Can an insurer withhold paying until the homeowner actually repairs or rebuilds? 21 May 2015
In the case of East v Medical Assurance New Zealand Limited, the question of when an insurer has to make full payment to a homeowner to settle their earthquake damage claim was considered.
The insurer argued that it did not have to make payment until the homeowner actually incurred the cost of repairs/rebuilding. The homeowner argued that the insurer had to make payment in advance of the works.
On the basis of the homeowner’s policy wording, the Court initially agreed with the homeowner. It held that, so long as the homeowner has made an election to repair/rebuild, the insurer was then liable to pay the homeowner the estimated reasonable cost of repair/rebuilding.
The insurer however appealed to the Court of Appeal which disagreed, instead holding that the insurer was not required to pay the cost of repairs/rebuilding until the homeowner became liable to do so (i.e. under a building contract).
The policy wording
The policy wording stated that:
- The insurer will “cover the cost of rebuilding or restoring the dwelling to a condition substantially the same as new, so far as modern materials allow, and including any additional costs which may be necessary to comply with any statutory requirements or Territorial Authority by-laws” and
- "If you elect not to rebuild or restore the building we will make a cash settlement not exceeding the indemnity value as assessed by a qualified Valuer."
Unlike some other policies (for example, Tower Insurance’s standard home policy at the time of the Canterbury earthquakes), the policy did not provide that the insurer was not required to make full payment until costs were actually incurred.
The Appeal decision
The Court of Appeal held that the words “will cover the cost” meant the insurer’s obligation to pay was only triggered when the reinstatement costs were actually incurred or just about to be incurred.
The Court’s decision was based on a number of different factors including:
1. The insurer had different obligations under the policy depending on whether the homeowner was going to repair/rebuild or not. One option expressly provided for a cash payment, the other did not.
If the homeowner was not repairing/rebuilding, the insurer was required to pay an agreed amount of money, essentially fixed at "market value" (which is generally less than replacement value). If the homeowner was repairing/rebuilding however, the policy provided that the insurer would "cover" the cost, which simply meant providing sufficient funds to protect the homeowner against having to pay the rebuild/repair costs when they were incurred. This latter obligation did not mean that the insurer had to pay out money where the homeowner had not incurred and may never incur the cost of repairs/rebuilding.
2. Under the policy, the insurer was agreeing to cover the cost, not an estimate of costs.
To provide otherwise had a number of difficulties, given that estimates are approximate and may change. In contrast, rebuild/repair contracts (which the homeowner would enter into prior to starting repairs/rebuilding) are generally for fixed prices subject only to variations under agreed provisions in the contract. Once the insurer approves the terms and conditions of the contract, the insurer is then liable to pay in accordance with it. In doing so, difficulties with estimates are avoided.
3. If the insurer was required to pay the homeowner estimated repair/rebuild costs before the homeowner actually committed to repairing/rebuilding, the insurer would not be able to stop them using the cash for some other purpose.
The insurer could take legal action to recover funds paid in excess of indemnity (the amount the homeowner was entitled to under the policy if they did not rebuild/repair) but there would be difficulties in doing so.
4. Similar to point 3, if the insurer paid on an estimate which exceeded actual repair/rebuild costs, the homeowner would be bound to pay the surplus back to the insurer. The policy however did not address this and, as such, there would be contractual difficulties for the insurer recovering any overpayment.
5. Concerns as to how the insurer would pay in practice (once the homeowner committed to repairing/rebuilding) were addressed by the fact that, once the insurer accepted the homeowner's claim and agreed to meet the repair/rebuild costs, the insurer was then bound to cover all costs the homeowner was required to pay under an approved repair/rebuild contract.
If the insurer did not, the insurer would be exposed to "serious legal and reputational consequences". The Court was not aware of any cases to date involving a dispute with an insurer over non-payment where the insurer had agreed to meet the repair/rebuild costs.
This case indicates that, on similar policy wording, homeowners who have made an election (binding decision) to repair/rebuild must wait until they incur a repair/rebuild obligation (i.e.under a building contract) before they can require their insurer to pay the cost of such to the homeowner.
If you would like any insurance advice please do not hesitate to contact Paul Cowey at firstname.lastname@example.org.