Endurance Corporate Capital Limited v Sartex Quilts & Textiles Limited  EWCA Civ 308
The Court of Appeal recently dismissed the insurer’s appeal in Endurance Corporate Capital Ltd v Sartex Quilts and Textiles Ltd (click here for the full judgment). Upholding the first instance decision of David Railton QC sitting as a deputy High Court judge in the Commercial Court, the Court of Appeal’s decision confirmed that the reinstatement basis was the appropriate measure of indemnity for property severely damaged by fire which had not been reinstated. The Court of Appeal held that it was not necessary for an insured to show that it had a genuine, fixed and settled intention to reinstate in order to recover for damaged property on a reinstatement basis of indemnity. The relevant questions were simply what was the insured’s loss and what measure of indemnity fully and fairly indemnifies the insured for that loss?
Sartex Quilts & Textiles Limited (Sartex) occupied premises at Crossfield Works where it had manufactured bed linen and quilts. Sartex subsequently moved production to larger premises at Castle Mill in Rochdale and looked to convert its former premises at Crossfield Works for use as a manufacturing plant for ‘shoddy hard pads’ used in mattresses and insulation. Sartex took out a Property Loss or Damage Policy (the Policy) for the Crossfield Works site which provided cover for the buildings, plant and machinery, as well as business interruption cover. The insurer was Endurance Corporate Capital (Endurance).
On 25 May 2011, a fire at Crossfield Works severely damaged the buildings. The plant and machinery were a total loss. In November 2013 Endurance paid Sartex £2,141,527 based on their assessment of the market value of the buildings, plant and machinery. Following the fire, Sartex considered a number of options for the site and its business including: (i) reinstating the facility at Crossfield Works; (ii) re-siting the facility to Castle Mill; (iii) moving the manufacturing operation to Pakistan; and (iv) re-developing Crossfield Works as a banqueting/wedding venue. At the time of the trial, Sartex’s prevailing intention was to reinstate the facility for manufacturing shoddy hard pads and it had taken steps to secure planning permission and listed building consent to do so.
The terms of the Policy were in a standard form used by the underwriting agent and divided into sections. Section A covered material damage to property with the Insuring Clause providing:
“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.” (emphasis added)
Condition 7 of Section A, headed ‘Reinstatement Basis’, 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:
- unless Reinstatement commences and proceeds without unreasonable delay;
- until the cost of Reinstatement has actually been incurred;
- 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.”
As Sartex had not incurred reinstatement costs, it was common ground that Special Condition 2(b) was not satisfied and Condition 7 of Section A of the Policy did not apply. The amount payable was therefore as provided for under the Insuring Clause on an indemnity basis.
The issue in dispute was whether Sartex was in fact entitled to be indemnified on a reinstatement basis. The Judge at first instance found in favour of Sartex and awarded damages based on the cost of reinstating the buildings and to replace the plant and machinery that was destroyed. He considered that the relevant question of law was “what had the insured lost as a result of the insured peril?” In making this determination, he saw the primary focus as being on Sartex’s intentions in relation to the property immediately before and at the time of the fire but he also thought it relevant to consider subsequent events, including the intentions of Sartex after the loss, in order to decide what measure of indemnity would fairly and fully compensate Sartex for its loss (see our article on the first instance decision here).
Endurance appealed on the basis that the sum awarded should have been limited to the (much lower) market value of the buildings, plant and machinery. Endurance argued that the Judge was wrong in law to assess the indemnity payable under the Policy as the cost of reinstatement where the insured did not have a genuine, fixed and settled intention to reinstate the property.
The questions raised on appeal concerned the correct legal test for assessing the sum payable under a property damage policy when the policy does not contain a term which fixes the measure of loss. The main issue was whether, in order to recover the cost of reinstating damaged property under such a policy when this cost has not actually been incurred, the insured needs to show a genuine, fixed and settled intention to reinstate the property
Leggatt LJ gave the leading judgment with which McCombe and Dingemans LLJ concurred.
The Court of Appeal considered that, as a matter of general principle, where an insurer has agreed to indemnify the insured against loss or damage caused by an insured peril, the nature of the insurer’s promise is that the insured will not suffer the loss or damage. The general object of an award of damages is to put the claimant in the same position (so far as money can do) as if the breach had not occurred. There are two distinct ways to give effect to this principle: one is to award the cost of replacing or repairing the property; the other is to award the market value of the property in its condition immediately before the damage occurred (less any residual value). What measure is appropriate in the circumstances depends on the use to which the claimant was intending to put the property. Where the property is a building insured against damage or destruction which the owner was intending to use, or continue to use, as premises in which to live or from which to carry on business, the appropriate measure of damages will generally be the cost of repair, if the building is damaged, or the cost of reinstatement, if the building is destroyed. On the other hand, if at the time when the damage occurred the insured was intending to sell the building (and land on which it was built), the measure of loss is the amount by which the market value of the property has been reduced as a result of the damage.
In the present case, it was not in dispute that before the fire Sartex intended to use the buildings (and the plant and equipment) at the Crossfield Works site as a facility for manufacturing shoddy hard pads. Prima facie, therefore, the appropriate measure of the insured’s loss was the cost of repairing the buildings and buying replacement plant and machinery.
Endurance argued, however, that in circumstances where the insured had not at the time of trial actually incurred the cost of reinstating the property at the Crossfield Works site and had not, in the period following the fire, demonstrated a genuine, fixed and settled intention to do so, this was not the appropriate measure of loss. Endurance relied on the Court of Appeal judgment in Great Lakes Reinsurance (UK) SE v Western Trading Ltd in which Christopher Clarke LJ said (at para 72) that:
“I doubt whether a claimant who has no intention of using the insurance money to reinstate, and whose property has increased in value on account of the fire, is entitled to claim the cost of reinstatement as the measure of indemnity unless the policy so provides. The true measure of indemnity is ‘a matter of fact and degree to be decided on the circumstances of each case’ per Forbes J in Reynolds v Phoenix; and is materially affected by the insured’s intentions in relation to the property.”
Leggatt LJ reasoned that the statement of Christopher Clarke relied upon by Endurance in the Great Lakes case was expressly limited to instances where the property damage had in fact increased the property value. Moreover, he considered that Christopher Clarke LJ’s observations were in any case made obiter dicta as the insured’s intention to reinstate was not an issue in dispute or on which the Court heard argument in the Great Lakes case.
In the absence of binding authority, therefore, it was necessary to consider the position in principle. The Court of Appeal considered that the relevance of intention only arises where, at the time when damages are assessed, the claimant has not taken any action to remedy or mitigate the effect of the defendant’s breach of contract. In the present case, it was found as a fact that the insured was intending to use the Crossfield Works site as a facility for manufacturing shoddy hard pads. Thus to put Sartex in a position materially equivalent to the position it would have been in had the fire not occurred, it was necessary to award the cost of re-establishing such a facility. It was not suggested by Endurance that any of the other options considered by Sartex after the fire (such as re-siting the plant at Castle Mill or moving production to Pakistan) were options which Sartex ought reasonably to have adopted instead to mitigate its loss. As such, the question of whether Sartex actually intended to reinstate the buildings was of no relevance to the measure of indemnity.
Leggatt LJ also noted that in circumstances where Sartex was not intending to sell the property (and had no right to do so as it was only a licensee) the reduction in market value of the property could not be the proper basis of assessment.
Endurance had an alternative ground of appeal, namely that the Judge was wrong to decline to make a deduction from the cost of reinstatement for betterment.
At first instance the Judge saw considerable force in the insured’s argument that, where an insured is claiming the cost of the most reasonable and least expensive option, any benefit derived from getting something new for old is an unavoidable consequence of the loss and so to make a deduction for betterment is to deprive the insured of part of the indemnity to which he is entitled. However, he did not consider that it was open to him to depart from the well-established principle of betterment in the law of insurance. That said, he did not consider that he had a sufficient evidential basis to make a deduction for betterment.
Endurance submitted on appeal that the Judge was wrong to regard the evidence as insufficient to make a deduction from the cost of reinstatement to allow for betterment and that he should have made an assessment taking a broad brush approach by reference to the material available to him.
On the relevant principles in considering whether a deduction should be made for ‘betterment’, the Court of Appeal rejected the insurer’s submission that a broader approach to betterment was justified in insurance cases than where damages are awarded for breach of contract. In particular, it is no more just where the defendant is an insurer than it is in any other breach of contract case to force the claimant to pay for a benefit which it did not choose to receive (as an incidental consequence of adopting a reasonable reinstatement scheme) and which does not save the claimant any money.
Moreover, in the present case, the insurer who had the burden of proving that damages should be reduced on the basis that the insured will save money as a result of reinstatement, had made no attempt to quantify the items of betterment for which an allowance should properly be made. In these circumstances, the Court of Appeal held that the Judge was justified in declining to make any deduction for betterment.
Accordingly, Endurance’s appeal failed on both counts.
This is the latest decision in a line of cases in which the English courts have grappled with the measure of indemnity in property damage cases where there is no term in the policy which fixes the measure of loss and no reinstatement has been carried out at the time when damages are assessed and thus no reinstatement costs incurred.
The Court of Appeal judgment which is based on general principles brings welcome clarification of the position confirming that an award based on the cost of replacing or repairing the damaged property can still be made even where reinstatement works have not been carried out. The relevant questions are simply what is the insured’s loss and what measure of indemnity fully and fairly indemnifies the insured for that loss? Both the reinstatement basis of indemnity and the reduction in market value of the property may fairly compensate the insured depending on the insured’s intention with regard to the property. However, where the property is a building which the insured was intending to use, or continue to use, as premises in which to live or from which to carry on business, the intention of the insured is only relevant where there is dispute about what action it would be reasonable for the insured to take to remedy or mitigate its loss. How the insured subsequently chooses to spend the damages and whether it actually attempts to reinstate the damaged property is irrelevant to the measure of indemnity.
Sartex Quilts & Textiles Ltd v Endurance Corporate Capital Ltd  EWHC 1103 (Comm)
Great Lakes Reinsurance (UK) SE v Western Trading Ltd  EWCA Civ 1003
Castellain v Preston (1883) 11 QBD 380
Reynolds v Phoenix Assurance Co Ltd  2 Lloyd’s Rep 440