Endurance Corporate Capital Limited v Sartex Quilts & Textiles Limited [2020] EWCA Civ 308 – Indemnity on the Reinstatement basis
In its decision earlier this year, the Court of Appeal confirmed that, absent a contractual provision to the contrary, an insured does not need to show a genuine, fixed and settled intention to reinstate in order to recover on the reinstatement basis under a property policy.
Background
Sartex Quilts & Textiles Limited (“Sartex”) was the owner of a factory at Crossfield Works, Rochdale (‘the Property’), from which it had manufactured textiles.
A serious fire occurred at the Property in 2011 destroying it and the plant and machinery it contained. Sartex was insured by Endurance Corporate Capital Limited (“Endurance”).
Endurance accepted liability for Sartex’s claim, but the parties disagreed as to the basis on which Sartex was entitled to indemnity. Specifically, Sartex claimed that it was entitled to the cost of reinstating the Property to the condition that it was in immediately before the fire, whereas Endurance argued that Sartex was only entitled to (significantly lower) sums representing the diminution in market value of the Property as a result of the fire.
The matter originally came before David Railton QC, sitting as a Deputy High Court Judge, in May 2019. He concluded that Sartex had a genuine intention to reinstate the Property, and that accordingly, reinstatement was the appropriate measure of indemnity. The Deputy Judge also rejected Endurance’s argument that there should be a discount for betterment.
The Appeal
Endurance appealed the decision on the basis that the Deputy Judge was wrong to assess damages on the reinstatement basis, when Sartex had not demonstrated a genuine intention to reinstate. In this regard, it asserted that Sartex’s ongoing failure to achieve reinstatement, 8 years after the fire, showed that it had no such intention.
Further, if Endurance failed on its primary case, it argued that the Deputy Judge was wrong not to make a deduction for betterment.
The Court’s decision
The measure of indemnity
Leggatt LJ observed that in indemnity insurance, damages were intended to put the insured in the same position it would have been in had the loss not occurred. What an insured actually intended to do with the damages was generally irrelevant.
There were two bases on which the court could award damages: (a) the cost of repair; or (b) the reduction in the market value of the property. Endurance argued that the latter applied, and relied on the decision in Great Lakes Reinsurance (UK) SE v Western Trading [2016] EWCA Civ 1003, in which a listed building was destroyed by a fire. Unusually in that case, the value of the property increased following the fire because its listed status was revoked, thereby improving its development potential. In Great Lakes, Clarke LJ commented that the basis of indemnity was “materially affected by the insured’s intentions in relation to the property”. He went on to say that “the insured’s intention need 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)”.
The Court of Appeal in Sartex said that these comments did not assist Endurance. It was only in rare cases such as Great Lakes, where the property had gone up in value, that there was a need to demonstrate a fixed and settled intention to reinstate. No such issue arose in this case. Therefore, to put Sartex in an equivalent position as if the fire had not occurred, it was necessary to award it the cost of repairing the buildings and buying replacement plant and machinery.
Betterment
Endurance asserted that a percentage deduction should be applied to any award of damages, representing the alleged betterment arising from the replacement of the original building with modern materials. The Court of Appeal agreed that a deduction could, in principle, be made for savings if the building or the new machinery would have generated lower running costs; however, it was incumbent upon the insurer to identify and justify those savings. In this case, Endurance had made no attempt to do so, and simply advanced notional deductions for betterment that were unsupported by evidence. Therefore, absent any evidence, the Deputy Judge had been right to reject Endurance’s argument.
Implications of the decision
The decision in Sartex is good news for property owners, who, subject to any alternative provision in a policy, will not be required to show an intention to reinstate in order to recover on the reinstatement basis. The insured’s intentions will only be relevant in exceptional circumstances, which did not apply on the facts.
As to betterment, although property owners may, in some instances, be required to give credit for savings made as a result of reinstatement, the “blanket percentage” approach will be impermissible. A deduction will only be allowed where insurers can prove and quantify the lower running costs of the new building or the greater efficiency of the new plant and machinery.
Alex Rosenfield is a Senior Associate at Fenchurch Law
“The Worst of Both Worlds”: Spire Healthcare Ltd v RSA
2016 was a bumper year for aficionados of aggregation cases. (One might say that it saw a series of related cases…) In April the Court of Appeal in AIG v Law Society considered aggregation under the Solicitors’ Minimum Terms, with the outcome of AIG’s expedited appeal to the Supreme Court expected this month or next. In October, the Commercial Court in MIC Simmonds v AJ Gammell had to decide whether claims for respiratory injuries suffered by thousands of rescue workers after 9/11 arose out of one event. And just before Christmas the Commercial Court, in Spire Healthcare Ltd v RSA, again considered aggregation, this time in the context of a private healthcare company facing claims from over 700 patients alleging that one particular surgeon had carried out unnecessary and/or negligent procedures.
The case involved a combined liability policy taken out by Spire, which included cover for medical negligence. Put crudely, the intention of the policy seems to have been to confer an indemnity limit of £10m for any one claim together with an annual aggregate cap of £20m. There was also a badly drafted clause, whereby all claims attributable to one source or original cause would attract only one “Limit of Indemnity”.
Thus, if that clause operated as a conventional aggregation clause, the policyholder could only recover £10m from insurers, since all 700 claims would be treated a single claim. If the clause didn’t have that effect, it could recover £20m.
In addition, the policyholder and insurers disagreed about whether aggregation applied to the £25,000 each-and-every-claim excess. The policyholder argued that it did, and that it only had to pay the £25,000 once. The insurers disagreed, arguing that the excess was payable in respect of each claim (albeit, as it happened, capped at £750,000 in all).
The case involved some interesting comments by the Judge (HHJ Waksman QC) about principles of policy construction. He confirmed, as had the Court of Appeal in the AIG case, that aggregation clauses should be construed neutrally, without any preconceptions that they should work in one or other of the parties’ favour. He also held that, just because a particular phrase or clause was redundant or duplicative in one part of the policy, that didn’t mean that it had no function or effect elsewhere in the policy.
Desperately interesting though this might all be to insurance lawyers, brokers and underwriters, the outcome of the case was disastrous from the policyholder’s perspective. The Judge held that the clause in question did mean that there was indeed only £10m of cover available. To rub salt into the policyholder’s wounds, the Judge also rejected its fall-back contention that, in that case, there should be “parity of aggregation” and that it should be implied - in the absence of an express provision to that effect - that the 700 claims, unquestionably linked as they were, should attract only one excess. So the policyholder, which had fought the case arguing that there was £20m of cover and just one £25,000 excess due, was held to be entitled to just £10m of cover and liable to pay £750,000-worth of excesses.
I understand that, predictably enough, the policyholder is applying to the Court of Appeal for permission to appeal.
See: Spire Healthcare Limited v Royal & Sun Alliance Insurance plc [2016] EWHC 3278 (Comm) http://www.bailii.org/ew/cases/EWHC/Comm/2016/3278.html
Jonathan Corman is a partner at Fenchurch Law.
The ordinary measure of indemnity: Great Lakes Reinsurance (UK) SE v Western Trading Limited
In the latest in a series of pro-policyholder decisions by the courts, the Court of Appeal yesterday handed down a judgment upholding the trial judge’s ruling that a policyholder was entitled to be reimbursed by its insurers as and when it reinstated its premises (the historic Boak Building in Walsall) which had been destroyed by fire.
The Insuring Clause in the policy merely stated that insurers agreed “to the extent and in the manner provided herein to indemnify the Assured against loss of or damage to the property specified in the Schedule.” However, there was a separate reinstatement clause (“the Memorandum”) which stated that, in the event of damage or destruction, the indemnity was to be calculated by reference to the reinstatement of the property destroyed or damaged but only if the reinstatement was carried out “with reasonable despatch”, failing which only the amount which would have been payable under the policy, absent the Memorandum, would be due.
No reinstatement had occurred by the time of the trial, for the simple reason that the insurers had denied all liability under the policy, relying on various defences in relation to misrepresentation, breach of warranty and insurable interest. These were all rejected by the Judge, and there was no appeal on that score, the Insurers’ appeal being confined to the correct measure of indemnity.
There was disagreement between the parties as to whether the Memorandum could be relied on, and thus the Court of Appeal considered what would be the correct measure of indemnity assuming it were indeed inapplicable.
Insurers argued that, on the facts of this case, the relevant measure of indemnity was the reduction in the building’s value. Its market value just before the fire had been a mere £75,000. That reflected the fact that it was virtually derelict but, since it was Grade II Listed, it was not capable of being economically converted into (say) a block of flats. Ironically, its value had increased after the fire, since it lost its listed status and thus could now be redeveloped. Insurers thus argued that there was no loss, and nothing for them to indemnify.
The Court of Appeal disagreed. It held that, where the policyholder was the owner of the property or, if not, where it was obliged to replace the property (here the policyholder was the lessee of the building and owed the owner an obligation to repair it), the indemnity under the policy was ordinarily to be assessed as the cost of reinstatement. The Court of Appeal recognised that the position would be different if, at the time of the loss, the policyholder was trying to sell the property or intended to demolish it anyway.
The Court of Appeal also recognised, as had the trial judge, that an insurer who paid out the cost of reinstatement would have no redress if the policyholder then decided simply to keep the insurance proceeds. It held that the insurers could be protected if, rather than their being ordered to pay an immediate sum of money, the court instead made a declaration requiring insurers to reimburse the policyholder for the actual reinstatement costs as and when incurred.
Finally, it should be noted that the Court of Appeal held that, where a reinstatement clause required the policyholder to undertake the works of reinstatement “with all reasonable despatch”, it would not be in breach of that requirement unless and until insurers had confirmed indemnity under the policy. That is an obvious victory for common sense, even if it might be thought depressing that the Insurers would really have wished to argue that a policyholder could legitimately be prejudiced by a combination of its own impecuniosity and insurers’ unlawful refusal to affirm cover.
See: Great Lakes Reinsurance (UK) SE v Western Trading Limited [2016] EWCA Civ 1003.
http://www.bailii.org/ew/cases/EWCA/Civ/2016/1003.html
Jonathan Corman is a Partner at Fenchurch Law.