Great Lakes Reinsurance (UK) SE v Western Trading Ltd

Factual and Procedural Background

The appeal concerns whether a company insured under a fire policy is entitled to indemnity covering the cost of reinstatement after a building insured was destroyed by fire. The property, known as the Boak Building at 1-7 Station Street in Central Walsall, was an historic listed leather factory built circa 1906. The Property was owned by an individual ("Owner") and insured by Western Trading Limited ("Insured Company"), a company managing the Owner's property portfolio. The insurers are Great Lakes Reinsurance (UK) Plc ("Insurers"). On 24 July 2012, the Property was destroyed by fire, leading to the revocation of its listed status. At trial, the Insurers challenged the claim on grounds including lack of insurable interest, policy misrepresentation, and breach of warranty, but these defenses were rejected by the trial judge. The trial judge declared that the Insured Company was entitled to indemnity under the policy, and the Insurers appealed that decision.

Legal Issues Presented

1. Whether the Insured Company is entitled to indemnity for the cost of reinstatement of the Property under the terms of the fire insurance policy.
2. The appropriate measure of indemnity: whether it is the cost of reinstatement or the reduction in open market value of the insured interest.
3. Whether a declaration as to entitlement to indemnity is appropriate prior to actual reinstatement.
4. The significance of the insured's genuine intention to reinstate the Property on the entitlement to indemnity.
5. The effect of policy conditions requiring reinstatement to be undertaken with reasonable despatch and payment only upon incurring reinstatement costs, particularly in the context of repudiation by the Insurers.

Arguments of the Parties

Appellant's Arguments (Insurers)

• The measure of indemnity should be the reduction in open market value of the Property, which they contend has not decreased because the Property’s market value increased after the fire due to removal of listed status and potential for more profitable redevelopment.
• The Insured Company had no genuine or fixed intention to reinstate the Property as required for entitlement to reinstatement costs.
• The declaration granted by the trial judge was inappropriate because it did not specify what losses were covered or clarify the meaning of reinstatement.
• Clause conditions requiring reinstatement to be commenced with reasonable despatch and payment only upon incurring costs should prevent payment until actual reinstatement begins; the Insured Company has not commenced reinstatement.
• There is no accrued breach of contract or prospect of future loss to indemnify; thus, the declaration is meaningless and should be refused.

Respondent's Arguments (Insured Company)

• The Insured Company has an insurable interest and is entitled to indemnity up to the sum insured for reinstatement costs as per the policy’s reinstatement clause.
• The cost of reinstatement, defined as rebuilding the Property to its condition when new (not better or more extensive), is the proper measure of indemnity, not market value.
• The Insured Company has a genuine intention to reinstate the Property, supported by evidence of the Owner’s longstanding connection and plans, despite some ambiguity in details.
• A declaration as to entitlement is appropriate and provides protection to both parties, particularly the Insurers, by conditioning payment on actual reinstatement.
• The Insurers’ defences of misrepresentation, non-disclosure, and breach of warranty were rejected at trial and are not appealed.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analysed the contractual terms of the insurance policy, particularly the reinstatement clause, which defined reinstatement as rebuilding the property in a condition equal to but not better than when new. The court accepted the trial judge’s findings that the Insured Company had an insurable interest in the Property and was contractually obliged to reinstate it in the event of fire.

The court acknowledged that the market value of the Property before the fire was significantly lower than the sum insured and that post-fire, the Property’s value had increased due to delisting and potential for redevelopment. However, the court held that the measure of indemnity under the policy and the reinstatement memorandum is the cost of reinstatement, not market value, provided the insured has a genuine intention to reinstate.

The court considered the ambiguity in the trial judge’s approach to the Insured Company’s intention to reinstate, noting that while the judge accepted a wish to reinstate, he did not make a definitive finding on intention, preferring to leave it as a matter to be established by conduct following a declaration. The court found that the Insured Company’s stated intention, supported by witness evidence and expert costings, was sufficient to satisfy the requirement of genuine intention for the purposes of entitlement.

The court further addressed the policy conditions requiring reinstatement to be carried out with reasonable despatch and payment only upon incurring reinstatement costs. It accepted the trial judge’s view that these conditions could not be enforced while the Insurers repudiated liability and that the Insured Company had not failed to act with reasonable despatch.

The court held that making a declaration that the Insured Company is entitled to indemnity if it reinstates the Property is a suitable remedy, providing protection to both parties by conditioning payment on actual reinstatement and avoiding premature damages awards. The wording of the trial judge’s declaration was found insufficiently precise, and the court proposed an amended declaration clarifying entitlement to indemnity for reinstatement costs upon reinstatement.

The court declined to award damages at this stage due to the uncertainty surrounding the Insured Company’s definitive intention and the practical feasibility of reinstatement, preferring to leave these matters to be determined when reinstatement occurs or fails to occur.

Regarding costs, the court upheld the trial judge’s order that the Insurers pay the Insured Company’s costs but varied the order so that costs are assessed on the standard scale rather than indemnity basis.

Holding and Implications

The court ALLOWED the appeal in part and VARIED the declaration made by the trial judge to clarify that the Insured Company is entitled to indemnity for the cost of reinstating the Property up to the policy limit, if it carries out reinstatement.

The court held that the measure of indemnity under the policy is the cost of reinstatement, subject to the insured’s genuine intention to reinstate and compliance with policy conditions. The court confirmed that a declaration is an appropriate remedy to resolve entitlement prior to actual reinstatement and that damages are premature given the uncertainties.

The direct effect is that the Insured Company may recover reinstatement costs upon carrying out reinstatement, but the Insurers are protected against paying if reinstatement does not occur. No new precedent was established beyond applying established principles to the facts. The appeal was also allowed to the extent of varying the costs order to standard basis assessment.