Great Lakes Reinsurance (UK) SE v. Western Trading Limited  EWCA Civ. 1003;  Lloyd’s Rep. I.R. 643;  2 C.L.C. 478;
In Great Lakes Reinsurance (UK) SE v Western Trading Limited, Insurers appealed the first instance judge’s decision that the Insured was entitled to a declaration that Insurers were obliged to indemnify it for the cost of reinstating the insured premises following a significant fire. The Court of Appeal’s decision is considered by Nicholas Broomfield of 4 New Square.
Ben Elkington QC of 4 New Square represented Western Trading Limited at first instance ( EWHC 103 (QB);  Lloyd’s Rep I.R. 561) and in the Court of Appeal.
On 24 July 2012 a fire occurred at premises at 1-8 Station Street, Walsall (“the Property”), consisting of a historic building known as “the Boak Building” and part of a terrace. Planning permission had been granted in January 2009 to convert the Boak Building into 31 residential apartments. On the date of the fire the Property was derelict, awaiting demolition and let to the son of the Insured’s sole shareholder for the purposes of rough storage.
At the time of the fire Insurers insured the Property for a sum of £2,121,800. The insured sum represented the rebuilding cost of the Property and was significantly more than the Property’s market value, which the experts agreed was only £75,000 based on its condition and use at the relevant time. Section A of the Policy provided that the Property was insured against fire damage up to the insured sum. The material parts of the Memorandum provided that the event of the Property being lost or damaged as a result of a fire, the amount payable to the Insured was to be calculated by reference to the cost of reinstatement. “Reinstatement” was defined as:
“the rebuilding of the property, if a building … in a condition equal to but not better or more extensive than its condition when new”;
The Special Provisions applicable to the reinstatement Memorandum further specified that:
“(a) The work of reinstatement … must be commenced and carried out with reasonable despatch otherwise no payment beyond the amount which would have been payable under the Policy if this Memorandum had not been incorporated therein shall be made
(c) No payment beyond the amount which would have been payable under the Policy if [the Memorandum] has not been incorporated herein shall be made until the cost of reinstatement shall have been actually incurred.”
Insurers refused to indemnify the Insured on the basis that (1) the Insured had no insurable interest in the Property; (2) the Policy was avoidable for misrepresentation and non-disclosure; (3) the Insured was in breach of warranty. The Insured therefore issued proceedings in which it sought a declaration that it was entitled to be indemnified by Insurers, up to the limit of indemnity, for the cost of reinstating the Property.
Insurers challenged the Insured’s right to a declaration, arguing that following comments made by Megaw LJ in Lepperd Express v Excess Insurance Co Ltd  2 Lloyd’s Rep 91 the only remedy that the Insured was entitled to if successful was the diminution in the market value of the Property. Further, Insurers challenged the appropriateness of a declaration in circumstances where:
- The Insured had shown no signs of reinstating the Property (i.e. it had taken no steps to start construction) and it was far from clear that the Insured intended to do so;
- There were difficulties determining what “reinstatement” meant in the case of non-standard buildings (e.g. cases where planning permission had been granted for redevelopment; Beaumont v Humberts  49 E.G. 46); and
- There was uncertainty about who might carry out the proposed works and for what purpose.
At first instance, each of the defences raised by Insurers was rejected by HHJ Mackie QC. The Judge also concluded that the Insured was entitled to a declaration in the terms sought and that a declaration would alleviate any concerns that Insurers had about the Insured’s intention to reinstate. The declaration (upon which the parties had substantially agreed) took the following form:
“The [Insured] is entitled to be indemnified by the [Insurer] under the terms of the Policy No. P01957/2012/PO in respect of the losses it has suffered (and is continuing to suffer) as a result of the fire on 24th July 2012, up to the limit of indemnity within the Policy”.
Insurers appealed on the grounds that:
- The declaration begged the question as to what losses had been suffered by the Insured; and
- There was no relevant loss because, based upon the expert evidence before HHJ Mackie QC, the Property had risen in value after the fire. There was, therefore, no diminution in market value.
THE COURT OF APPEAL’S DECISION
Christopher Clarke LJ, with whom Lewison LJ and Laws LJ agreed, handed down judgment on 11 October 2016. The Court of Appeal held that whilst the declaration did not achieve the intentions of the Judge because it simply referred to the Insured’s “losses”, and therefore needed to be varied, Insurers’ appeal should be dismissed.
The Measure of Indemnity: reinstatement or diminution in value?
Following consideration of the evidence before HHJ Mackie QC relating to the Insured’s intention to reinstate the Property, and a number of cases concerning the correct measure of damages (including, notably, a passage from the judgment of Jonathan Sumption QC (as he was then) in Lonsdale & Thompson Ltd v Black Arrow Group  Ch. 361), the Christopher Clarke LJ set out the principles that the Court should consider when determining the measure of indemnity to which an insured is entitled following a fire:
“40. Where real property is destroyed the measure of indemnity to which the insured is entitled will depend upon (i) the terms of the policy; (ii) the interest of the insured in, or its obligations in respect of, the property insured; and (iii) the facts of the case including, in particular, the intention of the insured at the time of the loss. If the insured has a limited interest in the property it will be material to consider whether the subject matter of the insurance is the whole interest in the property insured and not solely that of the insured himself and, if it is the whole interest, whether the insured is accountable to others for any sum received in excess of his interest.”
Applying the principles to the facts of the Insured’s case, Christopher Clarke LJ held that:
- Reinstatement was the correct measure of damages. The wording of the Policy (set out above) made it apparent that the Insured held an insurable interest in the Property and was contractually entitled to an indemnity calculated by reference to the cost of reinstatement, subject to certain conditions.
- Even if it was necessary for the Insured to make a request to reinstate, Mr Singh had intended for the Insured to reinstate the Property and had brought proceedings to secure the funding to do so. It was implicit in that stance that he would require the Insured to reinstate the Property.
The effect of the Special Provisions in the Memorandum and the role of “intention”
After establishing that reinstatement was the correct measure of damages, the Court of Appeal had to consider the effect of the Special Provisions in the Memorandum (see above).
The Court of Appeal considered that, as set out by Forbes J in Reynolds v Phoenix, the true measure of the indemnity is a matter of fact and degree which is materially affected by the insured’s intentions in relation to the property. Christopher Clarke LJ doubted to whether a claimant who had no intention of using the insurance money to reinstate, and whose property had increased in value on account of the fire, would be entitled to claim the cost of reinstatement unless the policy so provided.
Christopher Clarke LJ, went on to express tentative conclusions that:
- The insured’s intention to reinstate must be genuine, fixed and settled. There must be a reasonable prospect of him bringing about those intentions (if the insurance money is paid).
- In certain circumstances it would be appropriate for the Court to grant declaratory relief, or relief subject to conditions, until such time that reinstatement could or would proceed and/or to provide a mechanism by which monies paid over would be safeguarded and recovered.
The right to an indemnity despite the fact that works had not been carried out
Insurers argued that HHJ Mackie QC was wrong to find that because the Policy had been repudiated it could not rely on the proviso that costs of reinstatement would only be paid once they had been incurred. This was rejected by the Court of Appeal on the grounds that it did not form part of the Judge’s findings. What HHJ Mackie QC had in fact found, in reliance upon paragraph 20-022 of McGillivray, was that the requirement to reinstate could not be regarded as arising until the Insurer had agreed to indemnify. At paragraph 85, the Court of Appeal commented that:
“Whether an insured has acted with reasonable despatch is a question of fact. I would, however, accept that in many cases, of which this is one, that the insured will not have failed to act with reasonable despatch whilst insurers deny liability or assert that the insured is not entitled to be compensated on the basis of reinstatement. I would not regard [the Insured] as having failed to act with reasonable despatch because it had not commenced reinstatement before the conclusion of these proceedings.”
Was the Judge right to grant a declaration?
Following its’ findings in respect of the measure of indemnity, the Court of Appeal concluded that the Judge was entitled to grant a declaration to the effect that, if the Insured reinstated the Property, it would be entitled to an indemnity from Insurers: Padden v Arbuthnot Pensions & Investments Ltd  EWCA Civ 82; Rolls Royce plc v Unite the Union  1 WLR 318. However, the declaration made did not satisfy the Judge’s aim and the Court of Appeal adopted alternative wording advanced on the appeal:
“It is declared that (i) the [Insured] had an insurable interest in the subject matter of [the Policy]; (ii) the [Insurer] was not entitled to avoid [the Policy]; [the Insured] was not in breach of warranty’ (iv) if [the Insured] carries out reinstatement of the property lost then it will be entitled to be indemnified by the [Insurer] for the cost of so doing, up to the limit of indemnity of £2,121,800.”
The Court of Appeal’s decision is worthy of note for the following reasons in particular:
- First, the Court of Appeal took the opportunity to set out clearly the principles applicable to determining the proper measure of indemnity. Central to those principles are the wording and construction of the policy and the intention of the insured.
- Second, the Court has also given some guidance as to the test that should be adopted by the Court when assessing whether the insured has sufficient intention to satisfy the test. These principles are of general application to property insurance.
- Third, the Court has provided clarity as to the approach applicable to the issue which often arises as to whether the Insured has acted with reasonable despatch in commencing the work of reinstatement.