Problems arising from the Assignment document.
Anyone who has purchased, or may be purchasing, a property still needing repairs and where the insurance policy is signed over should read the item in the CanCERN newsletter (reproduced below).
The problems raised are possibly a cause for concern if you bought, or are thinking of buying, a house needing significant repairs and/or you will need to move out while repairs are carried out. There may as yet be undisclosed problems.
Depending on the circumstances of the property purchased, you may encounter two expensive situations that you and your lawyer need to be aware of. If it turns to custard (a repair turns out to be a rebuild, or you need alternative accommodation while repairs are being carried out) you may be faced with unexpected costs. If your lawyer recommended or checked the terms of the agreement for sale and purchase before you signed it, you might end up having to take action against them for your loss as they had not acted with a suitable degree of diligence.
To the extent that the issue is clear, it hinges on what part of an insurance policy can be transferred at the time a property is sold.
When house insurance is assigned to a purchaser, some insurance companies believe that the nature of the policy changes. For those buying a damaged house there are two very important changes that happen. The first, and biggest, is that at the time of sale a full replacement policy can become an indemnity policy (i.e. you are entitled only to current market value - what is an earthquake damaged house worth?).
The consequence of this is that if the damage turns out to be more extensive than originally thought, and repairs are uneconomic, the new owner WILL NOT be entitled to have a replacement house built. Instead the insurance company will pay out what they assess to be the indemnity value. The difference between a rebuild and indemnity value will be eye-wateringly large (and likely to result in receiving less than you paid for the property).
The second change relates to alternative accommodation allowances. While the owner of the property at the time of the damage was permitted a certain amount to live elsewhere during repairs, that allowance probably won't be transferable when the house is sold. As this allowance is usually part of a house contents policy, and the contents policy isn't being transferred, it does seem logical.
Nowhere mentioned is what happens should a property be further damaged or destroyed by other events (new earthquakes, storm, fire). Is the policy also considered to have indemnity value under those circumstances?
In the CanCERN newsletter the insurer mentioned is IAG, however this should not be seen as just an IAG issue. Chances are all insurers have a similar view. If in doubt ring your insurance company or lawyer.
From the CanCERN newsletter
Last week we summarised our understanding of the interpretation change to the Assignment of the Deed Rights. We have since sent this summary to insurers, the Canterbury Law Society, a few specific lawyers we know and CERA for further clarification and we will update you as we hear anything. We have also sought responses to the following questions from some of these people:
- Who informed the insurers that they had been interpreting this part of their policy incorrectly and that the below interpretation was correct?
- Have all insurers been informed of this change to interpretation?
- Has the document wording of the Assignment of the Deed of Rights been changed to reflect this change in interpretation?
- Who is responsible for passing this interpretation information onto lawyers and real estate agencies and other people that may be involved in a sale and purchase agreement on a damaged but unsettled home?
- Do the individual insurers have a legal obligation to communicate this change of interpretation of policy to all policy holders or directly to those who have indicated they intend to buy a house rather than build?
IAG has provided the following clarification in terms of their position:ADDED 13 July: There is another post on the topic here.
As discussed, the insurance policy on the existing dwelling is between the current owners and the insurer. IAG’s policies entitle a customer to rebuild or repair their home. If they elect to sell their home then they are foregoing the reinstatement entitlements and an indemnity settlement is the maximum settlement. IAG is willing to look at honouring repairs of a property for the new purchaser but if the home becomes uneconomic to repair then the maximum IAG will pay is indemnity or market value to the purchaser. Therefore we advise people to check with their insurers before entering into agreements so that they are clear on what they can transfer or have transferred to them. They should understand if the property is repairable or a total loss before making any decisions. In addition often other policy entitlements such as alternative accommodation cannot be carried over by the purchaser.Southern Response has supplied this initial response:There was a case (commercial insurance, we believe) to the effect that an assignees rights were limited to indemnity value rather than rebuild value. This, it would appear, is the issue that you are discussing. Our policy is that we would never exercise that option, although it is open to insurers to seek to do so.