The recent decision by the English High Court in the case of Western Trading Ltd v Great Lakes Reinsurance (UK) PLC  provides useful guidance to insurers should they wish to rely on the insured's failure to comply with the reinstatement conditions under a property policy, in the event that a claim has been wrongfully declined. The case further highlights the Court's reluctance to uphold a lack of insurable interest to defeat a claim and the increased scrutiny placed on the relevant underwriter's evidence on inducement when seeking to avoid a policy.
Edwin Co were acting as solicitors for the Insured and Kennedy's for Insurers.
The case involved two neighbouring properties in central Walsall which were destroyed in a fire in July 2012. The properties were insured under a Property Owner's policy placed with an underwriting agency of Great Lakes.
The Insured sought a declaration that it was entitled to be indemnified under the terms of the policy. Both defences raised by Insurers failed on the facts. The Court held that the Insured did have a sufficient insurable interest in the properties. The Judge was prepared to pierce the corporate veil in circumstances where he felt that this defence was raised as a technicality and was unjust. Furthermore, the Court did not agree that Insurers were entitled to avoid the policy. They had failed to establish either that any of the alleged misrepresentations were material or that sufficient reliance had been placed upon them by the relevant underwriter.
As a valid policy was deemed to be in place, the question arose as to whether the Insured was entitled to proceed to claim the full cost of reinstatement as the appropriate remedy. Insurers sought to argue that the Insured was precluded from claiming the reinstatement value as it had failed to comply with the reinstatement conditions in the policy. The policy expressly provided that reinstatement must be carried out "with reasonable despatch otherwise no payment". However, the Insured argued that it could not afford to reinstate in the event that the policy did not respond and was unable to comply with this condition owing to the declinature of the claim.
Insurers further argued that since the Insured had not reinstated and had showed no intention of doing so, it would only be entitled to payment made on an indemnity basis (i.e., the diminution in value of the property). The properties were classified as Listed buildings. The destruction of the buildings by the fire made it possible to utilise the centrally located site to build new flats without having to comply with the Listed Building Requirements. This increased the value of the site by making it more attractive to developers. In the circumstances, the Insured had not suffered a loss and was in no worse position than it had been prior to the fire. Accordingly Insurers submitted that no payment should be made under the policy on this basis.
The Court rejected these arguments. It considered that requiring an insured to incur the cost of reinstating a property if insurers have wrongly denied liability and repudiated the policy would be overly harsh: "The assured cannot reasonably be expected to take a decision about whether to spend what may be millions of pounds until it knows the fundamental financial ramifications of committing to reinstate." As such, a requirement on the insured to reinstate cannot be read to arise until insurers have confirmed that they will provide an indemnity under the policy.
The Judge found that the Insured had a contractual right to be indemnified for the cost of reinstating the properties and as a result, a declaration was granted in the Insured's favour. The value of the land before and after the fire is therefore irrelevant, unless this differential leads the insured to decide that it would prefer to sell rather than reinstate. If there is to be no reinstatement then there would be no obligation on the insurer to pay because the insured has not invoked the relevant contractual commitment. On the facts, however, the Judge was satisfied that the Insured did have a genuine wish to reinstate.
The Court's decision confirms that insurers are not entitled to "have their cake and eat it" by seeking to claim that the insured had breached the reinstatement conditions where the failure to do so was as a result of a wrongful denial of liability. This position applies equally to insureds who cannot afford to pay for the reinstatement as well as profitable businesses which may have to divert funds to the detriment of some other business activity.
Western Trading adds some much needed clarity to the pre-existing line of authorities on the issue dating pre-dominantly from the 1970's (see for example, Reynolds v Phoenix ) which decided upon the most appropriate form of indemnity to grant. However, at the time it was common for property insurance policies to give an insurer the option of either paying the insured value of lost property or reinstating the property. It was not a contractual right for the insured – as it is now in most policies – since the reinstatement conditions were not incorporated into property insurance wordings until more recently. Therefore, it is no longer relevant to determine whether the insured had a genuine intention to reinstate. The Judge believed that the grant of a declaration was the most appropriate remedy in the circumstances. Such a declaration should remove from insurers any concern about whether there was a genuine intention to reinstate. If the insured does not reinstate, then insurers will be spared the consequences of the declaration.