Court of Appeal confirms insured's entitlement to a declaration of indemnity for cost of reinstatement of property damaged by fire

In Great Lakes Reinsurance (UK) SE v Western Trading Limited [2016] EWCA Civ 1003 the Court of Appeal confirmed that the court may make a declaration that an insured under a property insurance policy is entitled to be indemnified for the cost of reinstating property damaged by an insured peril, particularly in circumstances where it is unclear whether the insured intends or is able to reinstate the property. The case also provides helpful guidance on the insured's right to be indemnified on a reinstatement basis under a property insurance policy.

Background

The case concerned two neighbouring buildings: (i) the principal building at 1-7 Station Street, Walsall, known as the Boak Building, a listed building and (ii) No 8 which was part of a terrace (together the "Property"). The Property was owned by Chinderpal Singh but insured by Western Trading Limited ("Western Trading") which held and managed Mr Singh's property portfolio. The Property was insured under a property insurance policy (the "Policy") with Great Lakes Reinsurance (UK) SE (the "Insurer") for £2,121,800, which was understood to be the rebuilding cost of the Property.

The Property was destroyed by fire and Western Trading sought a declaration that it was entitled to be indemnified under the terms of the Policy for the losses it had suffered up to the limits of indemnity within the Policy. The Insurer argued that (i) Western Trading did not have an insurable interest in the Policy; (ii) the Policy was avoidable for misrepresentation and non-disclosure; and (iii) Western Trading was in breach of warranty. The judge at first interest rejected these defences. He held that Western Trading was entitled to the cost of reinstatement provided it reinstated the Property and granted a declaration that "The Claimant is entitled to be indemnified by the Defendant in respect of the losses it has suffered (and is continuing to suffer) as a result of the fire on 24th July 2012, up to the limits of indemnity within the policy".

The Insurer appealed against the grant of the declaration.

The Insurer submitted that there should be no declaration and that the court should determine the measure of indemnity and in particular whether Western Trading was entitled to recover the cost of reinstating the Property.  The Insurer argued that the measure of indemnity was the reduction, if any, in the open market value of the Property. The Property was worth about £75,000 before the fire but after it (following delisting) it was worth about £500,000. Hence, the Insurer submitted there had been no reduction in the market value and there was no loss to be indemnified.

Terms of the policy

The Insuring Clause of the Material Damage – Section A of the Policy provided:

“Subject to the General Conditions and Exclusions of this Certificate, and the conditions and exclusions contained in this Section, we the Underwriters agree to the extent and in the manner provided herein to indemnify the Assured against loss of or damage to the property specified in the Schedule (hereinafter referred to as ‘the Property’) caused by or arising from the Perils shown as operative in the Schedule, occurring during the period of this insurance.

“Underwriters shall not be liable for more than the Sum Insured stated in the Specification or in the Certificate in respect of each loss or series of losses arising out of one event at each location as stated in the Schedule.”

A memorandum to Section A of the Policy (the "Memorandum") provided that the amount payable for loss, destruction or damage of insured property would be the reinstatement value provided certain conditions were met. For the purpose of the Memorandum 'reinstatement' meant:

"a) the carrying out of the following work, namely,
i) Where property is lost or destroyed, the rebuilding of the property, if a building … in a condition equal to but not better or more extensive than its condition when new."

The Special Provisions in the Memorandum which had to be met included in particular:

"a) The work of reinstatement (which may be carried out upon another site and in any manner suitable to the requirements of the Assured subject to the liability of the Underwriters not being thereby increased) must be carried out with reasonable despatch otherwise no payment beyond the amount which would have been payable under the Policy if this Memorandum had not been incorporated therein shall be made;
…
c) No payment beyond the amount which would have been payable under the Policy if this Memorandum has [sic] not been incorporated herein shall be made until the cost of reinstatement shall have been actually incurred."

Decision

Measure of indemnity

Following a line of authorities the Court of Appeal found that the measure of indemnity to which the insured is entitled where insured real property is destroyed depends on "(i) the terms of the policy; (ii) the interest of the insured in, or its obligations in respect of, the property insured; and (iii) the facts of the case including, in particular, the intention of the insured at the time of the loss".

The measure of indemnity under the Memorandum

Christopher Clarke LJ (who gave the leading judgment of the Court of Appeal) found that the measure of Western Trading's indemnity under the Memorandum was the cost of reinstating the Property. Western Trading was bound to insure the property and to replace it in the event of fire. Western Trading therefore had an express entitlement under the Memorandum to the reinstatement cost, provided certain conditions were met.

With regard to the conditions, he held that in many cases the insured will not have failed to act with reasonable despatch whilst insurers deny any liability or assert that the insured is not entitled to be compensated on the basis of reinstatement. He did not therefore regard Western Trading as having failed to act with reasonable despatch because it had not commenced reinstatement before the conclusion of the proceedings.

Measure of indemnity under the Insuring Clause alone

Since no reinstatement had actually begun and no costs had been incurred, the Court of Appeal also considered what would have been payable under the Policy if the Memorandum had not been incorporated.

It found that: "Where the insured is obliged to replace the lost property the cost of doing so is prima facie the measure of indemnity … at any rate where there is a genuine intention to replace". Even where the insured owns the property and is not under an obligation to reinstate or repair it, the indemnity is assessed by reference to the value of the property to the insured at the time of the peril. In most cases, this will be the reinstatement cost although that may not be the case if the insured was planning to sell the property, intending to destroy it anyway, or no one in their right mind would reinstate.

The problem in this case was that there was a real possibility that reinstatement would not take place. Christopher Clarke LJ said that it seemed to him that the insured's intention needs to be not only genuine but also fixed and settled and what he intends must be at least something which there is a reasonable prospect of him bringing about. He inclined to the view that in such a case it was open to the court to decline to make an immediate award of damages and either to make some form of declaratory relief, alternatively to postpone assessment of the indemnity.

Declaration

In light of its conclusion on the measure of indemnity under the Memorandum, the Court of Appeal was satisfied that it was open to the judge to make a declaration to the effect that, if Western Trading reinstated the Property, it would be entitled to an indemnity from the Insurer. As the judge had pointed out, a declaration gave the Insurer a measure of protection which an award of damages would not.  If Western Trading did not reinstate, the Insurer would be spared the consequences of the declaration.

However, something had gone awry in the link between the judgment and the declaration.  The judgment provided that if reinstatement took place, the Insurer would have to pay the cost of reinstatement but the declaration provided that the insured was entitled to be indemnified "for its losses".  The declaration therefore did not make it clear that the Insurer would be required to indemnify Western Trading if it reinstated the Property. This defect was remedied by amending the declaration to provide that "if the Claimant carries out reinstatement of the property lost then it will be entitled to be indemnified by the Defendant for the cost of so doing, up to the limit of indemnity".

The Court of Appeal also considered whether the grant of a money judgment, rather than a declaration, was the appropriate remedy.  This necessarily required a determination as to whether Western Trading was entitled to recover the cost of reinstating the Property under the Insuring Clause even though it had not yet been reinstated. This in turn required a determination as to whether there was a genuine intention to reinstate.

Notwithstanding what the Court of Appeal held to be the measure of indemnity under the Insuring Clause and the judge's finding that Mr Singh intended that Western Trading should reinstate, Christopher Clarke LJ came to the conclusion that the Court of Appeal should not order a money judgment and regarded a declaration in the amended terms as the appropriate remedy.

Comment

The Court of Appeal decision provides helpful guidance in light of the authorities on the measure of indemnity under a property insurance policy and in particular the circumstances in which the insured is entitled to be indemnified on a reinstatement basis.

Where the policy does not include an express reinstatement clause, prima facia the measure of indemnity is the cost of reinstatement where the insured is obliged to replace the lost property, at least where there is a genuine intention to replace.  Where the insured is the owner of the property, and is not obliged to reinstate or repair, the measure of the indemnity is the value of the property to the insured at the time of the peril.  In many cases the insured's loss will be the cost of reinstatement unless the insured was trying to sell the property at the time of the loss or intending to destroy it or if no one in his right mind would reinstate it.

Where there is a real possibility that reinstatement may not take place, the Court may decide not to make an award of damages and instead make some form of declaration.  This gives insurers a measure of protection which an award of damages would not.  The insurers will only have to pay for the cost of reinstatement if the property is actually reinstated.

The benefits to the insured under an express reinstatement clause are usually wider than would otherwise be the case under the policy.  Where an express reinstatement clause is included in the policy, this is normally subject to conditions including that the work of reinstatement is commenced and carried out with reasonable despatch and the cost of reinstatement has actually been incurred.  However, the requirement on an insured to begin to reinstate cannot be regarded as arising until the insurer has confirmed that it will indemnify the insured.  It is similarly open to the Court to make a declaration to the effect that if the insured reinstates the property, it will be entitled to an indemnity from insurers for the cost of reinstatement.