Tag Archives: insurance

Supreme Court insurance case: no to assignment of replacement benefits

A majority of the Supreme Court has ruled that it is not possible to assign replacement benefits in an insurance policy:  Xu v IAG New Zealand Limited [2019] NZSC 68 (3 July 2019). In the view of your humble correspondent, the minority view is to be preferred. The case presents an opportunity to review some of the underlying principles. This review is useful because these ideas may resurface if a later Court picks up the minority opinion. You can read a summary of the case prepared by the Court/ its staff here. In this article, editorial views are put forward.

The principal issue in Xu was whether the entitlement to replacement was capable of being assigned where the customer, as assignor, had not incurred the cost of replacement at the time of the assignment. The assignment occurred at the time of a sale and purchase of the property between the assignor and assignee.

The subject was considered in Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA) which held that a right to replacement benefits was conditional on the insured incurring the cost of repair could not be assigned where the insured party has not incurred that cost.

Under an classical insurance policy the insurer indemnifies the insured in respect of the loss or damage. The insured is put in the position it would have been in if the loss or damage had not occurred. Where property is involved, generally, this form of cover requires the insurer to indemnify the insured for the indemnity value of the property. Often that will be less than the cost of purchasing the property new at the time of the loss.

Commentators have said previously, as has your humble correspondent, that replacement type insurance is a different beast altogether. In the event of an accepted claim, it represents a boon to the customer, who receives something new for something old. If this involves a one-hundred year old mansion being rebuilt as-new then the difference is significant by an order of magnitude.  A premium of $600 may result in building costs in the millions.

This is not betterment because betterment by its nature is not covered. Betterment is an uplift on an indemnity where doing what is necessary under the policy necessarily results in an increase of value of the property. It sits to the account of the insured.

By contrast, replacement as-new may involve the insured receiving from the insurer something significantly more valuable than it otherwise would have obtained under a traditional indemnity policy. It is not an indemnity at all. From the insurer’s point of view, it is closer to a gamble. In individual cases the insurer writes the risk without having specific information about the total replacement costs for a building if it is destroyed. (The market value is not a point of reference.) Put differently, the amount required for replacement is not solely an incident of the loss. It is the function of a contractual commitment to be liable for certain costs, whatever they happen to be, if a certain thing happens and other criteria are met.

There is a principle of insurance law that an insurance policy is not capable of being assigned by the insured without the consent of the insurer. The reason for this rule is that an insurance policy is personal to the insured. The insurer has had the opportunity to assess the risk of the individual being insured. It cannot make this assessment of the new person who takes its interest under an assignment. That person might have a bad claims history. It might be a customer the insured does not wish to deal with. (Insurers may transfer policies to other insurers under a legislative scheme which required Court approval.)

So much for insurance law principles. Then there are the classical laws of property, including rules of law regulating assignments. A chose in action may be assigned. On the face of it, a claim under an insurance policy–certainly an outstanding claim for an indemnity only–is a chose in action, like a debt. It is a thing capable of being assigned, as a matter of law.

How then to treat an assignment of a replacement type policy? This question draws together rules of insurance law and rules of property law. It is also useful to understand the economics of the situation.

Until the time of the Canterbury earthquakes, competition in the retail insurance sector led to insurers offering unlimited replacement cover for property. This risk was passed on to reinsurers. Insurers made money on the margin between the reinsurance premium and the premium charged to the customer, less their costs. These margins have always been, and remain, tight.

Since the time of the earthquakes, market practices in New Zealand have changed. Generally, cover of this nature is not offered. This change is linked to the cost of reinsurance. The cost of reinsurance for full replacement cover means that the insurer could not make an adequate margin. This means they could not operate prudentially: they would not have enough premium income to pay claims and make a surplus.

So, opposition by insurers to moving away from the Bryant approach is understandable. There will also be a more immediate issue about a cohort of similarly affected people wishing to advance assigned claims on the same basis. Even if there are only about one hundred claimants, complete replacement in every case could presumably add up to tens of millions across the sector.

The present case will not have been one that invoked a great deal of sympathy for the claimant. The Courts will have proceeded on the reasonable assumption that the claimant-purchaser-assignee received legal advice on the possibility that he would not receive the replacement benefit he received under the assignment, on the basis of Bryant. Presumably the claimant was not counting on a change of law by an appellate Court.

Replacement  is often expressed in the insurance policy to be dependent on the customer having already paid for the reinstatement. In reality, this is generally not what happens because almost no one has sufficient surplus funds to pay for those works and then wait to be reimbursed. The actual concept in play is a little different. This requirement represents a commitment to pay for replacement works that are planned and then implemented. Generally, that process is coordinated by the insurer and its representatives. This way, it is in control of the cost. All of this is subject to the specific terms of the insurance policy.

These are reasons to read down this requirement. This kind of reading-down occurs where a provision in an insurance policy conflict with its basic purpose. I say that this occurs because an insurance contract is not an ordinary commercial agreement, it is one that is intended to effect the transfer of a particular risk.

For example, Courts have read down a requirement on an insured to take reasonable care and stipulations about “alteration of the risk” during the currency of the policy. You cannot agree to deliver 10 widgets and then say you have a discretion to deliver 8. The Court will require you to deliver 10. So, you cannot insure someone against their own negligence and then except cover when they are negligent. The minority approached this issue on the basis that by the time of the agreement for sale and purchase of the property, the right to claim replacement under the policy had accrued. This analysis is preferable because regarding the right as having accrued reflects the reality that building works are not generally carried out and then reimbursed. The right to require performance of a contractual commitment arises in accordance with the terms of the contract–in this case, upon the occurrence of loss or damage covered by the policy. The identity of the claimant should not matter because by that stage, the subject-matter is not personal.

Reinstatement of this kind cannot be described as personal. While there are many decisions to be made, they are capable of being resolved objectively and so are not dependent on the whims of the person requiring the works to be carried out or paid for. Neither the person nor the property need to be assessed for risk. The damage has already occurred.

In summary, I consider that the better approach is to regard the right to obtain reinstatement as purely contractual in nature. It is not an indemnity. All talk of the indemnity principle should be jettisoned. As a contractual right, it is capable of being assigned on ordinary principles. The minority achieved this outcome by regarding the rights as having accrued at the relevant time. For the issue to resurface, market practices must change once again. That is likely to be a while away. By then, a differently composed Court may take the opportunity to revisit Bryant.

Steve Keall
Barrister
4 July 2019

Miah v AXA: complex life insurance dispute heads for trial

Summary

In Miah v The National Mutual Life Association of Australasia Ltd (AXA) [2016] NZCA 590 the New Zealand Court of Appeal allowed an appeal against a summary judgment of the High Court; finding that in a case of mutual life insurance upon the death of a life insured half of benefit was payable to her estate in respect of which her surviving husband could make a claim as executor of her estate. The husband as the co-owner of the policy could not claim on his own account because he had been adjudicated bankrupt and his interest in the policy vested in the Official Assignee which accepted a decision by the insurer not to pay the claim. The case throws up interesting issues of contract interpretation. The Court of Appeal’s property rights analysis which relied upon the existence and then severance of a joint tenancy between two policyholders sits uncomfortably with the presumed intention of these policyholders between themselves as opposed to the presumed intention between the policyholders and the insurer. It may be that the trial Court, with the benefit of full evidence of the contractual matrix of fact, reaches a different conclusion on the merits—as it is entitled to.

The High Court decision

Mr and Mrs Miah were a married couple. They took out mutual life insurance with AXA. Mr Miah was adjudicated bankrupt. Several weeks later, Mrs Miah died. Mr Miah is the executor of Mrs Miah’s estate. Upon Mr Miah’s bankruptcy by operation of law all of his property, including his interest in the life insurance policy, vested in the Official Assignee (“OA”). AXA avoided the policy; a decision the OA accepted. The Official Assignee refused to assign to Mr Miah the right to sue on the policy. That decision was challenged by Mr Miah but upheld by the High Court on appeal.

Mr Miah has continued litigation seeking to claim the benefit of the life insurance in respect of Mrs Miah. Proper comprehension of certain causes of action advanced in the statement of claim is required. In the first cause of action, Mr Miah alleges that Mrs Miah’s estate was entitled to part of the sum insured because the Miahs owned the policy as tenants in common in equal shares. He claims to enforce that right as her executor for her half of the policy. In the second cause of action, Mr Miah alleges that if the policy was jointly owned then that ownership was severed on his bankruptcy so that Mrs Miah was entitled to an equal share that he could enforce as her executor. Mr Miah’s capacity as executor is central to both of these causes of action—he does not claim on his own behalf. Outside of the litigation presumably Mr Miah expects to enjoy a benefit under Mrs Miah’s will were one of these causes of action to succeed.

In the High Court an Associate Judge granted a defendant’s summary judgment application made by AXA, finding that: (i) Mrs Miah had no entitlement to payment on her death; rather, the benefit vested in Mr Miah alone as survivor, and (ii) on Mr Miah’s bankruptcy all of Mr Miah’s interest in the policy vested in the Official Assignee, with whom that interest remains. That being the case, none of the causes of action as pleaded could succeed. Mr Miah appealed to the Court of Appeal which examined these two issues.

The Court of Appeal decision

The first issue is a matter of contract interpretation. As the Court of Appeal noted, resolution of the second issue flows from the first one. So the heart of the matter was whether, as a matter of interpretation,  Mrs Miah (i.e., her estate) had any entitlement under the policy upon her death.

I comment that it appears that the precise circumstances of how the insurance cover came into being is not discussed in the Court of Appeal decision; this may be a point of interest in any later trial. In any event, working from the facts as they are conveyed in the decision: one policy was issued identifying Mr Miah as the relevant “Life Insured” and another, a separate policy was issued identifying Mrs Miah as the relevant “Life Insured.” It was the latter policy that was in issue in the case although I assume that both policies were issued on substantially identical (i.e., reciprocal) terms. The policy schedule says that the relevant event is the death of the Life Insured (i.e., Mrs Miah) and it provides that “All … Benefits are payable to You.” “You” is defined as the “Policy Owner.” The definition of “Policy Owner” is “the person or persons named as Policy Owner in the schedule and if more than one means all such persons jointly” (my italics). The schedule states under the heading “Policy Owner” the names Adbur Miah and Afrouza Miah; Mr and Mrs Miah.

The Court of Appeal considered Murphy v Murphy [2003] EWCA Civ 1862, [2004] Lloyd’s Rep IR 744 which is a decision of the English Court of Appeal. In England, s. 9 of the Inheritance (Provision for Family and Dependants) Act 1975 provides that when there is a joint tenancy in respect of property and a person dies, there can be an application to the Court for an order that the deceased’s severable share be treated as part of the deceased’s estate. (The English legislation is broadly the equivalent of New Zealand’s Family Protection Act 1955—but a specific application of this kind is not available under the New Zealand legislation.) Mr Murphy died. The offspring of Mr Murphy made an application in respect of an claimed interest in a life insurance policy. The policy benefit was payable to the “policyholder”, who was defined as “the person(s) named as the policyholder in the policy schedule or his executors, administrators or assignees.” Mr and Mrs Murphy were the named policyholders. The application for an order did not succeed because the Court held that the obvious intention of the policy was that the death benefit was payable to the survivor of Mr and Mrs Murphy. The gist of the English Court of Appeal’s reasoning was that the parties could never have intended severance after the death of one of them. As a consequence, the death benefit was always payable to the survivor and the Court would not order otherwise.

The New Zealand Court of Appeal noted a difference between the policy wordings in Murphy and the present case, where there is the specific use of the words “if more than one means all such [owners] jointly” (my emphasis). It noted that in Murphy there was no reference to the death benefit being paid jointly. The Court regarded this as material. This meant just what it said—the benefit was payable jointly.

The Court of Appeal also distinguished Murphy on the basis that in that case each person was a life insured and policyholder under the same policy document. The policy benefit was only payable once, on the death of one, before the other one (different considerations may apply in England, and New Zealand, in the case of simultaneous deaths—outside the scope of this note). So, survivorship was the only concept they possibility could have contemplated. The Court saw this as being significant for several reasons. In the present case: (i) each party had a half share in each contract so it was not clear the survivor would always benefit entirely, (ii) there was no point in naming Mrs Miah as a joint owner if she was not to benefit, and (iii) the focus on survivorship only works if there is a survivor. If hypothetically speaking Mr Miah had died first, the policy would be extant and the benefit would either be paid to Mrs Miah’s estate if so provided in the policy or otherwise payable to her estate if she is the single beneficiary, as a matter of contract interpretation.

The Court then went to find that on the bankruptcy of Mr Miah the “unity of title” was destroyed. This severed the joint tenancy into two separate tenancies in common. The Court concluded that it was arguable that Mr Miah, as the executor of Mrs Miah’s estate, had a claim in respect of the second cause of action (refer above).

As the Court determined there was an initial joint tenancy as pleaded in the second cause of action, and not an initial tenancy in common as pleaded in the first cause of action, it followed that this first cause of action was not arguable. A third cause of action was apparently not pursued. Therefore the plaintiff was reduced to only one causes of action of the three initially pleaded. However because the success of a defendant’s summary judgment application depends on the defendant establishing that none of the causes of action can succeed, the arguability of the second cause of action meant that the application as a whole failed.

Comment

It would appear that the Court of Appeal’s reasoning is sound as far as it goes and for the purposes of a summary judgment application. On the face of it, the policy plainly provides for benefits to be paid jointly. Assuming it is correct that this created a joint tenancy of some description, Mr Miah’s bankruptcy severed that joint tenancy. Mrs Miah’s severed interest did not form part of Mr Miah’s bankrupt estate under the control of the OA. It was therefore arguable that Mr Miah was able to advance a claim in respect of this severed interest as Mrs Miah’s executor and not on his own behalf.

It seems to me that it is still open to the insurer to seek to establish that, in the factual matrix, unalloyed survivorship was intended to apply in all situations, irrespective of the use of the word “jointly.” Surely there is a good case for that conclusion, contextually, where the people making the proposal are in a married relationship and wish to benefit the other upon the death of one of them. This may well be different where two people take out life insurance in respect of the life of a third person because the two people in that case are not intending to benefit each other; they are intended to benefit themselves. If there are two of them the interest must by its nature be joint, and therefore, open to severance. The issue in this case might be approached on a “tripartite” basis where the Court takes into account what was intended as between the policyholders between themselves in terms of how the benefit was to be paid, on the one hand, and the presumed intention as between the policyholders together and the insurer, on the other. If the former is given more weight than the latter, then it may be open to the Court to consider that the interest was not ever intended to be severed.

Even if not approached on this basis, it would not be heretical for the Court to override the use of specific words in order to achieve the intention of the insurance contract. This has arisen in two different kinds of cases in the past. The first is where an insurer makes it a condition of cover that an insured takes reasonable care. The Court have found very easily, as a matter of interpretation, that a failure to take reasonable care must means something close to gross negligence or recklessness. This must the case, the Courts have said, otherwise the insurance in question (usually material damage or similar) would quite often be futile. This is because accidental damage frequently results from our own failure to take reasonable care. So reasonable care in this context cannot mean what is says on the face of it—ever. An insurer could state this in the clearest language possible, and in the largest font size available, and still have its chosen language overridden.

Similar kind of reasoning has been applied when the Courts have considered “alteration of risk” provisions which may require a policyholder to notify an insurer of any alteration of the risk during the term of the insurance. On the face of it this could lead to a multitude of irrelevant notifications. The Courts have held this cannot ever be what is intended. This kind of provision is consistently read down to only refer to a material change a nature of the risk, and not a change in circumstances.

In both of these cases there is I suggest not so much a purposive interpretation as a functional one. The Court give effect to the proper function of the contract which is to accurately reflect the extent of the risk that has been passed to the insurer in each case. Both of these kinds of provisions are understandable from a purely underwriting perspective. With regards to reasonable care, the underwriter would like to proceed on the assumption that a person in any situation would do what any reasonable person would do, because no other reference point is available. Regarding the alteration of the risk, it is the risk itself, as presented, that is underwritten, and naturally the underwriter would want to know of any material change. But an insurance agreement is not a simple exercise in underwriting. It is a bargain where the parties use contract as a mechanism to transfer risk. The Court will give effect to that function appropriately. For example, in a case where there was an operative insuring provision but a series of exclusions according to which there was no cover at all, the Court would reasonably interpret the insurance contract so that actual cover was deemed to have been intended, and would therefore be available. It would read down the exclusions. Underwriting intention is subsumed into the bargain.

Back to AXA and Mr Miah. Life insurance payable to the deceased estate is legally possible but counter-intuitive in many cases. Murphy describes the law as most people signing up for life insurance would expect it to be—where a married couple each identify the other as the relevant beneficiary then survivorship is contemplated to occur in all cases. In the circumstances of the case, did Mrs Miah really contemplate that if she died half of the proceeds of the life insurance would not be paid to Mr Miah? This is all, I suggest, proper material for a trial. With the benefit of full evidence and consideration of all of the available evidence of the contextual factual matrix the trial Court will be entitled to reach a different view to the Court of Appeal on the issue of contract interpretation. As I said earlier, the reference to the policy being joint is better suited to a situation where two people take out insurance on the life of a third person. It is not apt to describe the present case at all, as a matter of interpretation.

 

Steve Keall
Barrister
11 June 2017