Case Alert - [2016] EWCA Civ 1003

Court of Appeal considers reinstatement issues and insured's duty following rejection of a claim.

Kennedys for appellant, Edwin Coe for respondent

A fire insurance claim was resisted by the defendant insurer on the grounds of lack of insurable interest and misrepresentation/non-disclosure. Both defences failed on the facts. The insured sought and obtained a declaration that it was entitled to be indemnified for the cost of reinstatement, even though the property had not been reinstated yet and the insurer alleged that the insured showed no signs of planning to reinstate. The judge had declined to determine the issue of intention to reinstate at trial. The insurer appealed and the Court of Appeal has now held as follows:

  1. The insured was entitled, pursuant to the terms of the policy (see further below) to the cost of reinstating the property. Furthermore, as the insured was bound to reinstate the property (without the need for a request to do so), it could not be said that it had only a limited interest in the property (which would have required it to be accountable to others for any sum received in excess of its interest). Because of the contractual entitlement to reinstatement, it did not matter that there was no loss of market value because of the fire.
  2. However, the policy had imposed conditions on the entitlement to reinstatement: namely, the reinstatement work had to be carried out and the cost of reinstatement had to have been actually incurred. Since the reinstatement work had not actually been carried out, or the costs incurred, the Court of Appeal considered what the position would be had the contractual entitlement to reinstatement not been incorporated.
  3. Where the insured is bound to replace the lost property, the cost of doing so is prima facie the measure of indemnity. However, the evidence in this case was that, for a number of reasons, the value of the property had actually increased as a result of the fire. Clarke LJ held that "I doubt whether a claimant who has no intention of using the insurance money to reinstate, and whose property has increased in value on account of the fire, is entitled to claim the cost of reinstatement as the measure of indemnity unless the policy so provides". Here, there was a real possibility that reinstatement would not take place. In such a situation, the insured must show that it not only has a genuine intention to reinstate but that such intention is also "fixed and settled". If an insurer pays out and the insured then finds that it cannot reinstate (or it sells the property instead), "in a case where, at the time of the hearing, there is a real possibility that reinstatement may not in fact occur it is open to the court to decline to make an immediate award of damages and either to make some form of declaratory relief or, alternatively to postpone assessment of the extent of indemnity (and the payment of it) until such time as it is apparent that reinstatement (i) can and (ii) will go ahead or, at least that there is a reasonable prospect that it will".
  4. It was argued that the judge had been wrong to hold that where an insurer has repudiated the policy, it cannot rely on policy conditions (here, that the costs of reinstatement would only be repaid once they have been incurred). The Court of Appeal found that that had not been the judge's conclusion: instead, he had held that the requirement on the insured to begin to reinstate cannot be regarded as arising until the insurer has confirmed that it will indemnify: "Whether an insured has acted with reasonable despatch is a question of fact. I would, however, accept that in many cases, of which this is one, the insured will not have failed to act with reasonable despatch whilst insurers deny any liability or assert that the insured is not entitled to be compensated on the basis of reinstatement".
  5. The judge had been wrong to accept the declaration wording advanced by the insured. Instead, the judge should have made a declaration that, if the insured reinstated the property, then it would be entitled to an indemnity from the insurers. There was no need to further define "reinstatement" in the declaration.

COMMENT: The distinction between an insurer being unable to rely on policy conditions where it has repudiated the policy and an insured being under no obligation to comply with policy conditions unless cover is confirmed is, in practice, likely to be a fine one. The Court of Appeal did not refer to other decisions, such as Ted Baker v Axa and Lexington v Multinacional, where it was accepted that the insured was still bound to comply with a claims/cooperation provision even though insurers had rejected the claim. It therefore seems that this aspect of the decision is confined to the obligation to reinstate only, and is not intended to apply more widely.