Court considers reinstatement issues following fire at insured premises

This 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 claimant  sought a declaration that it is entitled to be indemnified for the cost of reinstatement. The  property had been destroyed by the fire but no reinstatement had yet taken place and the insurer  alleged that the insured showed no signs of planning to reinstate.

Insurance policies often grant an insurer the option of either paying the insured the value of lost  property or reinstating the property. However, the policy in this case gave the insured the right  to be indemnified for the costs of reinstatement. The policy also expressly provided that no  payment would be made “until the cost of reinstatement shall have been actually incurred” and there  was also a requirement that reinstatement be carried out “with reasonable despatch otherwise no payment”.

However, Mackie QC HHJ agreed with the insured that where, as here, the insurer has wrongly denied liability and repudiated the policy, it cannot rely  on the proviso that the costs of reinstatement will only be paid once they have been incurred, and  there cannot have been an absence of “reasonable despatch”. The judge, citing with approval an  extract from MacGillivray on Insurance Law, held that a requirement to carry out reinstatement cannot arise until the insurer has confirmed  that it will indemnify. Furthermore, that applies not just to insureds who cannot afford to pay for  the reinstatement, but also to successful businesses: “Even a profitable business will reasonably   defer a decision whether or not to reinstate until it knows whether the funding will come from  insurers or will have to be diverted from elsewhere to the detriment of some other business  activity”.

The judge also rejected the insurer’s argument that, since the policy had been avoided, the remedy  for the insured  was damages rather than a declaration. He noted that it is very common to grant  declarations in an insurance case. Here, the claimant had an express right to be indemnified for  reinstating the property and a declaration to that effect was appropriate here. Any dispute about  what is, or is not, reinstatement could be resolved once it is known what form any reinstatement  project will take.

Although not required to decide the point, the judge also held that, had he not granted a  declaration, the claimant would have been entitled to recover as damages the cost of reinstatement.  The value of the site before and after the fire was irrelevant (unless the claimant decides not to  reinstate on this basis). Although the insurer would not have to pay  if there is to be no  reinstatement, the judge accepted the claimant’s evidence that he did wish to reinstate.

COMMENT: The approach of the court adopted in this case can be contrasted with that adopted in the  recent decision of Ted Baker v Axa (see Weekly Update 41/14), where the judge appeared to  implicitly accept that the insured was  still bound to comply with a claims provision even though  insurers had rejected the claim. Here, the insurer could not insist on compliance with the  reinstatement clause where it had wrongfully rejected a claim.