In Sartex Quilts & Textiles Limited v Endurance Corporate Capital Limited EWHC 1103 (Comm), David Railton QC sitting as a Deputy High Court Judge in the Commercial Court decided that the reinstatement basis was the appropriate measure of indemnity for a property severely damaged by fire which had not been reinstated. The Judge found that the question of whether an insured was entitled to be indemnified on the reinstatement basis required consideration of all the circumstances, including the position before the loss and up to and including trial; and that the insured's intentions regarding reinstatement were relevant on a continuing basis.
- The Policy
- The basis of the assessment of the indemnity
Sartex Quilts & Textiles Limited (Sartex) occupied premises at Crossfield Works and manufactured home textiles, bed linen and quilts. In 1995, Sartex signed an agreement allowing it to use Crossfield Works rent-free, as long as it insured the buildings and contents and ensured that the premises were kept in a good state of repair (the 1995 Agreement). By 1999, the business was so profitable that Sartex moved its production line to larger premises at Castle Mill in Rochdale, and Crossfield Works were used to store and re-pack imported linens.
By late-2010, Sartex was converting Crossfield Works for use as a manufacturing plant for 'shoddy hard pads', used in mattresses and insulation. At this point, Sartex took out a Property Loss or Damage Policy (the Policy), which provided cover for the buildings, plant and machinery, as well as business interruption. The buildings were insured for £2,020,000 and the plant and machinery for £2,500,000. The insurer, Endurance Corporate Capital (Endurance), was the sole member of the Lloyd's syndicate with which the insurance was placed. The Policy incepted on 11 November 2010.
On 25 May 2011, a serious fire at Crossfield Works severely damaged the buildings. The plant and machinery were a total loss. Sartex and Endurance settled the business interruption claim in May 2013, and in November 2013 Endurance paid Sartex £2,141,527 based on their assessment of the market value of the buildings, plant and machinery. Endurance refused to indemnify Sartex on the reinstatement basis.
This case followed the recent decision of the Court of Appeal in Great Lakes Reinsurance (UK) SE v Western Trading Limited  EWCA Civ 1003 in which a property severely damaged by fire increased in value, as it was de-listed and became suitable for development. The property had not been reinstated. The Court of Appeal held that it had been open to the judge at first instance to award a declaration that, if Western Trading reinstated the property, it was entitled to be indemnified by the insurer on the reinstatement basis. In obiter comments, Christopher Clarke LJ said that it seemed to him that the insured's intention needed to be "not only genuine, but fixed and settled," and there had to be at least a reasonable prospect of the insured bringing about what he intended. Where there was a real risk that reinstatement would not take place, it was open to the Court to decline a monetary award and to give declaratory relief.
The Policy in the present case was preceded by an insurance proposal sent to Sartex in October 2010. This proposal expressly noted that the basis of cover for the buildings, plant and machinery was 'reinstatement' and that the proposal was to be the basis of the Policy and incorporated into it.
The Insuring Clause provided:
"Subject to the general conditions and exclusions of this Policy, and the conditions and exclusions contained in this Section, we, the Underwriters, agree to the extent and in the manner provided herein to indemnify the Insured against loss or destruction of or damage to Property caused by or arising from the Perils shown as operative in the Schedule, occurring during the period of this Policy.
Underwriters shall not be liable for more than the Sum Insured stated in the Schedule or in the Policy in respect of each loss or series of losses arising out of one event at each location as stated in the Schedule."
Condition 7 of Section A, headed 'Reinstatement Basis', provided:
"In the event of loss or damage to or destruction of Buildings, Machinery and Plant or All Other Contents, the basis upon which the amount payable hereunder is to be calculated will be the Reinstatement of the Property lost, destroyed or damaged.
1. Underwriters' liability for the repair or restoration of property damaged in part only, will not exceed the amount which would have been payable had such property been wholly destroyed.
2. No payment beyond the amount which would have been payable in the absence of this condition will be made:
a) unless Reinstatement commences and proceeds without unreasonable delay;
b) until the cost of Reinstatement has actually been incurred;
c) if the Property at the time of its loss, destruction or damage is insured by any other insurance effected by the Insured, or on its behalf, which is not upon the same basis of Reinsurance."
The basis of the assessment of the indemnity
As Sartex had not incurred reinstatement costs, it was common ground that special condition 2(b) was not satisfied and Condition 7 of Section A of the Policy did not apply. The amount payable was therefore as provided for under the Insuring Clause: insurers agreed to indemnify Sartex "against loss or destruction of or damage to Property caused by or arising from" the fire. Both parties accepted that this provision permitted an indemnity on either the market value basis or the reinstatement basis. The parties disagreed on the applicable basis and on the criteria for determining the basis.
Sartex's primary position was that it was entitled to be indemnified on the reinstatement basis. This reflected the value of the buildings, plant and machinery to it at the time of the loss and reflected the terms of the 1995 Agreement.
Sartex accepted that the intentions of an insured at the time of the loss were relevant in determining the correct measure of indemnity but only in so far as these revealed what the insured intended to do with the property, assuming the loss had never happened. The insured's intentions after the loss were only relevant in exceptional cases, which this was not.
The manufacture of the shoddy hard pads was a "valuable opportunity, which [Sartex] was about to exploit." The loss, Sartex submitted, was the sum that enabled it to reinstate the buildings, plant and machinery at the date of the fire, although it was not bound to use the proceeds for reinstatement. Sartex submitted it was entitled to use the proceeds as it chose, provided any material changes or improvements made to Crossfield Works did not increase Endurance's liability.
In the alternative, if events after the fire were relevant to determining the measure of indemnity (which Sartex denied) and if there were doubts as to Sartex's intention to reinstate the buildings, plant and machinery, Sartex submitted that the correct course would be a declaration from the court that if it carried out the reinstatement, it was entitled to be paid the reinstatement costs.
Endurance's position was that it was necessary to look at all the circumstances to determine the insured's actual loss and the reinstatement basis only applied if Sartex intended to reinstate at Crossfield Works. Sartex had to show a genuine, fixed and settled intention to reinstate.
It was submitted that Sartex's intentions regarding reinstatement at the time of the fire were relevant, and so were its intentions on a continuing basis. Endurance pointed to several factors to show that there was certainly no fixed or settled intention to reinstate:
- no reinstatement works had taken place in the 8 years since the fire;
- Sartex had explored plans to buy other premises, to buy a fibre processing business in Pakistan, and to use Crossfield Works for other purposes, including a function venue or supermarket;
- Sartex had approached Rochdale Council with a redevelopment plan but failed to follow up with the additional procedural steps and documents required for the planning application, showing there was no genuine intention to reinstate; and
- the costs of reinstatement were likely to exceed the final value of the property, such that from a commercial standpoint, "no-one in their right mind would reinstate."
The Judge concluded that Sartex was entitled to indemnification on the reinstatement basis.
He began by reviewing the authorities on the relevant criteria in assessing the basis of indemnity in the context of property damage. The underlying principle that an insured is entitled to recover his actual loss but no more, as outlined in Castellain v Preston (1883) 11 QBD 380, required an examination of what the insured had lost and the value of the property to the insured. Events before and after the loss could be relevant in establishing the proper measure of indemnity but this was a "matter of fact and degree to be decided on the circumstances of each case," as stated by Forbes J in Reynolds v Phoenix Assurance Co Ltd  2 LLR 440.
He did not read Christopher Clarke LJ's comments in Great Lakes as suggesting there could be no indemnity on the reinstatement basis if remedial works were not carried out. Instead, Great Lakes was authority for the proposition that all circumstances had to be considered when determining the measure of indemnity, which could include the position up to the date of trial.
Sartex's intentions regarding Crossfield Works, both immediately before, at the time of the fire and afterwards, were therefore relevant. The Judge accordingly rejected Sartex's submission that an insured's intentions after and as a result of the loss were only relevant in exceptional cases (including the case in Great Lakes where the property had increased in value as a result of the fire). The Judge also rejected Endurance's submission that Sartex was required to demonstrate a genuine, fixed and settled intention to reinstate, although he found that Sartex had at all times since the fire genuinely intended to reinstate the plant and machinery at an appropriate site. Indemnification on the reinstatement basis would therefore most fully indemnify Sartex for its loss:
- the terms of the 1995 Agreement required Sartex to keep Crossfield Works in a state of good repair;
- immediately before the fire, Sartex had clearly intended to use Crossfield Works to manufacture shoddy hard pads and so the value of the buildings, plant and machinery was that they provided the location and means of carrying out this profitable new venture;
- although Sartex had looked elsewhere for premises and seriously considered reinstating in Pakistan, going as far as to sign an agreement to purchase a fibre manufacturing business there, by 2017 it was considering its options with Crossfield Works. These included rebuilding it as a manufacturing site and Sartex had employed surveyors to make the necessary planning application; and
- Sartex's key director submitted that his intention at all times since the fire had been to reinstate the destroyed plant and machinery at an appropriate site.
If, as Endurance submitted, Sartex was required to demonstrate a genuine, fixed and settled intention to reinstate, the Judge was prepared to find that it had done so. Sartex's argument in the alternative, that it was entitled to a declaration if not to indemnification, was irrelevant given the Judge's findings, but he held that if he were wrong as to the indemnity, he would have awarded a declaration akin to Great Lakes, given the risk that reinstatement would not happen. Betterment There was a subsidiary argument on betterment if the reinstatement basis applied under the Insuring Clause (cf. the specific reinstatement provisions in Condition 7 of Section A of the Policy which addressed betterment by providing for Reinstatement on a "new for old basis").
Endurance argued that there should be a deduction from the agreed reinstatement costs on account of betterment, to which Sartex objected on a number of grounds. The Judge did not consider that it was open to him to depart from the well-established principles of betterment which apply in this area of insurance law. In particular, he did not accept that betterment should be approached in the same way as it is in the assessment of damages in other areas of the law.
However, he did not consider that he had a sufficient evidential basis on which to make any reduction for betterment in this case. Accordingly, he did not consider the notional reduction proposed by Endurance of a third or a quarter was appropriate or warranted.
This is the latest in a line of cases in which the English Courts have had to consider the basis of assessment of the indemnity under a property damage insurance policy in circumstances in which no reinstatement had actually begun and no costs of reinstatement had been incurred.
The judgment provides further guidance on the relevant criteria following the recent decision of the Court of Appeal in Great Lakes. An indemnity on the reinstatement basis can still be given even if the reinstatement works have not been carried out. The relevant question is what has the insured lost as a result of the insured peril. This requires consideration of the value of the property to the insured at the date of the damage. The insured's intentions in relation to the property immediately before and at the time of the loss are important factors in determining the value to the insured at that date but the insured's intentions after the loss, and as a result of it, may also be relevant.