The Court of Appeal in Great Lakes Reinsurance (UK) SE v Western Trading Ltd1 held that an insured was entitled to be reimbursed by its insurers as and when it reinstated its insured premises which had been destroyed by fire.

The policy provided that in the event of destruction of the property, the indemnity was to be the cost of reinstatement, defined as “the rebuilding of the property, if a a condition equal to but not better or more extensive than its condition when new”, but only if the reinstatement was carried out “with reasonable despatch”.

At first instance, the insurers denied all liability under the policy on the basis of misrepresentation, breach of warranty and lack of insurable interest. As a result of the insurers’ denial, the insured had not begun reinstatement at the time of the trial. The insurers’ arguments were all rejected by the Judge at first instance. On appeal, the insurers confined argument to the measure of indemnity.

The insurers argued that the relevant measure of indemnity was the reduction in the building’s value. Its market value just prior to the fire was £75,000 since it was almost derelict, was Grade II Listed and it was not capable of being economically developed. Its value actually increased following the fire, as it lost its listed status and could therefore be redeveloped. Insurers therefore argued that there was no loss.

The Court of Appeal rejected this argument. The court held that, where the insured was the owner of the property, or where it was obliged to reinstating the property, the cost of doing so is the prima facie measure of indemnity, so long as there is a genuine intention to replace.

Where, at the time of trial, no reinstatement had taken place, the court determined that there were two matters to consider. First, the insured needed to show a genuine intention to reinstate that was fixed and settled and in relation to which there was a reasonable prospect of implementation, if the insurance proceeds were paid. Second, as an insurer would have no redress if the money was not used for reinstatement, the court could decline to make an immediate award of damages and make an order instead for declaratory relief, requiring insurers to reimburse the insured for the actual reinstatement costs as and when incurred.

In addition, the Court of Appeal held that, where a reinstatement clause required the insured to undertake the works of reinstatement “with all reasonable despatch”, the insured would not be in breach of that requirement unless and until insurers had confirmed indemnity under the policy.

The insured was therefore not prejudiced by its own lack of funds after what was found to be an unjustified denial of cover.