Property damage and the entitlement to reinstatement
Property Aware 5
The Court of Appeal (CoA) has clarified the law in respect of an insurer’s obligation to pay for the costs of reinstatement in circumstances when reinstatement may not take place. In essence, the court took the view that the indemnity covered the actual reinstatement costs incurred by the insured. However, there was no obligation by the insurer to provide an indemnity on a reinstatement basis, in the event that the damages would not be used for reinstatement purposes.
Great Lakes Reinsurance (UK) SE v Western Trading Limited Court of Appeal, 11 October 2016  EWCA Civ 1003
This case first appeared before the Mercantile Court. The claim related to property which was owned by Mr Singh and managed by a company which he owned, Western Trading Ltd (“Western”). As part of its purpose to manage and hold Mr Singh’s property portfolio, Western insured the property with Great Lakes Reinsurance (“Great Lakes”).
The property was destroyed by fire on 24 July 2014. Upon presentation of a claim by Western, Great Lakes avoided the policy of insurance and stated that this was on the grounds that Western did not have any insurable interest in the property and also that there had been a misrepresentation and non-disclosure at inception.
Western issued proceedings for a declaration that it was entitled to an indemnity from Great Lakes under the terms of the policy in respect of its losses up to the limit of the indemnity. Great Lakes argued that Western was only entitled to damages in respect of any reduction in the open market value.
The Mercantile Court’s decision
The judge made a finding in favour of Western and decided that Western had the right to be indemnified up to the limit of indemnity for the cost of reinstating the property if it did so.
The judge considered that this would provide Great Lakes with a measure of protection as if Western did not reinstate, then Great Lakes would not have any obligation to provide an indemnity.
In terms of the insurable interest point, the court was satisfied that Western had an insurable interest in the property based upon the evidence advanced. In regard to Great Lakes argument relative to misrepresentation and non-disclosure, the court made a finding of fact that the alleged misrepresentations had not been relied upon by Great Lakes at inception of the policy.
Great Lakes appealed the Mercantile Court’s decision in respect of Western’s entitlement to an indemnity consisting of the cost of reinstatement.
The grounds of the appeal were that Western had not shown any signs of reinstating and, that Western had not sustained any losses therefore there was nothing to indemnify. Great Lakes argued that the measure of indemnity was the reduction if any, of the open market value of the property.
The Court of Appeal’s decision focused upon the insured’s entitlement under the policy of insurance.
The policy was subject to a “Reinstatement Memorandum” whereby the amount payable:
“shall be the reinstatement of the property lost, destroyed or damaged but in a condition equal to but not better or more extensive than its condition when new and no payment will be made until the cost of reinstatement shall have been actually incurred”
Measure of indemnity – the authorities
The court considered the various authorities and concluded that, where property has been destroyed the measure of indemnity to which the insured is entitled will depend on:
• The terms of the policy.
• The interest of the insured in, or its obligations in respect of, the property; and
• The facts of the case including, in particular, the intention of the insured at the time of the loss.
Accordingly, the Court of Appeal was persuaded by Western’s evidence that there was an intention to reinstate the property to its pre-incident condition or at a level near to. Consequently, the Court of Appeal was satisfied that, the measure of Western’s indemnity under the terms of the insurance policy was the cost of reinstating the property.
This was subject to the condition that the reinstatement works were, in fact, undertaken by Western and the costs associated with that were actually incurred.
In essence, the Court of Appeal’s finding clarifies that an insured is not entitled to the benefit of reinstatement indemnity if the insured does not intend to use the funds to actually reinstate the property. An insurer who pays out has, in general, no redress if none of the money is used for the purposes of reinstatement. A declaration by the court does provide a degree of protection for insurers until such time as it is apparent that reinstatement (i) can and (ii) will go ahead, or at least there is a reasonable prospect that it will.
On balance, the above decision affords some protection to insurers in those circumstances where an insured does not intend to use the indemnity for the purposes of reinstatement.
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