In the recent case of Sartex Quilts & Textiles v Endurance Corporate Capital Ltd the English High Court considered the common law requirements for awarding an indemnity on a reinstatement basis under a property policy when the insured had not commenced reinstatement. The case provides a helpful reminder of the relevant legal principles.
The insured manufactured textiles and quilts. In 2010, the insured purchased property and business interruption insurance. The policy incorporated a typical reinstatement clause, not obliging insurers to indemnify the insured on a reinstatement basis until such time as reinstatement had been commenced and the costs of such had actually been incurred by the insured. In May 2011, fire damaged the building and machinery. The insured presented property damage and business interruption claims. The parties could not agree on the indemnity value of the property damage. The insured claimed that it was entitled to an indemnity on a reinstatement basis (£3,492,041). The insurer argued that the insured was instead entitled to an indemnity equal to the market value of the property as at the date of the fire (£2,141,526).
It was common ground that indemnification pursuant to the reinstatement clause was unavailable in the absence of actual reinstatement. In these circumstances the English common law provides the governing indemnity principles, subject to any conflicting provisions within the insurance policy.
The insured claimed that pursuant to common law it was still entitled to the reinstatement value of the property as this best reflected its value at the time of the fire. The insured claimed that it had demonstrated an intention to continue to use the property and that its conduct after the fire (i.e. not reinstating) was irrelevant.
The insurer disagreed and argued that it was necessary for the insured to demonstrate a genuine, fixed and settled intention to reinstate in order for it to be entitled to a reinstatement based indemnity. The insurer argued that the insured had not evidenced that: no reinstatement had been undertaken and the insured had considered other options for its business (including buying a textile company in Pakistan to resume manufacture or redeveloping the premises into a function centre or supermarket). Accordingly, it was argued that the indemnity should be the market value of the property as at the date of the fire.
The judge accepted that in line with established legal principles the insured was entitled to an indemnity equivalent to the value of the property to the insured at the date of the fire. To determine what that value was, the judge found the following principles applied:
- The measure of indemnity is a matter of fact which must be decided on the circumstances of each case;
- The primary focus of the enquiry should be on the circumstances before or at the time of the damage. However the court could consider evidence from subsequent events if that showed reinstatement would over-compensate the insured; and
- There was no general rule that the insured must show that it continued to have a genuine fixed and settled intention to reinstate at the date of trial.
The judge was satisfied on the evidence that the insured had a genuine settled intention to reinstate (even though at the date of trial little had been done to do so). The persuasive factor was that the insured had considered, immediately after the fire, various alternatives for reinstating either at the existing site or an equivalent one. There was insufficient evidence to show that a reinstatement based indemnity would over-compensate the insured. Therefore, the judge held that the appropriate indemnity would be a reinstatement based one.
If an insured can demonstrate a genuine settled intention to reinstate (notwithstanding that it has not commenced reinstatement) a reinstatement based indemnity would be appropriate. This is a matter of evidence in each particular case. The enquiry should consider the insured's intention as at the date of loss and can take into account events / factors after that date if appropriate. We expect this issue to remain controversial. Generally, we would expect that the more time that has passed since the date of loss, the harder it might be for an insured to prove a genuine settled intention to reinstate and that it would not be over-compensated with a reinstatement based indemnity. A court or tribunal is likely to find it easier than insurers to ascertain the insured's intention in contentious matters because a court / tribunal will likely be assisted by written and oral evidence (including cross-examination) and legal argument, which are unlikely to all be available to insurers when considering the claim prior to litigation.
If an insured cannot evidence a genuine settled intention to reinstate, it might be indemnified on the basis of the market value of the property as at the date of loss.