In a subrogated claim, a restaurant owner's insurer pursued negligent contractors whose faulty repairs following a flood caused further material damage and loss of profits. The High Court held that the contractors were liable only for reasonable costs of reinstatement, and in a quantum assessment, the reinstatement costs actually incurred should be considered no more than a starting point.

Following a flood in December 2006, restaurant owner Brit Inns, hired building contractors BDW Trading to carry out extensive remedial works. Brit Inns' insurer paid out £205,500, and Thames Water, responsible for the flood, contributed a further £50,000. BDW's negligent remedial works resulted in a second, smaller flood, discovered in January 2007. BDW accepted liability, and agreed to reimburse Brit Inns for the cost of the further remedial works necessary to repair the damage caused by the second flood. Brit Inns arranged the further remedial works, and claimed from its insurer the sums of £355,000 for material damage, as well as a further £240,905 for lost profits. These sums were paid in full by the insurers. In Brit Inns Ltd & Ors v BDW Trading Ltd [2012] EWHC 2143 (TCC) Brit Inns' insurer pursued a subrogated claim against BDW to recover sums paid to Brit Inns.

Mr Justice Coulson had to determine the amount which could be recovered by the insurer from the liable third party. He recited the well-established principle that where a claimant's property has suffered physical damage as a result of a breach of contract or negligence, the claimant can recover reasonable costs of reinstatement from the defendant. He further stated that, where the costs of reinstatement had already been incurred prior to trial, the actual reinstatement costs incurred by the claimant should be the starting point. He was clear, however, that actual costs would not be decisive, and they could be disregarded entirely if there was reason to do so.

Coulson J undertook a detailed assessment of the actual costs claimed by Brit Inns and paid by its insurer. He found that the available invoices were inadequate, that there was insufficient evidence of actual payment, that there was a lack of documentation of the works actually done, and there was a complete absence of an agreed scope of work. He further noted the disparity between the reinstatement costs following the first and second floods, all the more surprising given the limited scope of the later remedial works.

Coulson J concluded that the sheer scale and range of problems with the claim submitted to the insurer meant that it was impossible to accept it as a basis for assessing the defendant's liability. Instead, the judge opted for a retrospective expert valuation of the works. He held that the contractors were liable for just £136,688 for the material damage. He also found serious flaws with Brit Inns' assessment of its loss of profits claim, and revised this down to a mere £20,779.

This case emphasises the importance of diligence in the adjustment process. The third party's liability is limited to reasonable costs of reinstatement: the insurer can recover no more than reasonable costs, regardless of the amount actually paid out to the insured. The insurer must, therefore, apply the the test of reasonableness itself, before paying the claim. It is uncontroversial that the insurer should demand adequate documentary evidence that the works were requested by the insured, actually carried out, properly invoiced, and actually paid. But the burden on insurers goes beyond this. It seems they must also take a view on whether the insured paid a fair price for the reinstatement. In Brit Inns, the claim against BDW would have been reduced by the court even if it had been properly evidenced, simply because the discrepancy between the cost of the first and second remedial works made it clear that the amount paid for the second works was unreasonable. Coulson J suggested that if an insured incurred the excessive reinstatement costs on the advice of a professional such as an architect or an engineer, the actual costs would still be persuasive in an assessment of the defendant's liability in quantum. But where no such advice was sought, the insurer should consider retrospectively valuing the works done, before relying on the costs actually incurred.