Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd

Under a property indemnity policy which does not fix the measure of loss, compensation ordinarily reflects the insured’s intended use of the property immediately before the insured peril. Repair or replacement cost is generally appropriate where the insured intended to use the property. Diminution in market value is generally appropriate where the insured intended to sell it.

The insured need not prove a genuine, fixed and settled intention to reinstate unless its intention bears on whether a disputed remedial course is reasonable, particularly where reinstatement would restore a feature of special subjective value. Betterment reduces recovery only for additional improvements or financial benefits which can reasonably be realised. The insurer bears the burden of proving and rationally quantifying any such deduction.

A fire severely damaged industrial buildings occupied by the insured and destroyed their plant and machinery. The insured had intended to use the property for a new manufacturing venture. The policy prescribed reinstatement as the basis of payment, but capped recovery at the amount payable without that condition where reinstatement costs had not yet been incurred.

The Deputy High Court Judge awarded the agreed reinstatement cost, less earlier payments, and made no deduction for betterment. He found that the insured had consistently intended to pursue the manufacturing business, although it had not maintained a fixed intention to reinstate at the original site.

The insurer appealed. It argued that reinstatement cost required a genuine, fixed and settled intention to reconstruct on the same site and substantially as before. Alternatively, it sought a deduction for betterment. The central questions concerned the default measure of indemnity, the relevance of the insured’s post-loss intentions and the evidential requirements for betterment.

1. Appeal dismissed. Condition 7 always made reinstatement cost the contractual basis of payment. Its special condition 2 imposed a cap, rather than an alternative measure, where reinstatement cost had not been incurred. The cap was the amount recoverable under the default legal principles which would apply without Condition 7.

2. Under those principles, damages place the insured in a materially equivalent position to that which would have existed without the insured peril. The appropriate measure depends primarily on the intended use of the property immediately before the loss. Where a building was to be used as a home or business premises, repair or replacement cost will generally be appropriate. Where it was to be sold, diminution in market value will generally be appropriate.

3. The insured’s use of an award, and whether it ultimately reinstates, are ordinarily irrelevant. Intention can become evidentially relevant where competing remedial options raise a genuine issue of reasonableness. This may occur where costly reinstatement would restore a feature having special subjective value. The requirement suggested in Great Lakes Reinsurance (UK) SE v Western Trading Ltd [2016] EWCA Civ 1003 was confined to property which had increased in value because of the fire and was, in any event, obiter.

4. The insured intended to use the property for manufacturing. An equivalent facility therefore had to be re-established. No unusually valuable feature, cheaper reasonable alternative or increase in the property’s value was shown. Whether the insured had a fixed intention to rebuild at the original site was consequently irrelevant. Market-value diminution was inappropriate, particularly as the insured neither intended nor had the right to sell the property.

5. A default indemnity may, where reasonable, reflect the cost of acquiring or constructing replacement premises elsewhere. The policy’s definition of “Reinstatement” governed Condition 7 alone and did not constrain the hypothetical default measure used to calculate its cap.

6. Betterment required separate analysis. Optional improvements and their additional costs fall outside reinstatement. Incidental financial savings must be credited because they reduce the money needed for an equivalent position. No deduction should be made for an unavoidable non-pecuniary advantage which the insured did not choose.

7. The insurer bore the burden of proving any deductible saving. Although broad estimation was permissible, it required a rational evidential foundation. The insurer proposed no supportable figure or method for valuing improved glazing, reduced maintenance or any other financial benefit. The judge therefore properly made no deduction.

Leggatt LJ gave the judgment. Dingemans and McCombe LJJ agreed.

1. Court of Appeal (Civil Division): The insurer’s appeal was dismissed by [2020] EWCA Civ 308. The reinstatement-cost award and refusal to deduct betterment were upheld.

2. High Court, Commercial Court: Mr David Railton QC, sitting as a Deputy High Court Judge, gave judgment for the insured for £1,386,172 plus interest on 3 May 2019. No neutral citation is stated in the judgment.