v Tower did not support the imposition of a duty on insurers to accurately assess claims. Young considered the Fair Insurance Code obligation to settle all valid claims quickly and fairly when finding that there is an implied duty of good faith on insurers to process a claim in a reasonable time. However, what is reasonable will depend on all the relevant circumstances, including whether the insurer shows reasonable grounds exist for disputing the claim. An insurer does not breach the implied term merely by failing to pay while the dispute is continuing. IAG argued that it had reasonable grounds to dispute the claim. What prevented the matter from being settled quickly was D’s view that his house needed to be rebuilt. The Tribunal ultimately disagreed.
  3. The Chairperson’s decision in LS v Medical Insurance Society was a significant departure from existing insurance law and no authority exists for its finding that, “…insurers have a duty to accurately assess claims and communicate details to the insured so the insured can make the choices the policy requires of them in an informed manner.” Similarly, the Tribunal’s reliance in LS on the High Court decision of van der Noll was misplaced.3 In van der Noll the insurer had a contractual discretion to determine whether the insured’s medical condition qualified the insured for certain benefits under the policy. A duty therefore fell on the insurer to properly inform itself when deciding how to exercise this discretion. The nature of the contractual powers and corresponding duties in van der Noll were very different to those in D’s policy where IAG had no discretion or decision-making power which would affect the availability of cover.
  4. Insurers do engage experts to assess damage to their customers’ houses. However, if it is discovered during the repair process that an insurer’s assessment of damage was inadequate, the insurer will be liable to pay to repair the further damage. That is quite different to the situation where an insured has disputed the insurer’s assessment in the first place. In those circumstances, the burden of proving damage or the scope of repair remains on the insured. The insurer is not in breach of a duty merely because there is disagreement as to the required repair scope.

What does this mean for insurers?

This decision should come as some relief to insurers. It helpfully reconfirms existing insurance law principles and practice around the timing for payment of repair costs. Also, the decision confirms that, while insurers are under an implied good faith obligation to process “valid” claims within a reasonable timeframe, this does not mean there is a duty on an insurer to undertake their own investigations to discharge a contractual burden of proof which sits squarely with the insured.

[1] Woodland v Essex County Council [2013] UKSC 66.

[2] IAG New Zealand v Degen [2024] NZHC 397.

[3] van der Noll v Sovereign Assurance Co Ltd [2013] NZHC 3051.