This article was first published in Insurance Day on 4 July.

Commercial Court considers the Appropriate Measure of Indemnity under a Property Loss or Damage Policy.

In Sartex Quilts & Textiles v. Endurance Corporate Capital [2019] EWHC 1103 (Comm), the Commercial Court considered the appropriate measure of indemnity under a Property Loss or Damage Policy. In particular, it considered (1) the relevance of an insured’s post-loss intentions in determining whether to award damages on the reinstatement (as opposed to market value) basis, and (2) whether reinstatement-based damages should factor in a betterment discount.

Background

The Policy issued by the Defendant provided material damage cover in respect of the buildings, plant and machinery at the Claimant’s manufacturing premises. In May 2011, a fire severely damaged the buildings, and the plant and machinery were destroyed.

The Defendant admitted liability in October 2011, but the parties were unable to agree on the appropriate basis of the indemnity. As the Claimant had not reinstated the buildings, plant and machinery – even some eight years after the loss – the Defendant disputed that there was a relevant intention to reinstate. It contended that the (lower) market value should be applied. The Claimant contended for the reinstatement basis, arguing that its post-loss intentions were irrelevant.

The Defendant also contended that, if the reinstatement basis was appropriate, a betterment discount should be made, as reinstatement would be ‘new for old’. The Claimant argued that, as it would have no choice but to incur betterment, no discount should be applied.

Appropriateness of the Reinstatement Basis

The Policy provided that the Defendant agreed “…to indemnify the Insured against loss or destruction of or damage to Property caused by or arising from …” perils including fire. The Court accordingly had to determine the value of the property to the insured at the date of the fire.

In such cases, it is established that an insured's intentions immediately before and at the time of a loss are important factors in determining the value of the property to the insured at that date: see Leppard v. Excess [1979] 1 W.L.R. 512. Thus, if an insured had intended to sell, or demolish, the property, it would likely have had a different value to them than if they had intended to use it for manufacturing purposes.

However, the issue arising in the instant case was whether one could look to the Claimant’s intentions as they were and developed after the loss. This potentially mattered because, after the fire, the Claimant explored various alternative premises for its business and various alternative uses for the original site (including non-manufacturing uses). The Defendant accordingly contended that there was no relevant intention to reinstate. The Claimant argued that post-loss intentions were irrelevant, save in exceptional cases such as Great Lakes v. Western Trading [2016] 2 C.L.C. 478 (where the property’s value had increased because of the loss).

Mr. David Railton Q.C., sitting as a Deputy High Court Judge, held that, in determining the appropriate measure of indemnity in any particular case, it is necessary to look at all the circumstances, including the intentions of the insured up to the date of trial. Such an approach was not confined to exceptional cases. At [76], he said that, in determining what measure fairly and fully indemnifies the insured:

“…the primary focus is on the position as at the time of (and immediately before) the fire. If the insured intended then to use the property, as opposed (for example) to selling, or demolishing it, the appropriate measure of indemnity, and the best reflection of the value of the property to him at that time, is likely to be the reinstatement basis. But subsequent events (and not just those foreseeable at the time of the fire) may show that such measure would over-compensate the insured, in which case the court at trial is likely to consider another measure of loss to be more appropriate. …”

On the facts, the judge concluded that the Claimant had, at all times since the fire, genuinely intended to reinstate the plant and machinery, at an appropriate manufacturing site, even though there remained a real possibility that reinstatement may not take place. Thus, taking into account all the circumstances, including pre- and post-fire events, the reinstatement basis was the appropriate measure, being that which most fully indemnified the Claimant for the loss caused by the fire. It was accordingly unnecessary to make a declaration – along the lines made in Great Lakes v. Western Trading – that the Claimant would only be entitled to reinstatement costs if it carried out the reinstatement.

Betterment

Given the judge’s decision that the reinstatement basis was appropriate, the issue arose whether a deduction should be made to reflect the incidental betterment that the Claimant would enjoy from reinstatement.

The principle of betterment “…is simply that an allowance must be made because the assured is getting something new for something old…”: see Reynolds v. Phoenix [1978] 2 Lloyd's Rep. 440. However, the principle can work hardship, particularly where the insured has no practicable alternative to repairing real property: see MacGillivray on Insurance Law (14th edn.), at §21–020. In a comparable tort and general contract context, a betterment discount is not made unless the claimant would have been able to mitigate its loss at less cost: see Lagden v. O'Connor [2004] 1 A.C. 1067, at [34]. Reflecting such views, in Great Lakes v. Western Trading, at [80], Christopher Clarke L.J. had stated that “…the justification for a deduction for betterment is itself open to question…”.

At [115] of Sartex Quilts, the judge noted that there was “…considerable force …” in the argument that betterment in this area of insurance law should, absent contrary contractual provision, be treated in the same way as in other areas of the law. He considered that, where the benefit is an unavoidable consequence of the loss, “…It is very arguable that in such circumstances making a deduction for betterment deprives the insured of a full indemnity for his loss…”. However, at [116], he considered that the insurance betterment principle was too well established to depart from.

However, whether any betterment deduction should be made is fact sensitive, depending on the damage suffered, and the repairs proposed. The onus is on the insurers to identify, and justify, any particular reductions contended for. In this case, the judge found that evidential shortcomings made it impossible to make any betterment deduction.

Conclusion and Implications

The Commercial Court accordingly confirmed that (1) an insured’s intentions – even post-loss – are a key factor in determining whether reinstatement damages should be awarded, and (2) the betterment principle continues to enjoy a special status in this area of insurance law. The decision also highlights the need for satisfactory evidence on each aspect. An insured seeking reinstatement damages should provide satisfactory evidence of its intention to reinstate, and an insurer seeking a betterment discount should provide detailed evidence to justify any reductions contended for. The latter will likely require detailed pre- and post-loss specifications of the property concerned.