On 10 October 2016, the English Court of Appeal (Court) handed down an important decision on the measure of indemnity under a property policy and, in particular, the effect of reinstatement provisions.
In Great Lakes Reinsurance v Western Trading ( EWCA Civ) the insured company was the occupier and manager of premises belonging to the company's controller, Mr Singh. The insured was under an obligation to insure the premises and to reinstate them in the event of loss or damage. The premises, for which planning permission to convert into apartments had earlier been obtained, were unoccupied and used for storage. They were insured under a policy for the sum of £2,121,800, representing the rebuilding cost of the property. The market value was only £75,000.
The policy provided that the insurers would indemnify the insured against loss or damage, but reinstatement costs were payable only if the reinstatement work had been commenced and carried out with reasonable despatch. If the cost of reinstatement had not actually been incurred, there was to be no payment beyond the indemnity amount. The insurers sought to avoid the policy for non-disclosure and misrepresentation, and also for the insured's lack of insurable interest.
The matter went to trial, the insured seeking a declaration that it was entitled to reinstatement costs if work was commenced. At the trial, Mr Singh stated his intention to rebuild the premises, although no reinstatement work had at that stage been carried out. The judge dismissed the insurers' defences and granted the declaration. The Court, making a minor variation to the judge's ruling, upheld his general conclusions.
The Court laid down the following general principles:
- Where real property was destroyed, the measure of indemnity to which the insured was entitled depended on:
- the terms of the policy
- the interest of the insured in, or its obligations in respect of, the property insured, and
- the facts of the case, including, in particular, the intention of the insured at the time of the loss. If the insured had a limited interest in the property, it would be material to consider whether the subject matter of the insurance was the whole interest in the property insured and not solely that of the insured himself and, if it was the whole interest, whether the insured was accountable to others for any sum received in excess of his interest.
- Where the insured was obliged to a third party to replace the lost property, the cost of doing so was prima facie the measure of indemnity where there was a genuine intention to replace. Even where the insured was the owner of the property, and not someone with an obligation to reinstate or repair, the indemnity was to be assessed by reference to the value of the property to the insured at the time of the peril. In most cases of damage or destruction, the insured's loss was the cost of reinstatement.
Although that might not be the case if, for instance, 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 was doubtful whether a claimant who had no intention of using the insurance money to reinstate was entitled to claim the cost of reinstatement as the measure of indemnity, unless the policy so provided.
- If the insured wished to claim reinstatement costs, the insured's intention to reinstate had to be genuine, fixed and settled, and there had to be a reasonable prospect that reinstatement could be brought about.
- Although reinstatement costs were not recoverable under the policy until the insured had begun to reinstate with reasonable despatch, the insured would not have failed to act with reasonable despatch whilst insurers denied any liability or asserted that the insured was not entitled to be compensated on the basis of reinstatement.
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