IAG New Zealand Limited v Degen
[2024] NZHC 397
•6 March 2024
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2023-409-033
[2024] NZHC 397
UNDER the Canterbury Earthquakes Insurance Tribunal Act 2019 BETWEEN
IAG NEW ZEALAND LIMITED
Appellant
AND
WILLIAM GERARD DEGEN
Respondent
Hearing: 12 September 2023 (appellant only)
Amicus submissions filed 10 November 2023
Appellant memorandum in reply 20 November 2023Appearances:
D J Cooper KC and M K Booth for Appellant W G Degen in person (not participating)
B Gray KC Amicus Curiae (from 10 November 2023)
Judgment:
6 March 2024
JUDGMENT OF HINTON J
This judgment was delivered by me on 6 March 2024 at 4.00 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date: ………………………….
Solicitors:
Wotton Kearney, Wellington
IAG NEW ZEALAND LTD v DEGEN [2024] NZHC 397 [6 March 2024]
[1] Mr Degen’s house was damaged by the Canterbury Earthquake Sequence. It was insured under an NZI “Supersurance House” policy, NZI being a division of IAG New Zealand Ltd.
[2] There was a dispute between Mr Degen and IAG as to whether the house was so badly damaged it needed to be rebuilt or whether it could be repaired, and also as to the required extent of repair.
[3] The Canterbury Earthquakes Insurance Tribunal (CEIT), by decision dated 21 December 2022, found against Mr Degen on the principal issue as to whether the house was capable of repair. The CEIT found that IAG’s repair strategy would restore Mr Degen’s house to the policy standard. The CEIT made further findings as to the scope of repairs required, these being largely in Mr Degen’s favour.1
[4] There were a number of subsidiary findings, three of which IAG has appealed, being:
(a)That IAG should be required to pay for reinstatement of the house in one lump sum upon Mr Degen’s entry into a building contract. IAG says payment should be made as costs are incurred.
(b)That IAG should be required to pay the costs of certain professional reports obtained by Mr Degen for the purposes of his claim against IAG on the basis that IAG breached a duty to adequately assess the damage and to adequately scope the repair strategy necessary. IAG says there is no such duty and it is not liable for these costs.
(c)That IAG should, alternatively to (b), be required to pay the costs of Mr Degen’s professional reports under cl C4 of the policy.
[5] As to (b) and (c) above, although the CEIT says its conclusion is reached based on either policy coverage for professional fees or failure of IAG to adequately assess
1 Degen v IAG New Zealand Ltd CEIT-0014-2020, 21 December 2022 [CEIT Decision]. The CEIT incorrectly said that the decision established the cost of repairs, at [307].
the damage, the CEIT did not undertake any analysis of policy coverage. Further, IAG paid the professional fees on a without prejudice basis following the decision and given the low quantum involved it does not seek repayment. In the circumstances, IAG proposed that I treat the finding as based solely on its alleged failure to properly undertake assessments, which is the real point of concern on the appeal. That then obviates the need to address (c), that is to analyse whether the professional fees at issue were covered by the Supersurance House policy, there being no such analysis on the part of the CEIT. Addressing that point is best left to a case where it is squarely at issue.
[6] IAG required leave to appeal from the CEIT which Brewer J granted on 27 March 2023.2
[7]While Mr Degen attended the hearing, he did not oppose the appeal.
[8] On its application for leave, IAG suggested that the Court might wish to appoint amicus curiae. Brewer J directed that was not necessary as the issues did not seem to be precedent-setting. However, at the outset of this hearing, having had the benefit of reading IAG’s submissions, I agreed with IAG that the issues raised were significant for the insurance industry and amicus should be engaged. Rather than adjourn, with the concurrence of Mr Cooper KC, I proceeded to hear from IAG’s counsel on the submissions filed and subsequently appointed Bruce Gray KC as amicus to file any additional submissions he considered appropriate. At my request, Mr Cooper updated Mr Gray on any authorities and other material not expressly referred to in his written submissions. Mr Gray’s submissions were filed and served on 10 November 2023. His submissions did not differ materially from those of IAG. Mr Cooper filed a memorandum dated 20 November 2023 advising that IAG did not seek to file submissions in reply.
[9] Under s 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 the CEIT’s decision. The High Court may “confirm, modify, or overturn the tribunal’s decision” or “order a remedy or award costs or interest that could be ordered or awarded by the
2 IAG New Zealand Ltd v Degen HC Christchurch CIV-2023-409-33, 27 March 2023.
tribunal”.3 Under r 20.18 of the High Court Rules 2016, appeals to this Court are by way of rehearing.
Was the CEIT in error as to the required timing of payment of reinstatement costs?
[10] Under the relevant policy provisions,4 where damage is repairable (which the CEIT found it was) IAG is obliged to pay the reasonable cost of repair. IAG can choose whether to undertake those works itself or pay the cost to Mr Degen. Mr Degen then has the right to choose whether the repair works are to be carried out or not. If he elects against repair works, IAG only has to pay the present value of the house plus reasonable associated costs (including demolition if necessary).
[11] In this case, IAG did not elect to undertake the works itself and Mr Degen chose to proceed with repair works. IAG is therefore obliged to pay Mr Degen the cost of repairs. The question is when payment has to be made.
[12] The CEIT held that Mr Degen’s right to be paid for repair work was absolute once Mr Degen had entered into a contract for repair.5 The CEIT 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,6 and/or on the basis that such a finding was in the interests of certainty and finality for the benefit of both parties.7
[13] The CEIT then ordered that the “reasonable cost of repair … less what has already been paid to Mr Degen”, should be paid by IAG to Mr Degen “within 10 working days of Mr Degen providing IAG with a copy of a building contract to repair his property”.8
[14] I agree with both IAG and Mr Gray that the CEIT erred in ordering full payment upfront. Rather the CEIT should have ordered that IAG fulfil its obligations
3 Canterbury Earthquakes Insurance Tribunal Act 2019, s 54(4).
4 Supersurance House Policy, cls C1, C2 and G2.
5 CEIT Decision, above n 1, at [116].
6 Medical Assurance Society of New Zealand Ltd v East [2015] NZCA 250, (2015) 18 ANZ Insurance Cases 62-074.
7 CEIT Decision, above n 1, at [118].
8 At [307].
under the policy by paying the relevant contractor(s), or Mr Degen himself, the reasonable costs of repairs as they were actually incurred.
[15] As IAG submits, the courts have recognised there are “moral hazards” associated with replacement insurance.9 Where the cost of repair exceeds the present value of a house, an insured, if entitled to insist upon payment of repair costs before the repairs are undertaken, may decide not to proceed with the repairs but instead demolish and rebuild. This would be contrary to the insurance policy which entitles an insured who decides to demolish and rebuild, only to the present value of the building. As Mr Gray identified, these “moral hazards” remain even where an insured enters into a fixed price agreement, as contracts can be varied or terminated by agreement, without performance.
[16] These “moral hazards” are one reason why the insurer’s reinstatement promise is usually qualified expressly or impliedly by a requirement that the insured has first incurred the cost of reinstating the dwelling. This means that the insured must at least have a legal liability for the cost. That does not require the insured to actually be out of pocket because in practice, as Mr Cooper confirms, the insurer will generally discharge its payment obligation by payment directly to the builder or other contractor.
[17] The Supersurance House policy applicable here makes the point by implication rather than explicitly. The basic insuring promise is to “cover” the insured. In East, the Court of Appeal held that in an insurance context the words “will cover” are synonymous with will “indemnify the insured against”, and that this expressed the insurer’s undertaking “to pay the rebuilding costs when they are incurred”.10
[18] To expand, the High Court in East had determined that the Medical Assurance Society was obliged to pay the Easts the estimated cost of repairing the earthquake damage to their property irrespective of whether liability to incur those costs had been, or would ever be, incurred.11 In overturning the decision, the Court of Appeal said that the underlying basis of a reinstatement benefit is that an insured is only entitled
9 Xu v IAG New Zealand Ltd [2019] NZSC 68, [2019] 1 NZLR 600 at [21] and [45]; Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 185, [2015] 1 NZLR 341 at [26].
10 Medical Assurance Society of New Zealand Ltd v East, above n 6, at [20].
11 East v Medical Assurance Society New Zealand Ltd [2014] NZHC 3399.
to recover their actual, not estimated, costs of reinstatement and “the cost is not and will not be known until, at the least, liability to pay for the work is incurred”.12
[19] The Court later said that the insurer’s right to be paid the reinstatement benefit is “absolute once they incur a contractual obligation for the purpose of restoring the building”.13 A similar statement is made at [24]. The CEIT appears to have taken such statements as meaning that an insured is entitled to payment immediately upon entering into a building contract.14 However, read in context, it is clear that “contractual obligation” is a reference to an obligation to pay. Such an obligation will generally not arise under a building contract until an invoice issues.
[20] From a practical perspective, a building contract for repair will seldom, if ever, be for a fixed sum in an uncertain financial market. Nor, although the CEIT stated otherwise, did the decision actually determine the reasonable cost of repair. The CEIT had to consider the issue in broad terms to determine whether the house was repairable, but beyond that the issue was not one for the CEIT. The reasonable cost of repair will be determined by entry into a building contract and by payment of invoices on receipt.
[21] As the Court of Appeal further observed in East, and Mr Cooper submitted here, the approach of an insurer paying build costs on invoices submitted as work progresses works efficiently and effectively in practice. The Court considered this practice did 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.15
[22] As to the CEIT’s statement that both parties deserve the certainty and finality that making an order for immediate payment would achieve,16 I agree with IAG that such a rationale is not a legitimate basis for the order made. First, the obligation and timing of payment can only be dictated by the terms of the policy and the insurance principles that underpin it. Second, any payment prior to the quantification of actual
12 Medical Assurance Society of New Zealand Ltd v East, above n 6, at [21].
13 At [29].
14 CEIT Decision, above n 1, at [116]-[117].
15 Medical Assurance Society of New Zealand Ltd v East, above n 6, at [25].
16 CEIT Decision, above n 1, at [118]–[120].
costs would necessarily be based on an estimate, which by its very nature would create uncertainty in both directions and would run contrary to the decision in East.17 Further, as noted above, Mr Degen might choose not to proceed with reinstatement and use the money for some other purpose which, as the Court of Appeal observed in East, IAG would be powerless to prevent, short of taking legal action.18 “Certainty” would be very one-sided in that context.
[23] I therefore set aside the order made at [307] of the CEIT decision. That order is replaced with a declaration in terms of [5.3(a)] of the notice of appeal, namely that IAG is required to pay repair costs to Mr Degen only as and when Mr Degen has incurred the costs of such repair, submitted invoices to IAG, and IAG has assessed the invoices and is satisfied that the costs are reasonable and relate to the scope of work.
Did the CEIT err in ordering IAG to reimburse certain professional fees on the basis of a duty to make an adequate assessment of the insured’s damage?
[24]The CEIT held as follows:19
[280] In this case the various assessments of the damage by IAG were inadequate, at least until the matter was filed in the High Court. Had Mr Degen accepted IAG’s advised position on the damage and followed its repair strategy he would not have been fully indemnified under the policy. Therefore, I proceed on the basis that if Mr Degen has obtained a report to reasonably address an aspect of IAG’s inadequate assessment, the reasonable costs of this report should fall for cover by IAG. This conclusion is reached on either policy coverage for professional fees, or that the cost incurred by Mr Degen has followed from a failure of IAG to properly undertake assessments.
[281] I consider that IAG breached its duties to Mr Degen by failing its duty to adequately assess the damage to his property and therefore failed to adequately scope, and cost, the repair strategy necessary. If Mr Degen had not commissioned a number of his own experts, including engineers and AJ Minkley and Simplexcity to make their own assessments of the earthquake damage and consequently repair strategies and costs beyond what IAG had prepared, his house would not have been adequately repaired. It is highly likely this case would have instead been one about defective scoping and repairs.
[282] Because of IAG’s failures I do not consider that reimbursement for expert reports needs to be limited to those professions listed in the Policy.
17 See Medical Assurance Society of New Zealand Ltd v East, above n 6, at [26].
18 At [27].
19 CEIT Decision, above n 1.
[25] I agree with IAG and Mr Gray that the CEIT erred in finding at [281] that an insurer has a duty to adequately assess the damage sustained by the insured in cases of insurance policies of this nature. As submitted, again by both IAG and Mr Gray, there is no authority for the alleged duty. In fact, it is a fundamental principle of insurance law that the insured bears the burden of proving loss, including its actual quantum. This has been acknowledged in numerous decisions of this Court following the Canterbury Earthquake Sequence.20
[26] In finding that IAG owed a duty to accurately assess the earthquake damage to Mr Degen’s house, the CEIT relied on:
(a)the Fair Insurance Code provision requiring IAG to “settle all valid claims quickly and fairly”;
(b)Young v Tower Insurance Ltd;21 and
(c)the CEIT’s decision in LS v Medical Insurance Society Ltd.22
[27] The Fair Insurance Code is a code of practice that encourages good conduct and professionalism in the insurance industry generally.23 It is designed to sit alongside the law relating to insurance and has its own enforcement regime. It is not part of the terms and conditions of Mr Degen’s policy, and I agree with IAG that it is also not extrinsic material that might aid in its interpretation.
[28] In any event, the Code’s reference to settling all valid claims quickly and fairly is a different matter to, and not inconsistent with, Mr Degen’s obligation to prove his loss. I agree with Mr Gray that the Code goes to 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. Once an insured submits a valid claim an insurer must settle it quickly and fairly. Where there is a dispute about
20 See for example He v Earthquake Commission [2017] NZHC 2136 at [55] following Jarden v Lumley General Insurance (NZ) Ltd [2015] NZHC 1427, (2015) 18 ANZ Insurance Cases 62-077 at [47]–[54].
21 Young v Tower Insurance Ltd [2016] NZHC 2956, [2018] 2 NZLR 291.
22 LS v Medical Insurance Society Ltd CEIT 0024-2020, 22 March 2021 at [34].
23 Fair Insurance Code 2016 at 2.
the validity of the claim (including as to quantum) the insured bears the burden of proving the claim. There was clearly a dispute here about the nature (and sum) of the claim. I note finally with regard to the actual provision in the Code, that the CEIT did not find IAG breached that provision as worded.
[29] In Young, Gendall J considered whether there was an implied duty of good faith in insurance policies and whether this should extend to an insurer’s handling of claims.24 The Judge concluded there was such an implied duty and that, as a minimum, it requires an insurer to disclose all material information; act reasonably (including but not limited to the initial formation of the contract and during and after the lodgement of a claim); and to process the claim in a reasonable time.25 In the course of his judgment, Gendall J considered the Fair Insurance Code obligation to “settle all valid claims quickly and fairly”.
[30] I note the observations in Young that what is reasonable will depend on all the relevant circumstances, including whether the insurer shows that reasonable grounds exist for disputing the claim.26 An insurer does not breach the implied term merely by failing to pay while the dispute is continuing. But the conduct of the insurer in handling a claim may be a relevant factor in deciding whether that good faith duty was breached.27
[31] IAG says it had reasonable grounds to dispute the claim and that it always accepted it was liable to pay to remediate. What prevented the matter from being settled quickly was Mr Degen’s view that his house needed to be rebuilt, with which the CEIT ultimately disagreed.
[32] IAG says all that can be taken from Young is that an insurer is under an implied good faith obligation to process valid claims within a reasonable timeframe and they will not be in breach of that obligation if there are reasonable grounds for disputing the claim. I agree.
24 Young v Tower Insurance Ltd, above n 21.
25 At [163].
26 At [164].
27 At [164].
[33] I do not consider that either the Fair Insurance Code or Young go so far as to say, as the CEIT does, that IAG owed a duty to adequately assess the damage to Mr Degen’s property and to adequately scope and cost the repair strategy necessary. I do not read that obligation in either the Code or in Young. To find such an obligation would be to elevate the duty of disclosure to a duty to obtain information. Such a duty would be incompatible with the duty of an insured to demonstrate his or her entitlement to be indemnified under a policy.
[34] The CEIT also relied on its own decision in LS v Medical Insurance Society Ltd.28 The issue in that case was whether an insured had made an election under the policy to remediate the earthquake damage to their property.29 The CEIT said in LS 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. No authority was cited for that view, and both Mr Gray and IAG submit there is no such authority.
[35] In LS the CEIT relied upon Woodhouse J’s decision in van der Noll v Sovereign Assurance Co Ltd.30 In that case, Woodhouse J held that an insurer had a contractual (not fiduciary) duty to accurately assess a claim, by asking the correct questions of the relevant experts.31 The discussion in van der Noll concerned an income protection policy and a claim by an insured that he was suffering from a total disability. The contract conferred on the insurer a discretion to determine whether the medical condition exhibited by the insured qualified him for one or more of the benefits under the policy. A duty necessarily fell on the insurer to inform itself when deciding how to exercise that contractual discretion.
[36] The nature of the contractual powers and corresponding duties in van der Noll were very different to those at issue here where IAG had no discretion or decision-making power affecting the availability of cover. While all insurance claims will require an insurer to decide whether an insured has discharged their burden of
28 LS v Medical Insurance Society Ltd, above n 22.
29 At [1].
30 van der Noll v Sovereign Assurance Co Ltd [2013] NZHC 3051.
31 At [94].
demonstrating the amount for which they are entitled to be indemnified (if any), such an evaluation in this case is of a different character to that in van der Noll.
[37] As IAG says, insurers do engage experts at their cost to assess damage to their customers’ houses because those customers might not otherwise have the time or finances to do this themselves. If it is discovered during the repair process that this assessment was inadequate, an insurer will be liable to pay to repair the further damage. However, that is quite different to the situation here 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 is on the insured. The insurer is not in breach of duty merely because there is disagreement as to the required repair scope, and likely consequential delay.
[38] I agree with Mr Gray that the position taken by the CEIT in LS represents a significant departure from existing insurance law. 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 professional costs incurred by Mr Degen have been paid and the issue of a novel duty has not been pleaded nor the subject of evidence which would assist a Court.
[39] I conclude that the CEIT erred in finding IAG owed a duty to adequately assess the earthquake damage to Mr Degen’s house in circumstances where the issue of whether the house was repairable and the cost of repair was in dispute. Such a duty would override a fundamental principle of insurance law that the insured has the onus of proving their loss and the amount of that loss.
Result
[40]I find:
(a)IAG is required to pay repair costs to Mr Degen only as and when Mr Degen has incurred the costs of such repair, submitted invoices to IAG and IAG has assessed the invoices and is satisfied that the costs are reasonable and relate to the scope of work.
(b)IAG was not under a duty to adequately assess, or quantify, the earthquake damage to Mr Degen’s property.
[41]There is no issue as to costs.
[42] I express my gratitude to Mr Gray KC for his valuable assistance to the Court as amicus.
Hinton J
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