Destruction by fire of large part of old Suffolk maltings–Claim under contract for insurance–Extent of indemnity–Alternative methods of evaluating loss–Market value, equivalent modern replacement, or reinstatement–Whether reinstatement substantially as before or reconstructed with cheaper and salvaged, but serviceable, materials–Arguments on quantum–Indemnity requires substantial reinstatement with appropriate economies–Insurers’ submissions on non-disclosure avoiding policy rejected–Claimants awarded £343,320
In their
action the plaintiffs, Robert Marshall Reynolds, a farmer, and Keith Anderson,
a heavy haulage contractor, who had purchased old maltings at Stonham Parva,
Suffolk, claimed under an insurance policy in respect of severe damage to the
premises caused by a fire which largely destroyed the part of the main building
which consisted of the ‘floor maltings.’
The defendants were the Phoenix Assurance Co Ltd, the Royal Insurance Co
Ltd, the Sun Alliance and London Insurance Group, the Norwich Union Fire
Insurance Society Ltd and the Fire and All Risks Insurance Co Ltd.
R Beldam QC
and S Sedley (instructed by Vizards) appeared on behalf of the plaintiffs; J G
Wilmers QC, J Mitchell and S M Gee (instructed by Barlow, Lyde & Gilbert)
represented the defendants.
Giving
judgment FORBES J said that the case was concerned with a fire which did
considerable damage to some old maltings at Stonham Parva in Suffolk. The
questions which arose were broadly three–(1) what was the amount of the loss;
(2) could the insurers avoid the policy on the ground of non-disclosure; and
(3) what was the effect of the Rehabilitation of Offenders Act 1974 so far as
relevant to the question of disclosure.
History
The old
maltings, of massive construction, were used when the process of malting barley
included the spreading of the barley to a shallow depth on the floors. New
malting processes were developed and the property was eventually sold to the
present plaintiffs, Robert Marshall Reynolds and Keith Anderson, for £16,000.
They acquired it for the purposes of a grain store and for milling grain for
animal feeding-stuffs. The main part of the maltings consisted of three
buildings, the ‘floor maltings,’ the old kiln building, and the malt store. The
premises were at first insured for £18,000, being the amount of the purchase
price plus an addition for cost of acquisition. After advice received by the
plaintiffs and various discussions and negotiations the sum insured was
substantially increased so that at the date when a fire occurred, which
destroyed the great part of the old floor maltings, the buildings were insured
for £550,000, machinery for £28,000 and stock for £50,000. The total premium
was £1,919.62.
The fire
occurred on November 9 1973. Discussions took place between assessors
representing the plaintiffs and adjusters representing the defendant insurance
companies as to the amount payable to the plaintiffs under the policy in
respect of the loss caused by the fire. In reply to a question from the
adjusters the plaintiffs’ assessors confirmed that it was the plaintiffs’
intention to rebuild the premises destroyed or damaged, the use of the rebuilt
premises being for the manufacture of feeding-stuffs and the storage of grain.
There was a dispute as to whether any agreed sum should be paid to the
plaintiffs before rebuilding was started or only by way of interim or stage
payments. At a meeting between the plaintiffs’ assessors and the adjusters it
was agreed, but subject to a report to the insurers, (a) that the appropriate
way of calculating the loss was by reference to reinstatement costs, (b) that
the amount of the indemnity payment should be £243,000, and (c) that the whole
sum should be paid within four weeks irrespective of whether rebuilding had
started by then or not. However, the adjusters’ principals, the insurers,
although agreeing the figure of £243,000, provided that the plaintiffs were
really going to reinstate, insisted that there should be an initial payment on
account of £20,000 when the order for rebuilding was signed and that thereafter
stage payments would be made as certified by the insured’s architects. As
agreement could not be reached, this action was started.
Extent of
Indemnity
The material
provision of the policy under which the plaintiffs claimed was as follows:
The insurers
severally agree that if the property insured described in the said schedule or
any part of such property be destroyed or damaged by fire the insurers will pay
to the insured the value of the property at the time of the happening of its destruction
or the amount of such damage or the insurers at their option will reinstate or
replace such property or any part thereof, provided that the liability of the
insurers shall in no case exceed in respect of each item the sum expressed in
the said schedule to be insured thereon.
The sum
insured, as expressed in the schedule, on that part of the premises damaged by
fire was £450,000.
Three possible
ways of evaluating the plaintiffs’ loss had been canvassed, (1) market value,
(2) equivalent modern replacement, and (3) reinstatement.
Market
Value
This is the
value which the premises would have fetched if sold in the open market
immediately before the fire. Valuation evidence for the plaintiffs had been
given by Mr Fullerton of H C Wolton & Son, Bury St Edmunds, and Mr Rankin
of Henry Butcher & Co, and for the defendants by Mr Parker of Fuller
Peiser. Mr Fullerton’s valuation was £240,000, Mr Rankin’s £180,000, of which
he attributed £100,000 to the building damaged by fire. Mr Parker put a value
of £25,000 on the premises, but added that the land was worth £20,000 as a
cleared site. None of this evidence appeared to his Lordship to be satisfactory
and he was left in considerable difficulty in arriving at an appropriate point
between the values of Mr Rankin and Mr Parker.
Equivalent
Modern Replacement
This method
was based on the principle that the value of an old building could not exceed
the cost of erecting a new building which would fulfil the commercial purpose
of the old. On this
which to erect the replacement buildings, would be £55,000. This was merely an
alternative way of arriving at the market value.
Reinstatement
Here there was
a multiplicity of estimates. Eliminating those which could not stand
examination, his Lordship was left with a figure of £315,671, if the plaintiffs
were entitled to reinstatement of the building substantially as before without
taking any risks over the re-use of salvaged materials, and £246,883 if the
plaintiffs were only entitled to a building reconstituted with cheaper and
second-hand, but serviceable, materials.
The
Argument on Quantum
Although he
(his Lordship) rejected the submission that the parties actually contracted on
the basis that the indemnity was to be measured by the cost of reinstatement,
such cost still remained a possible means of measuring it. The classic
statement of the assured’s right to indemnity was to be found in the judgment
of Brett LJ (as he then was) in Castellain v Preston (1883) 11
QBD 380 at p 386, where he said that ‘this contract means that the assured, in
case of a loss against which the policy has been made, shall be fully
indemnified, but shall never be more than fully indemnified.’ A similar broad principle was apparent in the
law of compensation for compulsory acquisition; see per Scott LJ in Horn
v Sunderland Corporation [1941] 2 KB 26 at p 42. The difficulty,
however, lay in deciding whether the award of a particular sum amounted to
enrichment or impoverishment. This question could not depend on an automatic or
inevitable assumption that market value was the appropriate measure of loss.
Indeed in many, perhaps most, cases market value seemed singularly inept, as
its choice subsumes the proposition that the assured can be forced to go into
the market (if there is one) and buy a replacement. There must be many
circumstances in which an assured should be entitled to say that he does not
wish to go elsewhere and hence that his indemnity is not complete unless he is
paid the reasonable cost of rebuilding the premises in situ. At the same
time the cost of reinstatement could not be taken as inevitably the proper
measure of indemnity. The question of the proper measure thus becomes a matter
of fact and degree to be decided on the circumstances of each case.
His Lordship
was satisfied that the plaintiffs genuinely intended to reconstruct the
maltings if they received a sum to cover the cost of reasonable reconstruction.
He rejected the possible argument, based on an analogy with the compulsory
purchase case of The Festiniog Railway Co v Central Electricity
Generating Board (1962) 13 P & CR 248, that the amount of the indemnity
shall be reduced on the ground that the plaintiffs would only be prepared to
reconstruct if they obtained the insurance money to cover the cost. He
therefore concluded that on the basis of reinstatement the plaintiffs were
entitled to £246,883, plus VAT at 8 per cent and architects’ and surveyors’
fees at 12 1/2 per cent. If he were wrong, and if the Festiniog test
applied, namely, what would a sensible commercial person using his own money do
in the circumstances, the safest measure would be the cost of modern
replacement. In that case he was not satisfied that the indemnity would be more
than the £55,000 necessary to buy and erect a suitable building of steel and
asbestos construction and the land on which to erect it.
The
well-established insurance principle of betterment, ie the principle that an
allowance must be made because the assured was getting something new for
something old, had to be considered. If the figure of £246,883 was the correct
one, he (his Lordship) did not think that any deduction should be made for
betterment. The estimate already took into account the re-use of a great deal
of secondhand material or the substitution of inferior substances. If, however,
the figure of £55,000 were adopted, a deduction of £10,000 would be fair. The
total figure, including land, would then be £45,000 on this basis.
There was also
a point in regard to the planning position. It seemed justifiable to conclude
that there would be no planning impediment to the reconstruction of the
building substantially as before. Permission might not, however, be granted for
the erection of a modern steel and asbestos building on the site. In that case
the land would be a mere derelict site. It was doubtful whether, on these
hypotheses, so unattractive a piece of real property would command any
realistic price on the market. His Lordship was accordingly unwilling to reduce
the value of the maltings on this basis from the figure of £45,000 in order to
take account of the residual value of the land itself.
Non-Disclosure
The defendants
had claimed that they were entitled to avoid, and had avoided, the policy on
the ground of material non-disclosure. [After referring to the law relating
to a proposer’s duty of disclosure in the case of an insurance contract, as a
contract uberrima fides, and reviewing the evidence, the judge concluded that
the two matters on which the defendants relied were not material facts which it
was the duty of the plaintiffs to disclose.]
Fires
Prevention (Metropolis) Act 1774
The plaintiffs
had written to request the defendants that the insurance money should be laid
out and expended towards rebuilding or reinstating or repairing the
fire-damaged premises. The plaintiffs had made this request in order to bring
into effect the provisions of the Fires Prevention (Metropolis) Act 1774 and
they asked the court to declare that the defendants were by law required to
cause the insurance money to be laid out accordingly. The defendants now argued
that the court was bound to make this declaration and that the plaintiffs had
no other remedy. The 1774 Act was, however, intended to deal with a different
situation, namely, to prevent the insurance money being paid to an assured who
might make away with it. It was not intended to apply to a case where the
assured and the person serving the notice were one and the same. The claim for
a declaration failed.
The result was
that in his (his Lordship’s) view the proper figure to provide an indemnity
under the policy was £246,883, but this, of course, was the sum for which the
work could have been done in 1974. The damage which the plaintiffs had suffered
was measured by the failure of the defendants to indemnify them against their
loss, ie the cost of reinstating the building: see per Hamilton J in William
Pickersgill & Sons Ltd v London & Provincial Marine &
General Assurance Co [1912] 3 KB 614 at p 622. The proper figure to take in
view of the rise in costs was 115 per cent of the 1974 figure in order to carry
out the same building work today. This amounted to £283,915, to which should be
added 12 1/2 per cent for architects’ and surveyors’ fees (£35,490) and 8 per
cent VAT (£23,914) making a total of £343,320. This was the proper sum for
unliquidated damages and was sufficient on the evidence to put the plaintiffs
in the position in which they would have been had the defendants not refused to
pay under the contract.
The
plaintiffs were awarded their costs on the claim and counterclaim.
