Guidance on reinstatement conditions from UK Court of Appeal

Great Lakes Reinsurance (UK) SE v Western Trading Ltd  [2016] EWCA Civ 1003

Western Trading occupied and managed several buildings which were destroyed in a fire. The buildings were insured for £2,121,800, which was understood to be the cost of rebuilding. The market value of the property was much less (£75,000).

A memorandum attached to the insurance policy expressly provided for reinstatement as a possible measure of indemnity, but subject to conditions 5(a) and (c), that:

(a) The work of reinstatement…must be 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;

(b) No payment beyond the amount which would have been payable under the Policy if this Memorandum had not been incorporated herein shall be made until the cost of reinstatement shall have been actually incurred.

Following the fire, Western Trading claimed reinstatement costs under the policy. The insurer said that Western Trading was only entitled to payment on an indemnity basis (i.e. the loss in value of the property) as, per the above two conditions, it had not yet incurred any costs nor commenced any work. Western Trading sought a declaration from the Court that it was entitled to reinstatement costs. 

At the first instance, the judge found that the insured had a contractual right to be indemnified for reinstatement costs under the policy, and issued a declaration to that effect. He noted that it would be unduly harsh to expect the insured to incur the costs of reinstating property where the insurers have denied liability. Therefore, the requirement to incur costs does not arise until the insured has confirmed indemnity under the policy.

On appeal, Clarke LJ upheld this decision. He held that whether an insured has acted with “reasonable dispatch” is a question of fact, and that an insured cannot be said to have failed to do so in cases where the insurer has denied liability or asserted that the insured is not entitled to indemnity on the basis of reinstatement. When insurers do either of these things, he reasoned, they cannot then say that the insured has failed to meet conditions under the policy by not having yet incurred those costs.

He noted that the usual position (i.e. had there been no attached memorandum) is that indemnity is to be assessed by reference to the value of the property to the insured at the time of the incident. The Court noted that this would usually be the cost of reinstatement, but if the insured was not intending to reinstate the property then the loss in value would be more appropriate.

In determining whether the insured intended to reinstate, Clarke LJ thought two key questions needed to be examined:

  1. What exactly is the requisite degree of intention?

  2. What safeguards, if any, are available to an insurer who pays out the cost of reinstatement to an insured who then finds that they cannot reinstate, or decides not to?

The problem in this case was that, although it appeared that the insured would reinstate, it was also possible that it could not do so because of planning problems. Clarke LJ noted that the insured’s intention needs not only to be genuine, but also fixed and settled. There must be, at the very least, a reasonable prospect of them bringing about whatever they intend to do.

On the second question, it was noted that there was little protection for insurers in this regard and that insureds, once paid, are generally free to decide how the money is to be spent. This contributed to Clarke LJ’s decision that a declaration (as opposed to an immediate award) is the appropriate remedy in cases where there the insured’s willingness or ability to reinstate the damaged property is in doubt. This way, if the insured does not ultimately reinstate the damaged property, it will no longer be able to rely on the declaration, and will be entitled to payment on an indemnity basis only.

Read the full judgment here