For better(ment) or for worse?

Allegations of “betterment” arise frequently in property claims, particularly where roofs, façades, cladding or other structural elements are ageing or incapable of repair on a strict like-for-like basis. Insurers often contend that replacement will leave the policyholder better off than before the loss, and that a deduction is therefore justified. That contention is not always well-founded.

In this article, Chloe Franklin of Fenchurch Law’s Property and Real Estate team considers how betterment issues commonly arise and, if so, how they should be addressed, with the answer turning on the policy wording, necessity, and evidence.

The legal starting point

Property policies are rooted in the principle of indemnity. This principle was neatly described by Popplewell LJ in the Court of Appeal judgment in Sky UK Limited & another v Riverstone Managing Agency Limited & Others; “A contract of insurance against damage to property is a contract of indemnity, which is often described as a contract to hold someone harmless… in the sense that the insurer promises that the assured will not suffer the insured damage”

However, many operate on a reinstatement (replacement cost) basis, under which the insurer agrees to meet the reasonable cost of repairing, reinstating or replacing insured property damaged by an insured peril.

Betterment sits at the intersection of those principles. The insurer is not required to fund improvements, but equally, indemnity does not require reinstatement to replicate the damaged property in age or condition.

The critical question is whether the proposed works result in a material enhancement beyond that reasonably required to restore the property to its pre-loss position.

What betterment means in practice?

In property claims, insurers typically invoke betterment where reinstatement works are said to:

• increase value, durability, strength or useful life;
• introduce a higher specification than existed pre-loss; or
• go beyond what is required to reinstate the damaged property.

However, betterment is not established simply because:

• the damaged element was old;
• replacement produces something new; or
• modern materials or methods are required.

Those features are often inherent in reinstatement and, without more, do not justify a deduction.

Policy wording: typical betterment provisions

Betterment is ordinarily addressed within the Basis of Settlement provisions. While wordings vary, three common formulations arise.

• Reinstatement basis with “no betterment” proviso
  The insurer will pay the cost of repair, reinstatement or replacement, but not any amount representing improvement beyond the condition immediately prior to the loss.
• Express betterment deduction clause
  A deduction may be made where reinstatement results in increased value, durability or useful life.

• “Nearest equivalent” wording
  Where identical materials are unavailable, the insurer will fund replacement using the nearest equivalent necessary to restore the property to substantially the same condition.

These provisions must be read together. A prohibition on betterment is frequently qualified by an acceptance that modern or equivalent materials may need to be used where like-for-like reinstatement is not possible.

What betterment is not

Disputes framed as “betterment” often arise from a failure to distinguish between separate legal issues.

• Pre-Existing Defects, Inherent Vice Or Deterioration

First, pre-existing defects, inherent vice or deterioration are matters of causation and scope of cover, not quantum. Where proposed works address deficiencies unrelated to the insured peril, those costs may fall outside cover. Where insured damage necessitates works which also address underlying defects, the correct approach is one of identification and, where possible, apportionment. It does not follow that the entire cost can be characterised as betterment.

• Wear And Tear

Secondly, wear and tear exclusions operate at the coverage stage. They do not provide a mechanism for adjusting the measure of indemnity. Where an insured peril causes damage to property in a deteriorated state, the claim (if otherwise covered) proceeds on a reinstatement basis. Wear and tear cannot be reintroduced as a betterment deduction.

• Unavoidable Replacement

Thirdly, unavoidable replacement does not constitute betterment. Where repair will not achieve a durable or functional reinstatement, replacement is the minimum necessary response. For example, where a flat roof is leaking and a simple repair would not resolve the issue, the only way to ensure the property is watertight is to replace the flat roof entirely. The fact that the insured receives a new asset with a longer remaining life is an inherent feature of reinstatement and does not, of itself, amount to a material enhancement.

• Regulatory Compliance

Fourthly, compliance-driven works are often mischaracterised. Where compliance with current regulations is a necessary precondition to reinstatement, those costs form part of the reinstatement exercise (subject to policy wording). They are not elective improvements.

• Modern Materials and Methods

Finally, modern materials and methods will often deliver improved performance relative to older systems. Where those materials represent the nearest reasonable equivalent, their use is contemplated by the policy and does not justify a deduction.

Properly analysed, betterment is a narrow concept, confined to cases where the insured obtains something materially beyond that required to reinstate the property to its pre-loss condition and function.

Practical guidance for Brokers & Policyholders

Early engagement is critical. Insurers should be required to articulate their position clearly and with reference to the policy wording, but that unfortunately doesn’t always happen.

In order to reduce the risk of betterment arguments being raised by insurers, it is key that policyholders ensure that:

• pre-loss condition is evidenced through surveys, maintenance records and photographs;
• replacement (as opposed to repair) is properly justified;
• pricing distinguishes between core reinstatement and any enhanced specification; and
• elective improvements are clearly separated from insured works.

Conclusion

Betterment is a legitimate but limited concept in property claims. It is not a default consequence of age, replacement or the use of modern materials.

The distinction between reinstatement and improvement is critical. Only the latter engages betterment, and it is for insurers to identify and evidence it with precision.

Properly approached, betterment should remain a focused issue of quantum, not an obstacle to effective reinstatement

Author

Chloe Franklin, Associate