The Court of Appeal has held that, in a case where property had been damaged by fire and there was a real possibility that the property would not be reinstated by an insured, the court could decline to make an immediate award of damages. Instead, it was open to the court to make a declaration that the insurers were liable to indemnify the insured for the actual reinstatement costs as and when incurred.

Insurers can take some comfort from the court’s willingness to order declaratory relief, which may prevent an insured receiving an indemnity on a reinstatement basis in circumstances where there is no real prospect that the payment will be used for reinstatement purposes. To succeed in an application for declaratory relief insurers will, however, need to be able to demonstrate on the facts of any particular case that there is a real prospect that an indemnity would not be used for reinstatement. Moreover, without an order for declaratory relief, insurers will not be able to withhold payment to the insured simply on the basis that costs of reinstatement are yet to be incurred.

Background

The insurers underwrote the insurance of commercial properties in Walsall, which included material damage, loss of rent and liability cover. The insured, Western Trading Limited, was owned mainly by Mr Singh, with his wife as company secretary, and was used to manage Mr Singh’s property portfolio. Mr Singh received rent from Western Trading Limited and used the company to pay rates to the council and manage the properties. A claim was made under the insurance following a fire in July 2012 which destroyed various buildings, including a listed landmark. The properties were insured for rebuilding costs of over £2 million, although the market value of the properties before the fire was approximately £75,000 based on their existing condition and use.

The policy provided indemnity for the cost of reinstating the lost or damaged property. Reinstatement was defined as the replacement of the building in a condition equal to but not better or more extensive than its condition when new. A memorandum to the policy also provided that the work of reinstatement had to be carried out with reasonable despatch and the cost of reinstatement actually incurred.

The insurers originally resisted the claim on the basis that the company had no insurable interest in the property and that there had been a material misrepresentation concerning the occupancy of the premises. The judge at first instance rejected the insurers’ arguments and made a declaration that the insured was entitled to the losses it had suffered (and was continuing to suffer) as a result of the fire, up to the limits of indemnity under the policy, notwithstanding that no reinstatement works had been carried out by the time of the trial. The insurers appealed and the main question for the Court of Appeal was the issue of reinstatement.

Decision

The Court of Appeal recognised that an insurer who paid out the cost of reinstatement would have no redress if the policyholder then decided simply to keep the insurance proceeds and not carry out reinstatement. It therefore held that where, as in this case, there was a real possibility that reinstatement might not occur, the insurers could be protected if the court made a declaration requiring them to reimburse the insured for the actual reinstatement costs as and when incurred, rather than making an order for the immediate payment of a sum of money.

Measure of Indemnity

The insurers argued that the relevant measure of indemnity was the reduction in the properties’ value. The market value of the properties at the time of the fire had only been around £75,000. The value of the properties had in fact increased since the fire due to the potential for redevelopment and therefore, the insurers argued, there was no loss and consequently nothing for them to indemnify, meaning that there could be no breach of indemnity for refusing to cover reinstatement costs.

The court rejected the insurers’ approach and instead held that, in the circumstances, the relevant measure of indemnity was the cost of reinstatement. The starting point for the measure of indemnity will always be consideration of the terms of the policy, the insured’s interest in the property and the facts (including the intention of the insured). Loss is normally assessed as the cost of reinstatement. The court did, however, recognise that the case may be different in circumstances where the insured is attempting to sell the property or indeed demolish the property, but evidence of such an intention would need to be adduced.

Meaning of reinstatement

Insurers also contended that the trial judge had not properly considered what reinstatement entailed and that the declaration should only have been made if the company genuinely intended to reinstate the building. They argued that reinstatement of the listed building would impede development and reduce the market value of the site for redevelopment so that the company had suffered no actual loss.

The Court of Appeal rejected this argument, holding that the judge at first instance had referred to the expert’s costings of two schemes of reinstatement and had accepted Mr Singh’s evidence. Insurers could, however, take comfort from the declaration. Any ambiguity as to whether works amounted to reinstatement could be resolved in light of what had actually been done, as the declaration only required the insurers to indemnify the insured in the event that reinstatement is carried out.

Wording of the declaration

The power of the court to make a declaration is discretionary and is normally employed when the court is satisfied that it would be the most effective way of resolving the issues raised. The trial judge repeatedly referenced the fact that a declaration would give the insurers a measure of protection which an award of damages would not. However, the Court of Appeal found that the wording of the declaration did not fulfil its intended purpose and held that it had been wrong to make the declaration with the wording originally put forward by the company. The original wording had not made it clear that the insurers would only have to indemnify the costs of reinstatement if reinstatement was in fact carried out. The Court of Appeal amended the wording to remedy this defect.

Incurring costs before payment

The insurers also argued that the trial judge had been wrong to hold that where an insurer had repudiated the policy, it could not rely on the proviso that the costs of reinstatement will only be repaid once they have been incurred.

The Court of Appeal did not regard the judge as having reached such a conclusion. Instead, the court interpreted the trial judge’s meaning as a requirement on the insured to begin to reinstate only when insurers had confirmed that they would indemnify. Payment could not be withheld on the basis that the costs of reinstatement had yet to be incurred

Comment

This case provides useful guidance on the circumstances in which an insured is entitled to an indemnity on a reinstatement basis where the cost of reinstatement exceeds the loss in value of the property.

Insurers can take some comfort from the court’s willingness to order declaratory relief, which may prevent an insured receiving an indemnity on a reinstatement basis in circumstances where there is no real prospect that the payment will be used for reinstatement purposes. To succeed in an application for declaratory relief insurers will, however, need to be able to demonstrate on the facts of any particular case that there is a real prospect that an indemnity would not be used for reinstatement. Moreover, without an order for declaratory relief, insurers will not be able to withhold payment to the insured simply on the basis that costs of reinstatement are yet to be incurred.