BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
London EC4A 1NL |
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B e f o r e :
(sitting as a Deputy High Court Judge)
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SARTEX QUILTS & TEXTILES LIMITED |
Claimant |
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- and – |
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ENDURANCE CORPORATE CAPITAL LIMITED |
Defendant |
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Jason Evans-Tovey (instructed by DAC Beachcroft LLP) for the Defendant
Hearing dates: 25-29 March 2019
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Crown Copyright ©
David Railton QC (sitting as a Deputy High Court Judge):
Introduction
The factual background
The Policy terms
Subject to the general conditions and exclusions of this Policy, and the conditions and exclusions contained in this Section, we, the Underwriters, agree to the extent and in the manner provided herein to indemnify the Insured against loss or destruction of or damage to Property caused by or arising from the Perils shown as operative in the Schedule, occurring during the period of this Policy.
Underwriters shall not be liable for more than the Sum Insured stated in the Schedule or in the Policy in respect of each loss or series of losses arising out of one event at each location as stated in the Schedule.
In the event of loss or damage to or destruction of Buildings, Machinery and Plant or All Other Contents, the basis upon which the amount payable hereunder is to be calculated will be the Reinstatement of the Property lost, destroyed or damaged.
Special Conditions
1. Underwriters' liability for the repair or restoration of property damaged in part only, will not exceed the amount which would have been payable had such property been wholly destroyed.
2. No payment beyond the amount which would have been payable in the absence of this condition will be made:
a) unless Reinstatement commences and proceeds without unreasonable delay;
b) until the cost of Reinstatement has actually been incurred;
c) if the Property at the time of its loss, destruction or damage is insured by any other insurance effected by the Insured, or on its behalf, which is not upon the same basis of Reinstatement.
Buildings means the buildings at the address(es) set out in the Schedule, including, at the same location, outbuildings, gangways, conveniences and external hoists, and any extensions communicating with any of the building(s).
Property means the Buildings, Machinery and Plant, Stock and All Other Contents.
Reinstatement means:
a) the rebuilding or replacement of Property lost or destroyed which, provided the Underwriters' liability is not increased, may be carried out:
(i) in any manner suitable to the Insured's requirements;
(ii) upon another site.
b) the repair or restoration of Property damaged in either case to a condition equivalent to or substantially the same as but not better or more extensive than its condition when new.
3. AVERAGE (FOR BUILDINGS ONLY)
If the Sum Insured shown in the Schedule in respect of Buildings shall be less than 85% of the value of the Buildings at the time of the loss then the Insured shall be considered as being their own insurers for the difference and shall bear a rateable share of any loss occurring during such Period of Insurance in respect of such item.
11. ALTERATION OF RISK
The Underwriters shall not be liable to make any payment under this Policy if:
a) any change shall be made in the Buildings, the Business or the occupancy or duties of the Insured whereby the risk of loss, destruction or damage is increased, or
b) the Insured's interest ceases (unless the cessation is brought about by will or operation of law) except where such alteration be notified to and accepted by the Underwriters.
…
14. DUTIES OF THE INSURED
It is a condition precedent to Underwriters' liability under this Policy that the Insured shall:
a) maintain the Buildings, Machinery and Plant and equipment insured by this Policy in a satisfactory state of repair;
b) take all reasonable precautions to prevent loss or destruction or damage, accident or injury;
c) take all reasonable precautions for the safety and protection of the Property
… and not do or permit anything whereby the risk of Underwriters shall be increased…
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15. SALVAGE
On the occurrence of any loss, destruction or damage, the Insured shall give the Underwriters or their agent or representative leave and licence to enter the building where the loss, destruction or damage has occurred and take and keep possession of any of the Property hereby insured and deal with the salvage in a reasonable manner.
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17. CANCELLATION
…This Policy may also be cancelled by or on behalf of Underwriters by 30 days' notice given in writing, and sent by registered or recorded delivery mail, to the Insured at his last known address…
The claim for reinstatement costs
The relevant criteria
In order to give my opinion upon this case, I feel obliged to revert to the very foundation of every rule which has been promulgated and acted on by the Courts with regard to insurance law. The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and 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. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong.
Was the plaintiff's actual loss the cost of the reinstatement of the cottage? Or was it, as the defendants contend, the market value of the property as it was at the time of the fire? The defendants do not rely upon any general principle in support of their submission. They say, rightly in my judgment, that this is a question of fact, and that one must look at all the relevant facts of the particular case to ascertain the actual value of the loss at the relevant date. Of course, one is entitled to look to the future so as to bring in relevant factors which would have been foreseen at the relevant date as being likely to affect the value of the thing insured in one way or the other, if the loss of it had not occurred on that date.
But these are all broad principles – you are not to enrich or impoverish: the difficulty lies in deciding whether the award of a particular sum amounts to enrichment or impoverishment. This question cannot depend in my view on an automatic or inevitable assumption that market value is the appropriate measure of the loss. Indeed in many, perhaps most cases, market value seems 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. But buildings are not like tons of coffee or bales of cloth or other commodities unless perhaps the owner is one who deals in real property. To force an owner who is not a property dealer to accept market value if he has no desire to go to market seems to me a conclusion to which one should not easily arrive. 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 cannot be taken as inevitably the proper measure of indemnity. There must be cases where no one in his right mind would contemplate rebuilding if he could re-establish himself elsewhere. The question of the proper measure of indemnity thus becomes a matter of fact and degree to be decided on the circumstances of each case.
69. …where the insured is the owner of the property … the indemnity is to be assessed by reference to the value of the property to the insured at the time of the peril. In many, perhaps most, cases of damage or destruction the insured's loss is the cost of reinstatement: Reynolds v Phoenix Assurance; Colinvaux at para 10–35; although that may 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 anyway: see Leppard v Excess Insurance; Colinvaux at paras 10–38 and 10–39; or if no one in his right mind would reinstate: Reynolds v Phoenix.
72. I doubt whether a claimant who has no intention of using the insurance money to reinstate, and whose property has increased in value on account of the fire, is entitled to claim the cost of reinstatement as the measure of indemnity unless the policy so provides. In any event Mr Elkington QC did not seek to contend that in this case the cost of reinstatement would be recoverable if Mr Singh had no intention of doing so. The true measure of indemnity is "a matter of fact and degree to be decided on the circumstances of each case", per Forbes J in Reynolds v Phoenix; and is materially affected by the insured's intentions in relation to the property.
73. The significance of intention begs the question as to: (a) what exactly is the requisite degree of intention; and (b) what safeguard, if any, is available to an insurer who pays out the cost of reinstatement to an insured who then finds that he cannot reinstate or, even if he can, in fact sells the property. Neither of these issues were the subject of submission; so that what I say on them must be regarded as tentative.
74. In Castellain v Preston it was said that a tenant who is liable to replace is entitled to recover the cost of so doing from the insurers. That, no doubt, assumes that the tenant is required to fulfil his obligations and can and will do so. In Reynolds v Phoenix Assurance the insured recovered the cost of reinstatement before that started but there appears to have been no suggestion that the insured might not seek to reinstate or that there would be any impediment to his doing so. The problem arises in a case such as the present where there is a real possibility, which the judge's choice of the declaration route recognised, that reinstatement may not take place either because it cannot do so, eg as a result of planning problems, or because a markedly more attractive alternative presents itself.
75. As to (a) it seems to me that the insured's intention needs to be not only genuine, but also fixed and settled, and that what he intends must be at least something which there is a reasonable prospect of him bringing about (at any rate if the insurance money is paid).
76. As to (b) an insurer who pays out has, in general, no redress if none of the money is used in reinstatement. Once he has got it, it is for the insured to decide what to do with it: Halsbury's Laws – Insurance, volume 25 para 633. But I incline to the view that, in a case where, at the time of the hearing, there is a real possibility that reinstatement may not in fact occur it is 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 is apparent that reinstatement (i) can and (ii) will go ahead or, at least that there is a reasonable prospect that it will.
77. Whilst the insured's cause of action arises upon the happening of the insured event and is, prima facie, an obligation to pay money for the loss – Sprung v Royal Insurance (UK) Ltd [1999] Lloyd's Rep IR 111 – the assessment of the extent of his entitlement is invariably postponed until a later, often considerably later, date and I see nothing inconsistent with principle (which is that the insured is to receive an indemnity but no more than an indemnity) if, in an appropriate case, the court proceeds in a manner which enables the insured to recover an indemnity when those conditions are satisfied and protects the insurers against having to pay out for a reinstatement which is never going to take place. This may be particularly appropriate if there is doubt as to whether the insured can, whatever his stated intentions, lawfully reinstate.
The appropriate measure of indemnity
Betterment
Now the principle of betterment is too well established in the law of insurance to be departed from at this stage even though it may sometimes work hardship on the assured. It is simply that an allowance must be made because the assured is getting something new for something old. But in this class of insurance there is no automatic or accepted percentage deduction. … Taking a broad view on the evidence I have heard, the figure for deduction probably lies between a third and a quarter of the total.
It is submitted that in cases where the insured has no practicable alternative to repairing real property that has been damaged (as opposed to replacing property that has been lost), it may in some circumstances be appropriate to allow the full cost of reinstatement subject always to the limit of the total sum insured in the policy.
Of course, the facts in these two cases were quite different from those in this case. But I think that the principles on which they were decided are of general application, and it is possible to extract this guidance from them. It is for the defendant who seeks a deduction from expenditure in mitigation on the ground of betterment to make out his case for doing so. It is not enough that an element of betterment can be identified. It has to be shown that the claimant had a choice, and that he would have been able to mitigate his loss at less cost. The wrongdoer is not entitled to demand of the injured party that he incur a loss, bear a burden or make unreasonable sacrifices in the mitigation of his damages. He is entitled to demand that, where there are choices to be made, the least expensive route which will achieve mitigation must be selected. So if the evidence shows that the claimant had a choice, and that the route to mitigation which he chose was more costly than an alternative that was open to him, then a case will have been made out for a deduction. But if it shows that the claimant had no other choice available to him, the betterment must be seen as incidental to the step which he was entitled to take in the mitigation of his loss and there will be no ground for it to be deducted.
20% Co-insurance
Market value of the buildings
Other matters
The amounts payable
(1) In relation to the buildings, the reinstatement cost at the date of the fire is agreed at £2,345,293, reducing to £1,931,223 after the application of average (at 17.7%), and to £1,544,978 after application of the 20% co-insurance provision. A total of £1,141,527 has been paid to date by insurers in respect of this element of the claim, leaving (after rounding) a balance of £403,452.
(2) In relation to the plant and machinery, the reinstatement cost at the date of the fire is agreed at £3,600,000. This is subject to a cap of the sum insured of £2,500,000, reducing to £2,000,000 after application of the 20% co-insurance provision. A total of £1,000,000 has been paid to date by insurers in respect of this element of the claim, leaving a balance of £1,000,000.
Conclusions