Court considers reinstatement issues following fire at insured premises
This fire insurance claim was resisted by the defendant insurer on the grounds of lack of insurable interest and misrepresentation/non-disclosure. Both defences failed on the facts. The claimant sought a declaration that it is entitled to be indemnified for the cost of reinstatement. The property had been destroyed by the fire but no reinstatement had yet taken place and the insurer alleged that the insured showed no signs of planning to reinstate.
Insurance policies often grant an insurer the option of either paying the insured the value of lost property or reinstating the property. However, the policy in this case gave the insured the right to be indemnified for the costs of reinstatement. The policy also expressly provided that no payment would be made “until the cost of reinstatement shall have been actually incurred” and there was also a requirement that reinstatement be carried out “with reasonable despatch otherwise no payment”.
However, Mackie QC HHJ agreed with the insured that where, as here, the insurer has wrongly denied liability and repudiated the policy, it cannot rely on the proviso that the costs of reinstatement will only be paid once they have been incurred, and there cannot have been an absence of “reasonable despatch”. The judge, citing with approval an extract from MacGillivray on Insurance Law, held that a requirement to carry out reinstatement cannot arise until the insurer has confirmed that it will indemnify. Furthermore, that applies not just to insureds who cannot afford to pay for the reinstatement, but also to successful businesses: “Even a profitable business 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 elsewhere to the detriment of some other business activity”.
The judge also rejected the insurer’s argument that, since the policy had been avoided, the remedy for the insured was damages rather than a declaration. He noted that it is very common to grant declarations in an insurance case. Here, the claimant had an express right to be indemnified for reinstating the property and a declaration to that effect was appropriate here. Any dispute about what is, or is not, reinstatement could be resolved once it is known what form any reinstatement project will take.
Although not required to decide the point, the judge also held that, had he not granted a declaration, the claimant would have been entitled to recover as damages the cost of reinstatement. The value of the site before and after the fire was irrelevant (unless the claimant decides not to reinstate on this basis). Although the insurer would not have to pay if there is to be no reinstatement, the judge accepted the claimant’s evidence that he did wish to reinstate.
COMMENT: The approach of the court adopted in this case can be contrasted with that adopted in the recent decision of Ted Baker v Axa (see Weekly Update 41/14), where the judge appeared to implicitly accept that the insured was still bound to comply with a claims provision even though insurers had rejected the claim. Here, the insurer could not insist on compliance with the reinstatement clause where it had wrongfully rejected a claim.