Technical Bulletin – When is the Insured entitled to the reinstatement cost?
Great Lakes Reinsurance (UK) v Western Trading Limited – UK Court of Appeal 2016
As part of our “Technical” updates I would like to bring your attention to a very important Court of Appeal case in the UK involving “reinstatement” under a Commercial Property Policy. Cases dealing with these type of losses are rare enough and the Judgement gives significant direction in a situation where an insured building is destroyed or damaged and whether the Policyholder is entitled to the reinstatement cost or reinstatement less wear and tear or indeed loss of market value or indeed whether he has suffered any loss at all.
Whilst I have attempted to summarise the pertinent points, the Judgement is well worth reading.
The Policyholder was Western Trading Limited and its Director and sole Shareholder was a Mr. Singh. The property insured was The “Boak” building, a six storey commercial building originally constructed as a leather factory in 1906 at Station Street, Central Walsall.
The building was unoccupied but was deemed suitable for conversion and in January 2009 planning permission was given for conversion into 31 residential flats but plans were moth balled.
By July 2012 the property was a shell occasionally used for storage and on the 24th July 2012 it was destroyed by fire and its listed building status was in consequence revoked.
Whilst the main issues of the case are in relation to “reinstatement” as part of their general defence Great Lakes argued the following:
- Insurable Interest
As Western did not own or have a tenancy over the property, Western were not contractually liable for its preservation and did not have an interest in the event of damage to the property. In essence Western was a company owned by Mr. Singh and its purpose was to manage and hold Mr. Singh’s property port folio so that Great Lakes argued that Western had no insurable interest.The Court found that the arrangement between Mr. Singh and Western was lawful and not unusual in relation to similar businesses. It was also clear that Western paid rent to Mr. Singh and managed the property for him. The Court was satisfied that Western had an insurable interest in the property.
Insurers argued that Western misrepresented in the Proposal Form that the property was used for commercial purposes.The Court held that the extent to which any misrepresentation had been made was not material and had not been relied upon by Great Lakes at the inception of the Policy and Great Lakes defence failed.
Great Lakes suggested there was non-disclosure by Western in not volunteering the truth about alleged misrepresentations in relation to the rental of the property and also Western’s proposed plans to develop the property.Great Lakes accepted that any non-disclosure allegations would be dependent on a finding in relation to misrepresentation and the non-disclosure allegation fell away due to the failure of the misrepresentation defence. In this respect the onus would have been on Great Lakes to demonstrate that the misrepresentation had been relied on by Great Lakes at the time of the inception of the Policy and confirms the requirement that there must be reliance on the misrepresentations at the time the contract was entered in to.
The Court of Appeal Judgement centred around the issue of the Insured’s entitlement as an indemnity under the Policy.
The Policy wording was subject to the usual Reinstatement Memorandum whereby the amount payable “shall be the reinstatement of the property lost, destroyed or damaged but in a condition equal to but not better or more extensive than its condition when new and no payment will be made until the cost of reinstatement shall have been actually incurred”.
In simple terms this means the Policyholder is entitled to the reinstatement cost as new provided there is no measurable betterment. For want of a better description he is entitled to “new for old” but if he doesn’t reinstate or repair with reasonable despatch etc he is entitled to reinstatement or replacement less wear and tear deductions.
The essence of the Policyholder’s case in this instance was that it was always his intention to reinstate and on this basis he was entitled to the reinstatement costs and he sought a declaration from Insurers that they would pay the reinstatement cost up to the limit of indemnity within the Policy. On this basis if reinstatement took place Insurers would have to be pay the reinstatement cost. The Court of Appeal held in the Policyholder’s favour accordingly and awarded said declaration but on review of the Judgement the following important points should be noted:
- The sum insured was Stg£2.1million but it was agreed that the market value before the fire was significantly less at Stg£75,000. As part of their general defence Insurers had suggested that the measure of indemnity was loss in market value and that because of the fire the market value had actually increased. This was on the premise that Western Trading had looked into the possibility of developing the site into a residential development in 2008 and that demolition would have followed as a consequence. The Court of Appeal clearly rejected this argument on the basis it was convinced that Mr. Singh intended to reinstate and that the measure of indemnity was the reinstatement cost.
- The Court accepted Mr. Singh’s evidence that he genuinely intended to reinstate the building both for emotional and economic reasons. He had a family connection/history with the building and plans for its future.
- Mr. Singh/Western Trading primary case was that he was entitled to recover the cost of reinstating the property even though it had not yet been reinstated because there was no funds to do so as Insurers had refused to accept liability.
- Any Policy stipulation in terms of carrying out the works with “reasonable despatch” was not relevant because Western Trading were not allowed to act with reasonable despatch given Insurers declinature.
- Reynolds v Phoenix (1978) was quoted whereby a Claimant must demonstrate a genuine intention to reinstate and this must not be a “mere eccentricity”. Insurers argued that Mr. Singh’s intention to use modern material/architecture was eccentric because such a building would have no aesthetic or sentimental value. The Court thought otherwise. The Judge saying “I have accepted Mr. Singh’s evidence that he wishes to reinstate”.
- Quantity Surveyors had carried out an exercise in terms of reinstating using heritage materials (imperial size bricks and timber floors) and also using modern materials (modern bricks and block and beam floors). The cost range between both was between Stg£2.41million and Stg£2.5million. It would appear the main purpose of the exercise was to demonstrate that either option exceeded the sum insured or limit available under the Policy.
- Keystone Properties Limited v Sun Alliance London (1993) was also cited. This is an important case in that it outlines “the alternative basis of settlement” where the cost of reinstatement has not been incurred. In that instance it was stated the Insured was entitled to recover the “value of the buildings at the time of their destruction” whichwhichwwhich on balance meant the cost of restoring the damaged buildings to their pre-fire state less an allowance for betterment without reference to market value. This supports the contention that in the absence of reinstatement being carried out that the Policyholder is entitled to reinstatement less wear and tear deductions or indeed deductions for betterment and this is also relevant in the context of discussions on “retentions” etc.
In essence Mr. Singh’s evidence convinced the Court of Appeal that he intended to reinstate the property to its pre-incident condition or a level near to etc and was therefore entitled to the reinstatement cost from Insurers. However, unusually the settlement was agreed on a “declaration” basis to the effect that Insurers agreed to issue payment:-
“if the Claimant carries out reinstatement of the property lost then it would be entitled to be indemnified by the defendant for the cost of doing so up to the limit of indemnity of Stg£2,121,800”.
The Court of Appeal directed the relevant parties to go away and “agree what works will or will not, once carried out, amount to reinstatement”. In essence this means reinstating in a modern form to a similar size and capacity as the original building up to the sum insured level. Insurers were ordered to pay all costs of the action on the basis that none of their defences of lack of insurable interest, non-disclosure, misrepresentation or breach of warranty succeeded and that Western Trading had successfully secured a “declaration” which was the primary release sought by them at the outset.