The decision of Mr Justice Coulson in Brit Inns Limited & Ors v BDW Trading Limited [2012] EWHC 2143 (TCC) is illustrative of the difficulties insurers can face when exercising subrogation rights against third parties. As this somewhat extreme example demonstrates, if a claim is discharged without proper adjustment, any sums overpaid will be irrecoverable by insurers in a subsequent subrogated action.

Background

Brit Inns Limited ("Brit Inns"), a company now in liquidation, had engaged the defendant contractor to construct a new building intended to comprise a basement restaurant, a ground-floor bar and residential flats. These works included the tanking of the basement and the construction of a concrete slab, which were completed in May 2006. The directors of Brit Inns ("the Directors") had then taken charge of the fit-out works for the bar and restaurant, which had been largely completed by December 2006 at a cost of approximately £280,000. On 11 December 2006, however, the basement was flooded as a result of negligence on the part of Thames Water, which compensated Brit Inns for the damage caused. Some remedial work was undertaken, however, in 15 January 2007 the basement flooded once again, on this occasion as a result of the defendant contractor's and its sub-contractor's admitted negligence in installing a damp-proof membrane during the original development works in 2006. Brit Inns re-fitted the basement and the restaurant duly opened in October 2007. In the subsequent period, two separate odour problems emerged and were remedied. The second such problem was due to the piercing of a soil and vent pipe by an electrician engaged by Brit Inns. The Directors closed the basement restaurant in June 2008.

After the second round of reinstatement fit-out works had been completed, Brit Inns submitted an insurance claim in the early part of 2008 for material damage and business interruption losses allegedly occasioned by the second flood. The sums claimed were £396,502.38 and £2.2 million respectively, the latter sum on the basis that the delayed re-opening caused by the second flood had a terminal impact on the restaurant's future profitability. This claim was adjusted downward by loss adjusters instructed by Brit Inns' insurers, on whose recommendation Brit Inns recovered approximately £665,000 (including £355,070 in respect of material damage and £240,905 for lost profit). In the main action, Brit Inns' insurers sought to recover from the defendants, by way of a subrogated claim, the monies they had paid out to Brit Inns. In a further joined action, the Directors sought to recover for their uninsured losses in their capacity as assignees of Brit Inns, including a claim for increased insurance premiums following the second flood.

Decision

As Mr Justice Coulson noted at the outset of his judgment, the liability of the defendants for the second flood was not in dispute. In a sense, the case to be decided should therefore have been a simple assessment of loss, made all the more straightforward by the fact that the insurance claim had already been adjusted. However, and as the judge remarked, there were particular features of the case that were very unusual, the principal difficulty being that "both the claim itself, and the adjustment of it, were fundamentally flawed".

With that preamble, Coulson J proceeded to identify the principles applicable to the material damage claim. These principles appear not to have been disputed and may be summarised as follows:

1. Where the claimant's property has suffered physical damage as a result of the defendant's negligence, the claimant is entitled to recover the reasonable cost of reinstatement (East Ham Corporation v Bernard Sunley & Sons Ltd [1996] AC 406.

2. Although not strictly a principle of recovery of damages, if a sum has been assessed as reasonable by an experienced loss adjuster, it will ordinarily take good evidence to displace that assessment (Skandia Property (UK) Ltd v Thames Water Utilities Ltd [1999] BLR 338.

3. That said, a court will have no option but to perform a reasonable retrospective valuation of the reinstatement work if, notwithstanding the earlier scrutiny, it forms the conclusion that the particular insurance claim was "unreliable from top to bottom".

Adopting this approach, the judge had little hesitation concluding that a retrospective valuation was appropriate, involving the application of standard rates and prices to the reinstatement work. In that regard, the evidence before the court showed that no record had been kept of the work carried out and that numerous invoices had been submitted (and accepted) for works which had nothing to do with the second reinstatement of the basement, with the result that the claim was "wholly exaggerated". As to the subsequent, adjustment of the claim, the loss adjuster had himself admitted that he should not have accepted the invoices submitted to him at face value. Applying the proper approach to the individual elements of the material damage claim, the judge found that only £136,688.89 was recoverable (just over one third of the pleaded claim).

In relation to the claim for lost profit, the main issue of principle was whether this should be calculated on the basis of the actual profits generated by the restaurant when it re-opened in October 2007 (as contended for by the defendants) or whether the approach taken by the loss adjusters was to be preferred. That approach assumed the restaurant would have been immediately profitable on re-opening in March 2007 and was extrapolated from the financial results of another, different business. In addition, the view taken by the loss adjusters had been that the impact of the second flood on the restaurant's profitability endured up until November 2008 (i.e. beyond the closure of the restaurant), albeit that it ran down from June 2008 on account of the second odour problem. Finding for the defendants, the judge concluded that that it was appropriate to have regard to the actual profit and loss figures generated from October 2007 onwards and that the effect of the delayed opening was not such as would justify extending the period for the lost profit claim beyond seven months. On this basis, a modest sum of £20,779 was awarded to reflect the net loss of profit over the relevant period.

As to the Directors' claim for Brit Inns' increased insurance premiums said to have resulted from the second flood, this was found to be "fundamentally flawed", not only because the amount of the insurance premiums paid up to five years later was too remote from the second flood but also because "insurance premiums across the board have gone up…so that the mere fact that there was an increase in 2010, 2011 and 2012 could not be ascribed to the second inundation in any event."

Comment

While it is relatively uncommon for disputes over quantum to come before the courts, this is rarer still where the subject matter of the dispute is an adjusted insurance claim. Even then, and as the judge here noted, the court will attach significant weight to the sums paid out, on the grounds that the insurers and their loss adjusters have a clear incentive to ensure such payments are kept to the minimum. As such, the present case provides an unusual example of an insurance claim that was both demonstrably excessive and inadequately adjusted, resulting in an award of damages in an amount significantly less than the sum claimed.

All that said, this case should not simply be disregarded as an anomaly, at least from a subrogation perspective. For while the flaws in the insurance claim and its adjustment were undoubtedly considerable, Coulson J's decision underscores the general importance to insurers of ensuring claims are properly investigated in order for the sums paid out to be recoverable. While that will ordinarily be the case, the consequences of any oversight can prove significant, as this case shows. Conversely, liability insurers should be alive to the possibility that an over-payment has been made when faced with the prospect of a subrogated claim.