In Sartex Quilts & Textiles Limited v Endurance Corporate Capital Limited  EWHC 1103 (Comm), David Railton QC, sitting in the Commercial Court considered the effect of the Court of Appeal’s decision in Great Lakes Insurance (UK) Ltd v Western Trading Ltd  EWCA Civ 1003. He decided that whether an insured is entitled to be indemnified in respect of property damage on the reinstatement basis requires consideration of all the circumstances, including events both before and after the loss, to determine if that measure of indemnity would overcompensate the insured for the loss it suffered. The deputy judge’s decision is considered by Miles Harris of 4 New Square.
Ben Elkington QC of 4 New Square acted for the successful claimant insured.
The claimant, Sartex Quilts & Textiles Limited (“Sartex”) had historically carried on business manufacturing textiles from premises in Rochdale, known as the Crossfield Works. The freehold owners of Crossfield Works were the individuals controlling Sartex. They allowed Sartex to use the Crossfield Works rent free on condition that it both insured the premises and its contents and also maintained them in a good state of repair.
By late-2010, Sartex had shifted most of its production to other premises in Rochdale and virtually completed a process of changing the use of the Crossfield Works to the manufacture of shoddy hard pads for use in mattresses or as insulation. It was at this point that Sartex took out a Property Loss or Damage Policy with the Defendant (“the Policy”). The Policy incepted on 11 November 2010 and covered damage to the buildings, plant and machinery at the Crossfield Works and business interruption. The sum insured for the buildings was £2,020,000; for plant and machinery, £2,500,000.
On 25 May 2011, shortly after production of the shoddy hard pads had commenced, a fire at the Crossfield Works completely destroyed the buildings and left the plant and machinery a total loss. Sartex’s business at the site was effectively stopped. A claim under the Policy in respect of business interruption was settled by insurers in May 2013 on the basis that the manufacture of shoddy hard pads would have been profitable. However, although insurers paid Sartex a sum of £2,141,527 based on its assessment of the market value of the buildings, plant and machinery destroyed by the fire, it resisted a claim for an indemnity on the reinstatement measure. Eventually, although it had still not in fact commenced any reinstatement of the premises, Sartex issued proceedings in 2017, claiming to be entitled to an indemnity on the reinstatement basis.
The Insuring Clause provided:
“Subject to the general conditions and exclusions of this Policy, and the conditions and exclusions contained in this Section, we, the Underwriters, agree to the extent and in the manner provided herein to indemnify the Insured against loss or destruction of or damage to Property caused by or arising from the Perils shown as operative in the Schedule, occurring during the period of this Policy.
Underwriters shall not be liable for more than the Sum Insured stated in the Schedule or in the Policy in respect of each loss or series of losses arising out of one event at each location as stated in the Schedule.”
Under the heading “Reinstatement Basis” the Policy also provided:
In the event of loss or damage to or destruction of Buildings, Machinery and Plant or All Other Contents, the basis upon which the amount payable hereunder is to be calculated will be the Reinstatement of the Property lost, destroyed or damaged.
- Underwriters’ liability for the repair or restoration of property damaged in part only, will not exceed the amount which would have been payable had such property been wholly destroyed.
- No payment beyond the amount which would have been payable in the absence of this condition will be made:
- a) unless Reinstatement commences and proceeds without unreasonable delay;
- b) until the cost of Reinstatement has actually been incurred;
- c) if the Property at the time of its loss, destruction or damage is insured by any other insurance effected by the Insured, or on its behalf, which is not upon the same basis of Reinstatement.”
It was common ground that (1) these special conditions were not satisfied because the cost of reinstatement had not been incurred; and (2) therefore, the amount payable was to be determined by reference to the insuring clause, which provided that insurers would “indemnify the Insured against loss or destruction of or damage to Property caused by or arising from” fire.
The parties agreed that the Insuring Clause permitted an indemnity on the reinstatement basis or the market value basis, but the criteria for determining which basis should be paid were disputed, as was the basis which should be applied on the facts of the case.
Sartex’s primary case was that it was entitled to an indemnity on the reinstatement basis because:
- That reflected the value of the buildings, plant and machinery to it at the time of the loss; and
- Although it had not been called upon to reinstate the buildings, such measure also reflected (it said) its obligation in relation to the buildings under the terms of the agreement between it and the individuals controlling it.
In advancing this case, Sartex submitted that although an insured’s intentions at the time of the loss were relevant in determining the correct measure of indemnity, that was only in the context of asking what the insured intended to do with the property, assuming the loss had not occurred. If the insured were (for example) seeking to sell or destroy the property at the time of the loss, then the loss would not be the cost of reinstatement, but some other measure. In contrast, it submitted, the question of what the insured would do after the loss, and as a result of it, was not relevant save in exceptional cases (of which this is not one).
Sartex argued that, applying this approach its loss was the sum that would be required to reinstate the buildings, plant and machinery at the Crossfield Works as at the date of the fire, albeit it was not bound to use the proceeds of any claim for reinstatement. It was clear from the steps it had taken in the years leading up to the fire that it considered it had identified a profitable line of business in manufacturing shoddy hard pads from Crossfield Works. It was a valuable opportunity, which it was about to exploit.
Insurers submitted that:
- In determining which basis of indemnity was appropriate, it was necessary to look at all the circumstances of the case;
- If reinstatement had not taken place, then the reinstatement basis would only be applicable if the insured had at the time of the loss and continued to have a genuine, fixed and settled intention to reinstate what was lost or damaged and to do so in a way that would not lead to the erection of a materially different building; and
- Therefore, although the insured’s intentions at the time of the loss were relevant, so were its intentions on a continuing basis since then, including up to the date of trial, or the end of the limitation period (if sooner).
On the facts, insurers argued that Sartex could not establish the necessary intention, that there was no real prospect of reinstatement taking place, and that on commercial grounds no-one in their right mind would reinstate. In advancing that case it pointed to the fact that:
- No reinstatement has taken place for nearly 8 years since the fire;
- In the interim Sartex had explored both a number of other plans for buying other premises (including a fibre processing business in Pakistan), and using Crossfield Works for other purposes (including a function venue, or a supermarket).
Insurers argued that recent steps to progress a planning application for a reinstated building at Crossfield Works, and for the purchase of replacement plant and machinery, were taken solely for the purpose of identifying an intention to reinstate, but did not reflect a genuine intention to do so.
In response to these arguments, Sartex, while denying that events after the fire were on the facts relevant, maintained that it did have a genuine intention to reinstate the buildings, plant and machinery and its Mr Ahmed (the driving force behind Sartex) gave evidence to that effect. It contended, in the alternative, that if there was any doubt over whether it in fact intended to reinstate then the correct course would be to grant a declaration, of the kind granted in Western Trading, that if Sartex carried out reinstatement, it would be entitled to be paid the reinstatement costs.
THE JUDGE’S DECISION: THE CRITERIA RELEVANT TO THE BASIS OF INDEMNITY
David Railton QC rejected both insurers’ argument that the insured had to show a genuine, fixed and settled intention to reinstate at the time of trial (or the expiry of limitation), and also Sartex’s argument that intentions after loss were only relevant in exceptional cases, such as Western Trading where the fire increased the value of the property.
After reviewing the relevant authorities including Western Trading, the Judge instead concluded that the relevant questions to ask were: what loss had been suffered by the insured as a result of the fire? And what measure of indemnity fairly and fully indemnified it for that loss? In answering those questions, the primary focus was on the position as at the time of (and immediately before) the fire. If the insured intended then to use the property, as opposed (for example) to selling, or demolishing it, the appropriate measure of indemnity, and the best reflection of the value of the property to him at that time, was likely to be the reinstatement basis. But subsequent events (and not just those foreseeable at the time of the fire) may show that such measure would over-compensate the insured, in which case the court at trial was likely to consider another measure of loss to be more appropriate.
The Judge placed particular weight on Reynolds v. Phoenix Assurance Co Ltd  2 Lloyd’s Rep 440, where Forbes J had made clear that events and intentions both before and after the loss were relevant (at 451) that:
“… you are not to enrich or impoverish: the difficulty lies in deciding whether the award of a particular sum amounts to enrichment or impoverishment. This question cannot depend in my view on an automatic or inevitable assumption that market value is the appropriate measure of the loss. Indeed in many, perhaps most cases, market value seems singularly inept, as its choice subsumes the proposition that the assured can be forced to go into the market (if there is one) and buy a replacement. But buildings are not like tons of coffee or bales of cloth or other commodities unless perhaps the owner is one who deals in real property. To force an owner who is not a property dealer to accept market value if he has no desire to go to market seems to me a conclusion to which one should not easily arrive. There must be many circumstances in which an assured should be entitled to say that he does not wish to go elsewhere and hence that his indemnity is not complete unless he is paid the reasonable cost of rebuilding the premises in situ. At the same time the cost of reinstatement cannot be taken as inevitably the proper measure of indemnity. There must be cases where no one in his right mind would contemplate rebuilding if he could re-establish himself elsewhere. The question of the proper measure of indemnity thus becomes a matter of fact and degree to be decided on the circumstances of each case. At this juncture it seems important to me to consider what in fact is, and was, the attitude of the plaintiff towards this building…”
Christopher Clarke LJ’s Judgment in Great lakes v Western Trading
Insurers’ argument that a genuine, fixed and settled intention to reinstate was essential for an indemnity on the reinstatement basis placed reliance on the judgment of Christopher Clarke LJ in Western Trading. In that case a fire triggered the delisting of the insured’s premises, so increasing their value very significantly because profitable development became viable. The insured in Western Trading was only seeking a declaration as to its entitlement to be indemnified (so addressing concerns as to its intention). Therefore, whether it had to show an intention to reinstate in order to be indemnified on the reinstatement basis was not in issue. Nevertheless, in obiter comments Christopher Clarke LJ stated:
- 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….The true measure of indemnity is “a matter of fact and degree to be decided on the circumstances of each case”, per Forbes J in Reynolds v Phoenix; and is materially affected by the insured’s intentions in relation to the property.
- The significance of intention begs the question as to: (a) what exactly is the requisite degree of intention; and (b) what safeguard, if any, is available to an insurer who pays out the cost of reinstatement to an insured who then finds that he cannot reinstate or, even if he can, in fact sells the property. Neither of these issues were the subject of submission; so that what I say on them must be regarded as tentative.
- … The problem arises in a case such as the present where there is a real possibility, which the judge’s choice of the declaration route recognised, that reinstatement may not take place either because it cannot do so, eg as a result of planning problems, or because a markedly more attractive alternative presents itself.
- As to (a) it seems to me that the insured’s intention needs to be not only genuine, but also fixed and settled, and that what he intends must be at least something which there is a reasonable prospect of him bringing about (at any rate if the insurance money is paid).
- As to (b) an insurer who pays out has, in general, no redress if none of the money is used in reinstatement. Once he has got it, it is for the insured to decide what to do with it: Halsbury’s Laws – Insurance, volume 25 para 633. But I incline to the view that, 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.”
Approving obiter comments upon Western Trading by Jefford J in Hodgson v. NHBC  EWHC 2226 (TCC), the Judge held that the judgment of Christopher Clarke LJ did not indicate that reinstatement could not be given if the remedial works were not in fact carried out. Rather, it envisaged that in determining what the appropriate measure of indemnity is in any particular case, it would be necessary to look at all the circumstances, which could include the position up to the date of trial when the extent of the insured’s indemnity is determined. In some circumstances, such as those in Great Lakes, the absence of a continuing intention to reinstate would indicate that the reinstatement basis would not be appropriate, as it would over-compensate the insured for his loss. But in other cases, that would not be so. As Forbes J said in Reynolds v Phoenix, the true measure of indemnity was a matter of fact and degree to be decided on the circumstances of each case.
The Judge’s conclusion on basis of indemnity
Applying what he had held was the correct approach, the Judge concluded that it was appropriate to award Sartex an indemnity on the reinstatement basis, awarding it a sum of over £1.3m in addition to the monies insurers had already paid on a loss of value basis.
In his view, immediately before the fire Sartex had intended to use the Crossfield Works for its new venture of manufacturing shoddy hard pads and that the value of the buildings, plant and machinery to it was that of providing the location and means for pursuing that venture. While the Crossfield Works were not the only location where this could take place, they were where Sartex planned to operate. Furthermore, the terms of its occupation of the Crossfield Works meant Sartex was obliged to ensure the premises were maintained and in a good state of repair. Therefore, by reference to the position immediately before and at the time of the fire it was clear that the reinstatement measure of indemnity was appropriate.
The Judge recognised that there was force in some of the insurer’s arguments to the effect that events after the fire, up to the date of trial, meant it would nonetheless be inappropriate or would overcompensate Sartex if it was indemnified on the reinstatement basis. Eight years had passed since the fire, little had been done to achieve reinstatement, Sartex had explored reinstating in Pakistan and using the Crossfield Works for very different purposes. However, he found that the process of exploring alternative solutions had over time made it clear that reinstating the manufacturing of shoddy hard pads at the Crossfield Works was the solution for Sartex’s business because appropriate alternative manufacturing premises could not be found. Assessing Sartex’s Mr Ahmed to be a straightforward witness, the Judge ultimately accepted that at all times since the fire Sartex had genuinely intended to reinstate the plant and machinery lost in the fire and had intended to reinstate them at an appropriate manufacturing site. Therefore, in all the circumstances, including events before and after the fire, up to and including trial, reinstatement was the appropriate basis of indemnity in respect of buildings, plant and machinery. Indeed, the Judge said that had it been necessary he would have found that Sartex had demonstrated a genuine, fixed and settled intention to reinstate.
In the circumstances, Sartex’s alternative claim for a declaration as to its right to an indemnity did not arise, but the Judge said he would have granted such a declaration had it been necessary.
The Judgment provides helpful guidance on the significance of Western Trading and particularly Christopher Clarke LJ’s obiter remarks in that case. It is suggested, the Judge’s analysis of the approach to determining the appropriate measure of indemnity is correct and in line with prior authority. The case makes clear to parties arguing over the appropriate measure of indemnity that they must consider, and address in their evidence, all the relevant circumstances both before and after loss. It also a striking example of the fact that reinstatement can still be the appropriate measure of indemnity even where a lengthy period has passed since a loss and even if the insured has engaged in exploring alternative ways of using its premises during that time.