In the recent case of Western Trading Limited v Great Lakes Reinsurance (UK) Limited  EWHC 103 (QB), His Honour Judge Mackie QC found that the Claimant policyholder was entitled to an indemnity under a property policy for the costs of reinstatement of properties damaged by fire. The case is of general interest given the judge's approach to a range of policy defences raised by the Defendant insurer, ranging from the Claimant’s alleged lack of insurable interest and misrepresentation of the risk, to whether a declaration of indemnity for the costs of reinstatement should be awarded in circumstances where the Claimant had taken no steps to reinstate the property and the Defendant had doubts about whether the Claimant in fact intended to do so.
The Claimant was mainly owned by Mr Chinderpal Singh, a successful investor in modest commercial property, and its function was to hold and manage his property portfolio. Mr Singh's portfolio included two neighbouring properties in Walsall, which were destroyed by fire in July 2012. One of the properties was a listed building and local landmark which had been in the family since the 1980s.
The Claimant sought a declaration that it was entitled to be indemnified for the costs of reinstatement of the properties under a property insurance policy written by the Defendant through an underwriting agency. The Defendant declined cover on a number of grounds. The claim came to trial in the High Court in November 2014 and the judge handed down his judgment on 26 January 2015, finding in favour of the Claimant. We summarise below the Defendant's main defences and the judge's approach and findings.
Lack of Insurable Interest
The Defendant’s first ground of defence was that the Claimant had no insurable interest in the subject matter of the insurance, which must therefore fail as a wager.
The judge was unimpressed with this defence. At the heart of the claim was a factual dispute about the use and occupancy of the properties. The Defendant contended that the Claimant had no interest in the properties, which had been empty since 2001 at the latest. The Claimant contended that, to the contrary, the properties were let by Mr Singh to the Claimant, which in turn sub-let the properties. During the relevant period the properties were partially occupied for commercial purposes including storage and a car wash.
The judge readily preferred the Claimant’s evidence on this factual issue and found the live evidence of Mr Singh to be particularly persuasive. He found that the property was insured as a source of rental income to which the Claimant was contractually entitled. Indeed, the Claimant was at the heart of Mr Singh’s business. It had paid rent to Mr Singh for many years and dealt with insurance and rates and granting leases to sub-tenants. In the judge's view, it was obvious that the Claimant had an insurable interest.
The judge highlighted that it was unusual for insurers to raise questions of insurable interest except in the context of fraud, and tacitly criticised the Defendant for taking a point in circumstances where it had taken no interest in this issue prior to inception of the policy.
The Defendant's second ground of defence was that the Claimant had misrepresented the risk prior to inception in allegedly having confirmed the content of a (rather historic) proposal form. There were also allegations of non-disclosure although the Defendant accepted that these allegations would stand or fall with its allegations of misrepresentation. The proposal form, which had originally been submitted to a different insurer on a previous policy year, contained a representation that there were three occupational tenancies, relating to storage of furniture and metal products and car washing. The Defendant alleged that these representations, amongst others, had been confirmed at each renewal. By the time of trial, the Defendant’s case had been refined and, in light of the judge’s finding that the properties were let and occupied, the only misrepresentation issue considered by the judge in any detail was whether the level of occupancy was significantly less than had been represented to the Defendant.
There had in fact been two and not three tenancies of the properties but it was largely common ground between the parties’ respective underwriting experts (at least following cross-examination of the Defendant’s expert) that the material issue was the level of activity and occupation, and not the number of tenancies. The judge therefore found that any misrepresentation as to the number of tenancies was not material in the legal sense.
Moreover, the Defendant’s evidence as to inducement did not stand up to scrutiny at trial. The Defendant had submitted only one witness statement on this issue from the former director of underwriting at the underwriting agency involved in binding the cover, but it became apparent during cross-examination that her witness statement had been poorly prepared. She accepted during live evidence that she had not seen the proposal form – and that it had been misleading for her witness statement to suggest to the contrary – and in any case she could not recall what she had been thinking at the time of accepting the risk. The judge found her to be an honest and candid witness but there were shortcomings in her underwriting and, with hindsight, both she and the Defendant’s solicitors should have spent more time on completing and testing her statement.
Given these findings, the judge concluded that the defence of misrepresentation failed because the limited misrepresentations that had been made were neither material nor relied upon.
Breach of warranty
The Defendant also raised a breach of warranty defence but this was dismissed in peremptory fashion by the judge. The Defendant’s case was that the proposal form was the basis of the contract and that the Claimant had breached warranties in respect of the number of tenants and occupation of the properties, which had been incorporated into the policy as a result. The Claimant argued that this was wrong because the proposal form had been submitted to different insurers, in a different policy year and in relation to a different policy. The Claimant had not confirmed the accuracy of the proposal form to the Defendant and, moreover, it had been superseded by a later survey of the properties by a surveyor appointed by the Defendant. The judge accepted the Claimant’s submissions given the undisputed facts as to how the Defendant came on risk and the evidence of the Defendant’s witness on inducement at trial that she had not considered the proposal form. The judge accordingly found that the proposal form did not form the basis of the contract and, as such, there had been no breach of warranty.
It appears to have been common ground that the costs of reinstating the properties would exceed the limit of indemnity under the policy. However, there was an issue as to whether the Claimant was entitled to a declaration of indemnity for such costs.
The first point taken by the Defendant was that any indemnity depends upon actual reinstatement, which must be carried out by the Claimant with reasonable despatch. As the Claimant had, on the Defendant’s case, not done so that was an end to the matter. The Claimant argued that, in circumstances where an insurer has wrongly declined an indemnity, it cannot rely upon a proviso requiring reinstatement with reasonable despatch. The judge agreed and found that there cannot be an absence of reasonable despatch before the insurer’s obligation is accepted or established. In essence, it would not be reasonable to expect a policyholder to fund reinstatement (whether or not it can afford to do so) before it knows whether any costs it incurs will be met by the insurer.
The second point taken by the Defendant was that a declaration was not available because the Claimant’s claim could only be for damages; and, in any event, a declaration would be inappropriate for a number of reasons including in essence that there were question marks over whether the Claimant genuinely intended to reinstate the properties and on what basis it would be entitled to do so. The judge found that a declaration was not only available but a particularly suitable remedy in this case, as it would also protect the Defendant in the event the Claimant did not reinstate despite its stated intention to do so. Any practical issues concerning the basis for reinstatement could be resolved by the parties or ultimately brought before the Court, and should not be a bar to a declaration. It was clear that the judge had no appetite to engage in a debate about the proper basis for reinstatement.
In view of his award of a declaration, the judge determined that it was not necessary for him to decide the Claimant’s alternative claim for damages for breach of contract. However, had he been required to decide this issue, he would have awarded the Claimant damages calculated as the cost of reinstatement (which is the prima facie rule absent any special features of the risk), subject to the Claimant in fact reinstating the property.
The judge also accepted the Claimant’s claim for loss of rent under the terms of the policy, but reduced the sum claimed by 50% on the basis that it was unclear whether the Claimant would, in fact, have demanded or received payment of rent during this period given the nature of the relationship with the sub-tenant (which was controlled by Mr Singh's son).
This case highlights a number of interesting features of the approach which the Courts will take to common issues which may arise in claims under property insurance policies.
The decision brings into relief the importance for insurers of considering in advance of inception of the policy any concerns which they may have over the policyholder's insurable interest in the subject matter of the insurance. Otherwise, if the contract proceeds, the Court is likely to be reluctant to find that the policyholder does not have such an interest save potentially in cases involving fraud.
The issues on misrepresentation and breach of warranty in this case were largely fact specific. Once the judge had (readily) concluded that the properties were partially occupied by sub-tenants of the Claimant, and in light of the rather haphazard approach to underwriting, it was clear that he had little sympathy for the Defendant insurer's case.
The case is of particular interest when considering the policyholder's right to be indemnified under a property insurance policy on a reinstatement basis. Ordinarily where the property is insured on a reinstatement basis (i.e. new for old) the right to claim for the costs of reinstating the damaged property is subject to a proviso that the reinstatement work is commenced and carried out with reasonable despatch. Otherwise the policyholder's entitlement under the policy reverts to its actual loss being the diminution in value of the property (usually the loss of market value). However, the judge agreed with the authors of MacGillivray that the requirement to reinstate cannot be read to arise until the insurer has confirmed that it will indemnify the policyholder. He said that that seems obvious where the policyholder cannot afford to pay the costs of reinstatement without the benefit of the indemnity which the insurer withholds but he also considered that the same considerations apply even to a successful business which will reasonably defer a decision whether or not to reinstate until it knows whether the funding will come from insurers or will have to be diverted from some other business activity.