Insurance – Indemnity – Building managed by respondent destroyed by fire – Appellants insuring property for cost of reinstatement – Whether respondent entitled to recover reinstatement cost – Whether entitlement depending on demonstration of intention to reinstate – Whether recovery confined to any reduction in value of property – Appropriate form of declaration – Appeal dismissed
The respondent company managed a property portfolio that included a former leather factory in central Walsall, which dated from about 1906 and was a local listed landmark. The respondent had insured it with the appellants in the amount of the rebuilding cost, which was considerably more than the property itself was worth. The memorandum to the insurance policy provided that the amount payable for any of the insured events was the cost of reinstatement of the property lost, destroyed or damaged, with “reinstatement” defined, in the case of a building, to mean rebuilding “in a condition equal to but not better or more extensive than its condition when new”.
In 2009, planning permission had been granted for the conversion of the factory building into 31 residential flats. However, by July 2012, the property was essentially a shell, unused save for occasional rough storage on the ground floor. At that date, the property was destroyed by fire and its listed building status was consequently revoked.
The respondent made an insurance claim which the appellants disputed. The respondent applied to the court for a declaration that he was entitled to be indemnified for the cost of reinstating the building so far as it did not exceed the policy limit, which was a sum in excess of £2m. At the trial, the expert evidence showed that the value of the property before the fire was only £75,000, based on its existing condition and use. Although the respondent did not itself own the property, the judge found that it managed it for the owner on terms that it was entitled to let and receive the rent from the property but was also responsible for the maintenance and insurance and was required to replace the property in the event of fire.
The judge held that, if the respondent reinstated the building, it was entitled to the cost of doing so. He made a declaration that the respondent was entitled to be indemnified under the insurance policy in respect of the losses that it had suffered as a result of the fire up to the policy limit under the policy.
The appellants appealed. They argued that the respondent’s only remedy was in damages for any reduction in open market value in circumstances where, inter alia, the owner of the property had shown no signs of making reinstatement.
Held: The appeal was allowed in part.
(1) Something had gone awry in the link between judgment and declaration in the instant case. The judge thought that a declaration would be appropriate because of the protection that it would afford the insurers, with the effect that they would have to pay if reinstatement took place, but would not have to pay if there was no reinstatement. However, the declaration as made did not have that effect since it referred simply to “losses”. It did not achieve its intended purpose of making clear that, if reinstatement was carried out, the appellants would be required to indemnify the respondent in respect of the cost up to the limits of the policy.
(2) Where real property was destroyed, the measure of indemnity to which the insured was entitled would depend partly on the terms of the policy, the interest of the insured in the property, or its obligations in relation to it, and the intention of the insured at the time of the loss. A contract of insurance, such as a fire policy, was a contract of indemnity only and, while the insured was entitled to an indemnity, it should never be more than fully indemnified: Castellain v Preston [1883] 11 QBD 380 applied.
(3) In the instant case, the measure of the respondent’s indemnity under the memorandum to the insurance policy was the cost of reinstating the property. The respondent was bound to insure the property and to replace it in the event of fire. It therefore had an insurable interest in the property. The total sum insured was not intended to represent the anticipated impact on the sale value of the property of the destruction of the buildings; instead, it was to represent the cost of reinstatement by the rebuilding of the property in a condition equal to but not better or more extensive than its condition when new. The respondent therefore had an express contractual entitlement, subject to certain conditions, to the reinstatement cost. Further, in light of the judge’s finding that the respondent was bound to reinstate the property, this was not a case where it had a limited interest in the property without being bound to account to anyone for the insurance monies in excess of its own interest. It was insuring against the cost of that which, on the judge’s findings, it was obliged by contract to do.
(4) Where the insured was obliged to replace the lost property, the cost of doing do was prima facie the measure of indemnity. The respondent’s obligation was not an obligation to replace on request and therefore the absence of any request by the owner did not affect the respondent’s entitlement. Nonetheless, it was doubtful whether a claimant who had no intention of using the insurance money to reinstate, and whose property had increased in value on account of the fire, was entitled to claim the cost of reinstatement as the measure of indemnity unless the policy so provided. In the instant case, that meant that the cost of reinstatement would not be recoverable if the owner of the property had no intention to reinstate.
(5) That begged the question as to the requisite degree of intention and as to what, if any, safeguard was available to an insurer who paid out the cost of reinstatement to an insured who then found that it could not reinstate or, even if it could, in fact sold the property. The better view was that the insured’s intention needed to be not only genuine, but also fixed and settled, and that what it intended had to be something that there was a reasonable prospect of it bringing about. An insurer who paid out had, in general, no redress if none of the money was used in reinstatement. However, in a case where, at the time of the hearing, there was a real possibility that reinstatement might not in fact occur, the better view was that it was open to the court to decline to make an immediate award of damages and either to make some form of declaratory relief or, alternatively, to postpone assessment of the extent of indemnity, and the payment of it, until such time as it was apparent that reinstatement could and would go ahead, or at least until there was a reasonable prospect of it.
(6) Accordingly, in all the circumstances, it was open to the judge to make a declaration to the effect that, if the respondent reinstated the property, it would be entitled to an indemnity from the appellants. A declaration in those terms would be substituted for the declaration which the judge had in fact made.
Robert Moxon Browne QC and Lucas Fear-Segal (instructed by Kennedys Law LLP, of Birmingham) appeared for the appellants; Ben Elkington QC (instructed by Edwin Coe LLP) appeared for the respondent.
Sally Dobson, barrister
Read a transcript of Western Trading Ltd v Great Lakes Reinsurance (UK) SE and another here
