Where a claim is made in respect of a chattel which has been destroyed negligently by a third party, the claimant will only be entitled to the replacement value where it is reasonable to replace the chattel and the cost of replacement is reasonable. In practice, the cost of reinstatement will only be awarded where the claimant intends to reinstate the chattel. The fact that the value of the chattel to its owner is greater than its market value may point to the cost of reinstatement as the proper measure of loss. Where it is appropriate to award damages on a diminution of value basis, the claimant may also be able to claim for future loss of profits.

Thames Water admitted liability for a burst water pipe which flooded the claimant’s premises and destroyed most of its archive of photographs, artwork and reference material relating to aviation. The claimant said that it intended to reinstate the archives and that, given that the market or resale value was unlikely to be adequate for that purpose, it should be awarded a sum representing the cost of replacement. Thames Water argued unsuccessfully that the claimant had no intention of replacing the archive and in any event that it would be unreasonable to do so. The claimant recovered more than £2.5 million on a reinstatement basis.

Comment: the claimant also sought to claim for the diversion of staff time, and the retention of two ex-employees on a freelance basis, as a consequence of the flooding. This issue arose last year in R & V Versicherung AG v Risk Insurance and Reinsurance Solutions SA, a case concerning a conspiracy to defraud the claimant company (see February 2006 Insurance Update). Gloster J held that, as a matter of principle, the costs of wasted staff time spent on the investigation and/or mitigation of a tort should be recoverable from the defendant, notwithstanding that no additional expenditure loss, or loss of revenue or profit could be shown. In the present case, to the extent that she disagreed with the decision in Admiral Management Services Ltd v Para-Protect Europe Ltd, the Court of Appeal approved her analysis.

They went further to assist claimants by concluding that where the claimant has adequately established the diversion of the time of a significant number of its employees, and where there can be no sensible challenge to the conclusion that the business was disrupted, the court will be entitled to infer that the employees have been diverted from revenue-generating activities which would have generated revenue for the claimant in an amount at least equal to the costs of employing them during that time. In such circumstances, the burden of disproving this inference will in practice rest upon the defendant. An award of £31,520, significantly reduced from the sum originally claimed, was upheld by the Court of Appeal. Where there has been substantial staff disruption following tortious damage, insurers should expect awards of damages in such cases to increase and reserves should be revisited to take this possibility into account.