This article was first published in Issue 5,588 of Insurance Day.

In Endurance Corporate Capital v Sartex Quilts Textiles (2020), the Court of Appeal of England and Wales gave important guidance as to the correct legal test for assessing the sum payable under a property damage policy and the circumstances in which a discount may be made for "betterment" when damaged property is reinstated.

A policy issued by the defendant covered the buildings, plant and machinery at the claimant's manufacturing premises. The defendant agreed "to indemnify the insured against loss or destruction of or damage to property caused by or arising from" perils including fire. In May 2011, a fire damaged the buildings and the plant and machinery were destroyed.

The defendant admitted liability. However, the claimant had not commenced reinstatement - even some eight years after the loss - and the parties disagreed about the measure of indemnity. The claimant contended for the cost of reinstatement, whereas the defendant contended for the (lower) diminution in the market value of the property caused by the fire.

The defendant also contended that, if the reinstatement measure applied, a betterment discount should be made, as reinstatement would be "new for old". The claimant argued as it would have no choice but to incur betterment, no discount should be applied.

The main question was whether to recover damages on the reinstatement basis, an insured must show a genuine, fixed and settled intention to reinstate and property after the peril. This arose because, although the claimant had intended to use the premises for manufacturing, it had explored other options in the years after the fire (including alternative premises for its business and alternative uses for the original site).

Post-loss intentions

The trial judge focused primarily on the claimant's intentions immediately before and at the time of the fire, but also considered it relevant to assess the claimant's intentions after the loss, to decide what measure would provide fair and full compensation (without overcompensating).

The Court of Appeal upheld the judge's decision but took the following, more direct approach, limiting the relevance of post-loss intentions.

First, any measure should aim to put the insured in the position it would have been but for the loss. With property damage/destruction, this can be achieved through awarding either the cost of replacing or repairing the property or the market value of the property in its condition immediately before the damage occurred (less any residual value).

Second, which of these two measures is appropriate depends, at least initially, on the use to which the insured intended to put the property at the time the damage occurred. If the intention was to use a building, the cost of repair/replacement is generally appropriate but if the intention was to sell, the reduction in market value is appropriate (for example, Lepard v Excess (1979)).

Third, it is generally irrelevant what an insured does or does not intend to do if awarded damages or if damages are calculated on any particular basis.

Fourth, what remedial action, if any, the insured intends to take is only capable of being relevant if there is a dispute about what action it would be reasonable to expect the insured to take to put them in the same position as before the peril. For example, an insured may contend some feature of the property has subjective value to it, even though its cost of reinstatement would not otherwise be reasonable. In that context, it can be relevant to assess whether the insured has a genuine, post-peril intention to reinstate before such damages are awarded (see Reynolds v Phoenix (1978)).

In the present case, the claimant had intended to use the property and there were no special factors such as features of alleged subjective value. The appropriate measure was therefore the cost of repairing the buildings and of buying replacement plant and machinery. The decrease in market value was irrelevant.

Betterment

The Court of Appeal also considered the circumstances in which it may be appropriate to make a deduction to reflect the "betterment" an insured may enjoy from reinstatement. In doing so, it stressed the need to distinguish between different senses of that word.

First, an insured may decide to make improvements at additional cost, rather than simply reinstate (for example, adding roof insulation or installing double glazing). Here, the additional cost is not truly part of the cost of reinstatement and is accordingly irrecoverable.

Second, the insured may derive a benefit as an incidental consequence of adopting a reasonable reinstatement scheme (for example, using modern materials that, although cheaper, achieve better thermal insulation or buying a new machine because the original model is no longer available).

Within this second category of betterment, the court highlighted a further distinction must be drawn. If the benefits achieved are pecuniary (for example, cost savings because a new machine is more efficient to run), a deduction should be made. This is because "the financial benefit of this saving reduces the amount of money required to put the insured into an equivalent position in money terms to the position in which it would have been if the property had not been destroyed". If, however, the benefits achieved are non-pecuniary (for example, having a new factory rather than an old one, but without cost savings), no deduction should be made because "it would force the claimant to pay for an advantage it has not chosen and which makes it no better off in money terms".

On the facts, while the claimant might achieve pecuniary savings in rebuilding the manufacturing works with modern materials, the defendant had not provided satisfactory evidence for these to be quantified. Therefore, no deduction was made.

The Court of Appeal has accordingly clarified an insured's pre-peril, rather than post-peril, intentions will generally dictate the appropriate measure of indemnity. Where the insured proves it intended to use property before its damage/destruction, the reinstatement basis will generally apply. As to any "betterment" resulting from reinstatement, a deduction should be made if the insured will achieve cost savings. However, if an insurer contends for such a discount, it must provide satisfactory evidence of any alleged savings. A court will only make a discount if some rational or evidential basis is provided for establishing a figure (even if it is only a rough and ready one).