Great Lakes Reinsurance (UK) SE v Western Trading Ltd

Where a property policy expressly makes reinstatement the basis of indemnity, an insured which is contractually bound to insure and replace the property may recover reinstatement cost. The measure is not confined to any fall in the property’s market value.

Conditions requiring reinstatement to be commenced promptly and its cost actually incurred govern the enhanced reinstatement cover. They do not exclude an entitlement under the basic insuring clause where reinstatement cost is otherwise the proper measure of indemnity.

Where reinstatement remains uncertain, an appropriately framed declaration conditional upon reinstatement may protect both parties more suitably than an immediate monetary award.

Western Trading managed property owned by its director, Mr Singh. It was contractually responsible for insurance, upkeep and replacement following fire. A fire destroyed a listed former factory building. The property’s market value increased after the fire because its listed status was removed.

The insurance policy contained a reinstatement memorandum. The Mercantile Court rejected the insurers’ defences and declared that Western Trading was entitled to an indemnity for its losses. The insurers appealed, contending that there was no loss, that reinstatement cost was unavailable before expenditure, and that the declaration was inappropriate.

The central issues were the proper measure of indemnity and whether declaratory, rather than monetary, relief should be granted where the insured’s intended development remained uncertain.

1. Appeal allowed in part. Christopher Clarke LJ, with whom Lewison and Laws LJJ agreed, held that the declaration should be varied and the costs order amended. The insurers nevertheless remained substantively liable under the policy.

2. Western Trading had an insurable interest because it was bound to insure and replace the property. The reinstatement memorandum expressly made the amount payable the cost of rebuilding the lost building, subject to its conditions. In those circumstances, and consistently with [1883] 11 QBD 380 and [1993] Ch 361, the proper indemnity was reinstatement cost rather than any reduction in market value. The fact that the site became more valuable after the fire did not answer that contractual claim.

3. The memorandum did not presently entitle Western Trading to payment under its enhanced reinstatement basis because no works had begun and no cost had been incurred. However, its conditions preserved the amount payable under the basic insuring clause. Under that clause, replacement cost was prima facie the appropriate measure where the insured was obliged to replace and genuinely intended to do so. The assessment remained one of fact and degree, materially affected by the insured’s intentions.

4. Western Trading had not failed to commence works with reasonable despatch while the insurers denied liability and disputed reinstatement as the measure of indemnity. That issue was fact-sensitive. The court also expressed the tentative view that a requisite intention should be genuine, fixed and settled, with a reasonable prospect of fulfilment if indemnity were paid.

5. A declaration was appropriate because there was a real and present dispute and it protected the insurers against payment for works which might never occur. The original declaration was defective because it did not state that reinstatement would trigger indemnity. It was replaced with a declaration that, if Western Trading carried out reinstatement, it would be entitled to the cost up to £2,121,800. A money judgment was inappropriate because the trial judge had not determined the genuineness or precise content of Western Trading’s intended reinstatement, and the evidence disclosed real uncertainty.

6. Whether works amount to reinstatement may be determined once they are carried out. That question is distinct from any subsequent change in the building’s use. The insurers were properly liable for Western Trading’s costs, but indemnity costs after its £1.85 million settlement offer were set aside because the conditional declaration was not demonstrably more advantageous than immediate payment.

• Court of Appeal (Civil Division): Allowed the insurers’ appeal in part. It varied the declaration so that indemnity for reinstatement cost arose only if reinstatement was carried out, and varied the costs order to standard rather than indemnity costs.

• High Court, Queen’s Bench Division, London Mercantile Court (HH Judge Mackie QC): On 26 January 2015, rejected the insurers’ substantive defences and granted Western Trading a declaration of entitlement to indemnity, with costs including indemnity costs from 1 May 2014.