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Friday, July 27, 2012

Assigning insurance policies

The Press has an article on the problems with assignment of insurance policies written by Duncan Cotterill lawyers Richard Lang and Stephanie Grieve.

It is a useful article and provides some background along with observations on how to handle the situation. The article is here. It is also on the Duncan Cotterill website here.

There appear, to my layman's eye, to be four significant errors of fact or issues in the article.

The first is in the paragraph that reads:

The problem now is that IAG and Vero say they are not obliged to repair or replace properties for buyers who have taken an assignment of the seller's insurance claim. Instead, the insurers will pay the buyer the indemnity value.

So far all news from IAG and Vero has been to the effect that repairs will be honoured but, should a damaged property turn out to be too expensive to repair, the new owner will be paid out the indemnity value. The following is from a Press article on the 21st of July (here):

IAG and Vero's approach is that if a homeowner with full replacement insurance decided to sell their quake-damaged house, the buyer would take over the insurance claim for repairs, but if the property became uneconomic to repair settlement would be limited to the indemnity value.

On or about the 5th of July the Property Law Section of the New Zealand Law Society wrote to both IAG and Vero asking them to confirm, amongst other things, whether their practice to assign claims allowed for assignment of the right to repair but not a right to rebuild. Can't find any sign of a reply. Consequently the statement "are not obliged to repair" may be incorrect and unnecessarily disturbing.

The second error or issue involves the following:

Unless the insurance policy states that insurance claims cannot be assigned (as some do), the insured person has the legal right to assign that right to anyone they want.

This seems extraordinarily broad.

What if the purchaser was a known risk to insurance companies and had previously been denied insurance (e.g. insurance fraud)? Can the insured really over-rule the insurer's right to determine who holds or benefits from a policy?

In cases where there were assignments of entitlements covered by contents policies, it is quite unclear how these could be considered part of the agreement for sale and purchase of a house.

Reference to legislation or case law would be comforting here.

The third issue relates to the comment:

You also need to review what due diligence you did in relation to the earthquake damage and insurance claim when you purchased the property.

What is meant by “… due diligence you did…”. It seems to me that buyers and sellers of property engage lawyers to undertake the due diligence work for them. This being so, any lawyer who did not think or bother to clear the deed of assignment with the insurance company may be the party at fault.

It may be a complaint to the Law Society will be necessary, especially in the more clear-cut cases of agreements to assign entitlements for benefits covered by contents policies.

The fourth is the comment:

One of the most difficult aspects of this change in approach is that it is effectively retrospective. This means that people, who bought properties on the basis that the insurance claim they were taking over would give them the same rights to reinstatement as the original owner, will be caught out.

What does “effectively retrospective” mean? Surely it is either retrospective or it isn’t? My understanding is that one of the insurers concerned discovered what they had been doing was a “mistake” and changed their practice. How does the law cover mistakes?

The bottom line: in a post-earthquake world, where nothing is normal, a prudent course of action would have been to assume nothing.

If somewhere in the process lawyers had taken the simple step of confirming with insurance companies whether they agreed to the transfer of policies, and what conditions might apply, perhaps all of this would have been avoided.

The Duncan Cotterill article concludes:

In short, take care, get really good advice …

Surely that is what buyers thought they were getting by going to a lawyer?

There was a blog post on some of this on the 5th of July here.

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