Lease of premises to tenant — Landlord covenanting to insure property — Landlord insuring property in its own name — Sale of freehold in property — Property destroyed by fire between contract and completion — Sale going ahead at contract price taking no account of fire — Whether insurers obliged to pay sum under insurance policy — Whether landlord indemnified in full by receipt of purchase price — High Court holding that insurers must pay sum necessary fully to reinstate demised premises
The defendant was the freehold owner of a warehouse in Liverpool. On December 4 1978 it let it to the plaintiff for 25 years. Under the lease the landlord covenanted that he would cause the premises to be insured in a sum not less than the full reinstatement value against specified risks including fire. It followed from the scheme of the lease that although the tenant had the general obligation to reinstate the premises if they were damaged, he could not be required to do so if the damage requiring reinstatement had arisen from an insured peril and the landlord had recovered the reinstatement cost from the insurer. Under the insurance policy, the landlord and its associated and subsidiary companies were the only assureds. The tenant was not a co-assured.
On December 21 1989 the landlord contracted to sell the freehold subject to the lease in favour of the tenant. Completion occurred on March 22 1990. Between the two dates, on February 8 1990, the warehouse was destroyed by fire. However, completion proceeded and the price of the freehold was paid in accordance with the terms of the contract with regard to the fire damage. Under section 83 of the Fire Protection Metropolis Act 1974 the lessee was entitled to require the insurers to discharge such liability as they might have to their assured under the policy by reinstating the premises.
A notice was served on the insurer under the Act, but they declined to comply with it. They argued that they did not have any contractual liability to their assured and could not therefore have any statutory liability to the lessee. The result of the contract of sale was that at the time of the fire the assured had parted with his entire beneficial interest in the property retaining no other interest than his vendor’s lien for the price. When upon completion the assured received the price in full without any abatement on account of the fire, he was completely indemnified for his loss. The tenant applied to the court to determine whether the insurers were right in maintaining that nothing was payable by them.
Held Such sum was payable by the insurers under the insurance policy as was necessary fully to reinstate the demised premises in respect of the damage suffered.
1. The landlord owed an obligation under the lease to insure for the full reinstatement value. He therefore had an insurable interest up to that value because if he did not insure and the premises were damaged, he would be liable to the tenant. The full reinstatement value of the premises, which ought on that footing to have been recoverable from the insurer would be the measure of his liability: see Maurice v Goldsborough Mort & Co [1939] AC 452 at p 462.
2. The question whether the measure of the insurers’ liability was limited to the injury done to the landlord’s reversion depended in the terms of the policy. It was necessary to look at the particular position of the assured to see whether in the circumstances he would, by recovering the contractual measure, obtain more than an indemnity.
3. If the assured had only a limited interest in the property, being, eg a tenant or reversioner, a trustee, a mortgagee or a bailee, the value of his own interest might have diminished by much less than the value of the property or the cost of its reinstatement. But it did not necessarily follow that if the assured recovered the whole diminution in the value of the property or the whole cost of reinstatement he would be getting more than an indemnity. That depended on what his legal obligations were as to the use of the insurance proceeds when he had got them. If he was accountable for the proceeds to the owners of the other interests, then he would not be receiving more than an indemnity if the insurer paid the full amount for which the property was insured.
4. In the present case the subject matter of the insurance was damage to the premises up to the full reinstatement value and not simply that proportion of it which might relate to the assured’s reversion. Although the assured had no general obligation under the lease to reinstate the premises after a fire irrespective of receipt of the insurance proceeds, it was expressly provided that upon receipt of insurance proceeds, he had an obligation to pay them out in reinstatement, for the benefit of the tenant.
5. If after the day of the fire the insurer had been required to meet his obligations to the assured, even if there had been no lease, it would have been no defence for the insurer at that stage to say that in due course the assured would be entitled to receive an undiminished purchase price on completion. Without any express agreement to that effect, a person who contracted to indemnify another could never refuse on the ground that an indemnity could be obtained from someone else: see Collingridge v Royal Exchange Assurance Corporation (1877) 3 QBD 173.
6. If the insurers had paid the reinstatement cost to the assured before completion, they would not have been entitled by virtue of their subrogation rights, to recover an equivalent amount out of the purchase price once it was paid six weeks later. The assured, having received the insurance moneys would have become liable to the tenant to lay them out in reinstatement of the premises. The subsequent receipt of the purchase price would not in those circumstances diminish the loss.
Hazel Williamson QC and John Nicholls (instructed by Simmons & Simmons) appeared for the tenant; Michael Hart QC and William George (instructed by Harrison Drury & Co) appeared for the landlord and its insurer.
