Brit Inns Ltd & others v BDW Trading Ltd & another [31.07.12]
High Court sets out principles for assessment of damages where insured’s claim grossly exaggerated and insurer had not properly investigated it.
Following a flooding incident at a newly-built restaurant caused by the Defendant’s defective work, the Claimants made a claim under their insurance policy. This was assessed by a loss adjuster and forensic accountant and subsequently the Claimant’s insurer paid out £355,070 for material damage and £240,905 for loss of profits. It then sought to recover those sums from the Defendant, who did not dispute their liability but disputed the reasonableness of the sums claimed and whether they were caused by the flooding.
The High Court reiterated that the proper approach in a claim for material damage is that a claimant is entitled to recover the reasonable costs of reinstatement. If the reinstatement has been carried out, the actual costs incurred would be a starting point for assessing their reasonableness.
Furthermore, where the actual costs have been assessed as reasonable on the advice of an experienced loss adjuster “with a clear incentive to ensure that the sums paid out [by insurers] were kept to a minimum”, the court is likely to attach significance to the insurance payment sum. It would take good evidence from a defendant to demonstrate that the sum was not reasonable.
However, on the facts, the court held that the material damage claim was grossly exaggerated by the Claimants and had not been properly investigated by the insurer and its loss adjuster.
The court found that the invoices presented in support of the costs incurred for the reinstatement were unreliable, inadequate and impossible to analyse retrospectively given their lack of detail. This was compounded by the absence of evidence of payment and any checks by insurers as to whether the work had actually been done. Further, the quantity surveying experts agreed that many invoices were wrongly claimed for items unrelated to the reinstatement. There was also a significant discrepancy between the costs of the works when the restaurant was originally built and the reinstatement works.
Given that both the insurance claim for material damage and its adjustment were so fundamentally flawed, the court did not take as its starting point the sums paid under the insurance policy. Instead, it decided the measure of damages based on the Defendant’s quantity surveying expert evidence.
The court also rejected the basis for the insurer’s forensic accountant’s assessment of the loss of profit claim, which was based on a comparator business, when actual profit and loss figures were available. Where such figures are available, they ought to form the starting point for any loss of profit calculation. None of the reasons given by the Claimants justified disregarding its actual profits. Nor is it appropriate to assume that a new business will make a profit.
Accordingly, the court awarded just 26 per cent of the sum claimed by insurers and less than 3 per cent of the pleaded uninsured losses. This meant that out of a total of £1.15 million, the Defendants were ordered to pay less than 15 per cent.
Trials of quantum-only claims are unusual, especially where they have been through the filter of an adjusted insurance claim.
This case demonstrates that where a claim is shown to be exaggerated and that exaggeration is not dealt with by insurers when the claim is presented, subrogation can be especially problematic. It will invite close scrutiny of the claim and what steps were (or were not) taken by insurers in their adjustment.
The case was characterised by what the Judge described as “an attritional battle” involving inadequate documentation and invoices the inadequacies of which were “too numerous to identify comprehensively”. This provides a useful reminder that invoices of reinstatement costs are not necessarily decisive and that the evidential burden is on a claimant to show the reasonableness of those costs and that they were incurred in consequence of the incident.
The court has recently decided the costs of these proceedings, which we will detail in the next issue of Insurance Brief.