Insurance: assessment of damages in property damage policies

The High Court has ordered insurers to indemnify an insured for a property damage claim for building, plant and machinery destroyed in a fire on a reinstatement basis, as opposed to market value basis, despite no steps having been taken as yet to re-instate the damage. The court found that when determining the basis of assessment, due consideration should be taken of all the circumstances, both surrounding the insured event and up to trial, to determine what measure of indemnity would most fairly and fully indemnify the Insured for its loss.

Facts

The insured owned a textiles manufacturing business, which was insured under a Property Loss or Damage Policy, for material damage cover in respect of the buildings, plant and machinery at its manufacturing premises, together with business interruption cover. The premises were seriously damaged by a fire in May 2011 and the insured made a claim under its policy for material damage and business interruption.

Liability was accepted by insurers in October 2011, however the basis for valuing the damage was disputed. The insured sought indemnity on the basis of the property’s reinstatement value, whereas insurers sought to argue that the damages should be assessed on a market value basis. The parties agreed that the relevant date for assessing any amount payable was the date of the fire.

The policy contained a specific provision entitling the insured to indemnity on a reinstatement basis if specific conditions were met, including that reinstatement had commenced and proceeded without unreasonable delay and that costs of reinstatement had been incurred. At the time of trial, the insured had taken no steps to commence reinstatement at the site, and no costs had been incurred. It was common ground that these special conditions had not been met, and therefore that indemnity was to be provided under the general insuring clause “against loss”, which, the parties agreed, permitted indemnity on either a reinstatement basis or market value basis, however the criteria for determining this basis were disputed.

Decision

The court did not consider that it was necessary for the insured to show it had a continuous, genuine, fixed and settled intention to reinstate a property after damage. The key question was what loss had been suffered as a result of the fire, and what measure of indemnity most fairly and fully indemnified that loss.

The court reviewed the insured’s actions around the time of the fire and in the intervening 8 year period up to the trial. The insured had expressed clear intention to reinstate immediately following the fire, although it considered alternative locations, including sites abroad (as permitted under the policy), whilst investigating the redevelopment of the site as an event space. Eventually the insured concluded that reinstatement of the manufacturing facility on the original site would be the best option. Although the court noted that very little had been achieved towards reinstatement of the site prior to trial, it was clear that the insured, at the time of trial, still intended to reinstate the manufacturing facility as it had been prior to the fire.

When determining the basis of assessment, the primary focus should be on the insured’s position at the time of (and immediately before) the fire, for instance if the insured had intended to use the property, as opposed to selling or demolishing it, this would indicate that reinstatement basis was the best reflection of value. However subsequent events after the loss were also relevant as they might show that such a measure would result in an overcompensation to an insured.

The court concluded that determination of the appropriate measure of indemnity both in respect of the buildings and the plant and machinery required consideration of all the circumstances, including events before and after the fire, and up to and including the trial. Taking into account all of the facts, the court concluded that in this case, the appropriate measure of indemnity was on a reinstatement basis. The court also confirmed that it was not necessary for there to be an exact reinstatement of the site as it had been prior to the fire. The insured could take advantage of the fire to make changes, as long as in doing so it did not expect insurers to pay, or increase their liability.

The parties also sought a determination on whether any deduction should be made for betterment, to acknowledge that the insured would benefit from the better condition and quality of the reinstated building plant and machinery. The court confirmed that allowance should be made to ensure that the level of indemnity reflected actual loss and nothing more. However betterment also might be an inevitable and unavoidable consequence of reinstating a loss, and as such should not automatically be penalised. Any deduction for betterment should be considered on a case by case basis, depending on the damage suffered and repairs proposed. The court determined it had insufficient detail of the insured’s proposed reinstatement to assess whether a deduction should be made for betterment, but suggested the onus was on insurers to identify and justify any reductions they considered necessary to the reinstatement costs.

Comment

This case provides useful commentary on the basis of assessment of loss, particularly in property damages insurance claims, taking into account all the relevant circumstances. Albeit the court’s conclusion was that each case must be determined on a fact specific basis, and therefore no general assumptions can be made on the basis of assessment.

The case also provides commentary on Great Lakes Reinsurance v Western Trading Limited (2016), where the Court of Appeal found that there was a real prospect that the indemnity payment would not be used for reinstatement purposes and so awarded declaratory relief allowing insurers to delay payment and make the reimbursement as and when reinstatement occurred. In this case, the court concluded declaratory relief was unnecessary as taking into account all the events before and after the fire, and up to trial, reinstatement basis was the most appropriate measure of indemnity to ensure that the insured was fully indemnified. However, the court held that if this conclusion was wrong, declaratory relief would be appropriate. The Court did not interpret the Great Lakes judgment to mean that unless remedial works were carried out, an indemnity on the reinstatement basis could not be given, but instead that on the basis of Great Lakes the courts will look into all the circumstances, including up to the date of the trial, when determining the basis of an indemnity.

Further Reading: Sartex Quilts & Textiles Ltd v Endurance Corporate Capital Ltd [2019] EWHC 1103.

To read our Law-Now on the decision in Great Lakes Reinsurance v Western Trading Ltd [2016] EWCA Civ 1003, click here.