Indemnification on the Reinstatement Basis: Endurance Corporate Capital Limited v Sartex Quilts & Textiles Limited  EWCA Civ 308
In Endurance Corporate Capital Limited v Sartex Quilts & Textiles Limited  EWCA Civ 308, the Court of Appeal unanimously held that an insured is generally entitled to be indemnified in respect of property damage on the reinstatement basis, regardless of what it intends to do with the property following the insured event. It also ruled on the principles relevant to deductions from payments on the basis of betterment. The Court’s decision is considered by Miles Harris of 4 New Square.
Ben Elkington QC of 4 New Square acted for the successful claimant insured.
The claimant, Sartex Quilts & Textiles Limited (“Sartex”) had historically carried on business manufacturing textiles from premises in Rochdale, known as the Crossfield Works.
By late-2010, Sartex had shifted most of its production to other premises in Rochdale and virtually completed a process of changing the use of the Crossfield Works to the manufacture of shoddy hard pads for use in mattresses or as insulation. It was at this point that Sartex took out a Property Loss or Damage Policy (“the Policy”) with Endurance Corporate Capital Limited (“the Insurer”). The Policy incepted on 11 November 2010 and covered damage to the buildings, plant and machinery at the Crossfield Works and business interruption.
On 25 May 2011, shortly after production of the shoddy hard pads had commenced, a fire at the Crossfield Works severely damaged the buildings destroying the plant and machinery. Sartex’s business at the site was stopped. A claim under the Policy in respect of business interruption was settled by insurers in May 2013 on the basis that, but for the fire, profitable manufacture of shoddy hard pads would have continued at the Crossfield Works. However, although the Insurer paid Sartex a sum of £2,141,527 based on its assessment of the market value of the buildings, plant and machinery destroyed by the fire, it resisted a claim for an indemnity on the reinstatement measure. Eventually, although it had still not in fact commenced any reinstatement of the premises, Sartex issued proceedings in 2017, claiming it was entitled to a larger payment to be measured on the reinstatement basis.
The Insuring Clause provided:
“Subject to the general conditions and exclusions of this Policy, and the conditions and exclusions contained in this Section, we, the Underwriters, agree to the extent and in the manner provided herein to indemnify the Insured against loss or destruction of or damage to Property caused by or arising from the Perils shown as operative in the Schedule, occurring during the period of this Policy.”
Under the heading “Reinstatement Basis” the Policy also provided:
In the event of loss or damage to or destruction of Buildings, Machinery and Plant or All Other Contents, the basis upon which the amount payable hereunder is to be calculated will be the Reinstatement of the Property lost, destroyed or damaged.
- Underwriters’ liability for the repair or restoration of property damaged in part only, will not exceed the amount which would have been payable had such property been wholly destroyed.
- No payment beyond the amount which would have been payable in the absence of this condition will be made:
- a) unless Reinstatement commences and proceeds without unreasonable delay;
- b) until the cost of Reinstatement has actually been incurred;
- c) if the Property at the time of its loss, destruction or damage is insured by any other insurance effected by the Insured, or on its behalf, which is not upon the same basis of Reinstatement.”
It was common ground at first instance and on appeal that (1) these special conditions were not satisfied because the cost of reinstatement had not been incurred; and (2) therefore, the amount payable was to be determined by reference to the insuring clause, which provided that insurers would “indemnify the Insured against loss or destruction of or damage to Property caused by or arising from” fire. Giving the judgment of the Court, Leggatt LJ explained that in this case that involved determining what sum would be payable without any express contractual provision regarding the basis of the indemnity.
THE FIRST INSTANCE DECISION
At first instance David Railton QC rejected the Insurer’s argument that Great Lakes Reinsurance (UK) SE v Western Trading Ltd  Lloyd’s Rep IR 643 made it essential for an insured seeking an indemnity on the reinstatement basis to prove a genuine, fixed and settled intention to reinstate. He held that in considering the appropriate measure of indemnity the relevant questions to ask were: what loss had been suffered by the insured as a result of the fire? And what measure of indemnity fairly and fully indemnified it for that loss? Applying this approach, he concluded that it was appropriate to award Sartex an indemnity on the reinstatement basis, awarding it a sum of over £1.3m in addition to the monies already paid on a loss of value basis.
In his view, immediately before the fire Sartex had intended to use the Crossfield Works for its new venture of manufacturing shoddy hard pads and the value of the buildings, plant and machinery to Sartex was that of providing the location and means for pursuing that venture. Furthermore, the terms of its occupation of the Crossfield Works, as licensee, meant Sartex was obliged to ensure the premises were maintained and in a good state of repair. Therefore, by reference to the position immediately both before and at the time of the fire the reinstatement measure of indemnity was appropriate.
The Judge recognised that there was force in the Insurer arguments to the effect that events after the fire, up to the date of trial, meant it would nonetheless be inappropriate or would overcompensate Sartex if it was indemnified on the reinstatement basis. Eight years had passed since the fire, little had been done to achieve reinstatement, Sartex had explored reinstating in Pakistan and using the Crossfield Works for very different purposes. However, he found that the process of exploring alternative solutions had over time made it clear that reinstating the manufacturing of shoddy hard pads at the Crossfield Works was the solution for Sartex’s business because appropriate alternative manufacturing premises could not be found. The Judge ultimately accepted that at all times since the fire Sartex had genuinely intended to reinstate the plant and machinery lost in the fire and had intended to reinstate them at an appropriate manufacturing site. Therefore, in all the circumstances, including events before and after the fire, up to and including trial, reinstatement was the appropriate basis of indemnity in respect of buildings, plant and machinery. Indeed, the Judge said that had it been necessary he would have found that Sartex had demonstrated a genuine, fixed and settled intention to reinstate.
THE DECISION OF THE COURT OF APPEAL
The Insurer appealed on the basis that:
- The Judge had erred in law by concluding that it was not essential for Sartex to show that it had a genuine, fixed and settled intention to reinstate the property at the Crossfield Works if it wanted to be indemnified on the reinstatement basis; and
- The judge ought to have made a deduction from the award he did make to reflect betterment occasioned by the reinstatement.
The Court of Appeal dismissed the appeal.
Measure of Indemnity
In a crisp and clear judgment Leggatt LJ began by observing that the general principles governing the assessment of loss under a policy of insurance against property damage in the absence of an express provision were well established. If an insured peril caused loss then damages could be awarded on the reinstatement basis or by reference to the reduced value of the property. When, at the time the peril struck, the insured intended to live in the property or to carry on a business from it, then the sum of money required to put it into a materially equivalent position to that which prevailed before the peril was generally to be measured on the reinstatement basis. However, if at the time the peril struck the insured intended to sell the building and the land it was built on then the insured would be appropriately compensated by a measure reflecting its reduced value (see Leppard v Excess Insurance Co  1 WLR). As to Sartex, at the time of the fire it intended to use the Crossfield Works to manufacture shoddy pads and not to sell the premises; therefore, the appropriate measure of loss was the reinstatement basis. Leggatt LJ rejected Insurers’ suggestion that two cases (Reynolds v Phoenix Assurance Co Ltd  2 Lloyd’s Rep 440 and Great Lakes) showed that the reinstatement measure was inappropriate because Sartex could not show it had a genuine, fixed and settled intention to reinstate the property.
What an insured intended to do if awarded damages or if damages were calculated on a particular basis was generally irrelevant. The central question, derived from the overriding compensatory principle, was what damages would put the insured in materially the same position it would have been in had the peril not occurred? This was shown by Pleasurama Ltd v Sun Alliance and London Insurance  1 Lloyd’s Rep 389, where an insured was awarded damages on the reinstatement basis after fire destroyed a bingo hall, even though it had decided not to rebuild the hall and to move its business elsewhere.
The insured’s intention had been of relevance in Reynolds v Phoenix Assurance, but that was because it had been found that reinstating historic maltings buildings would cost £246,883, a sum dramatically higher than the £55,000 it would have cost to erect new, functionally equivalent buildings. In that context Forbes J held that so long as an insured’s intention to reinstate the historic building was not unreasonable or eccentric then the cost of reinstating the historic buildings was nonetheless recoverable. In contrast to the facts in Reynolds, Sartex sought compensation based on the cost of a modern building on the Crossfield Works site in substantially similar shape and general style using cheaper modern materials.
As to the Insurer’s reliance on Great Lakes, Leggatt LJ explained that this was misplaced.
As with Reynolds, Great Lakes involved unusual and distinguishable facts. It concerned a derelict but nonetheless listed former industrial building. Unlike the overwhelming majority of cases, its value was increased by the fire because the damage led to removal of its listed status, so facilitating profitable development. The insured in Great Lakes maintained that it intended to reinstate the old building and then convert it into flats rather than demolish it and construct new flats from scratch. However, it had not carried out those works at the time of trial, seeking instead a declaration that it was entitled to an indemnity on the reinstatement basis if it should do so.
In paragraph 75 of his judgment in Great Lakes Christopher Clarke LJ had made what he called a “tentative” comment that “the insured’s intention needs 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)”. However, he expressly stated (at paragraph 72) that this comment concerned what might be required in circumstances, such as those before him, where an insured’s property had been increased in value as a result of a fire. It was the fact that the property had increased in value that distinguished Great Lakes from Pleasurama and the usual position. Further, Leggat LJ pointed out that in addition to the fact they related to circumstances where a property increased in value, the views of Christopher Clarke LJ on the potential relevance of intention were obiter; the question of whether the insured intended to reinstate was sidestepped in Great Lakes because it sought only a declaration that it was entitled to an indemnity if it chose to reinstate. Thus, it was not necessary to resolve the question of what level of intention had to be proved by the insured.
Strikingly, Leggatt LJ emphasised that the question of whether or when an intention to cure a breach of contract, by reinstating a property or otherwise incurring the cost of obtaining the promised performance, was not limited to the field of insurance. The basic compensatory principle applicable to claims for damages in contract was that a claimant was entitled to recover the cost of putting himself back into the position he would have been in had the breach of contract not occurred. In a contract of insurance it is well established (albeit to some controversially and artificially) that an insurer agrees to hold the insured harmless from perils; therefore the sum payable is the sum required to put the insured back into the position it would have been in had a peril not occurred. In that context what a claimant had done or intended to do was only capable of being relevant to the question of what it would be reasonable to expect the claimant to do to put himself back into the position he would have been in had the breach of contract not occurred. Applying this approach, Sartex had not intended to sell the Crossfield Works when the fire took place and therefore the appropriate measure of indemnity was the reinstatement basis.
As to the second ground of appeal, Leggatt LJ’s judgment was again grounded in the usual principles applicable to contractual damages. He held that a distinction was to be drawn between:
- Cases when an insured chose to improve a property and those where an insured simply intended to reinstate destroyed or damaged property with something new. In the absence of some express provision in the policy the cost of voluntary improvements were not recoverable;
- Pecuniary incidental benefits associated with reinstatement and non-pecuniary incidental benefits. Where a pecuniary benefit accompanies reinstatement, it must be brought into account (e.g. costs savings resulting from the greater efficiency of new steam turbines in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd  AC 673). By contrast, non-pecuniary, albeit real, benefits of replacing an old building with a new one (without improvements) do not need to be brought into account as to do so would have the effect of forcing a claimant to invest their money in modernizing, which may be highly inconvenient (see Harbutt’s ‘Plasticine’ Ltd v Wayne Tank & Pump Co Ltd  1 QB 477).
Applying these principles, while there might be some pecuniary savings resulting from reinstatement, such as reduced maintenance costs attributable to the use of more modern materials, the Insurers had made no attempt to quantify these or any other items for which allowance could properly be made. While a ‘broad’ approach to quantification would often be appropriate, there had to be some rational or evidential basis for a reduction for betterment, even if it is only sought on a rough and ready basis: “The Court cannot simply make up a number.” As there was no evidence capable of supporting any estimate of betterment, the first instance judge had been right to decline to make any reduction.
Consideration of insurance law often focuses on how insurance contracts differ from other contracts. However, this decision is a powerful reminder of the applicability of the principles relevant to contractual damages in general. It makes clear that in the absence of express provisions to the contrary, if an insured loses his home or place of business then unless the property was to be sold at the time a peril occurred he will in most cases be entitled to payment on the reinstatement basis, regardless of what he intends to do after the peril has struck. The insured’s intentions are only likely to be relevant if the objective reasonableness of reinstatement can be questioned, for example if the property is made more valuable as a result of the peril (Great Lakes) or the costs of reinstating the property to its pre-peril form dramatically exceed the cost of constructing a modern, functional replacement (Reynolds). Sartex graphically shows that the effect of this approach is that, subject to the policy wording, an insured can claim the costs of reinstatement even after many years have passed. Insureds will want to look carefully at the impact of policy wording and whether they can avoid the need to deal with queries relating to their intentions. Insurers will wish to examine their policy wording, most obviously to ensure so far as possible that carrying out reinstatement is a condition of being given an indemnity on the reinstatement basis.
As to betterment, this decision makes clear that insureds can be obliged to give credit even for pecuniary benefits arising from a situation where reinstatement is thrust upon them and even where those benefits are relatively indirect and hard to quantify (such as reduced maintenance costs). However, Sartex shows that if insurers want to ask a Court to reduce for betterment, then they need to assemble and present a proper evidential basis for any reduction on the grounds of betterment. Thought will also need to be given to balancing the cost of preparing such evidence against the extent of any reduction that may be proven to be justified.