Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd

Factual and Procedural Background

The claim arises from a fire on 25 May 2011 at industrial premises known as Crossfield Works, occupied by the Plaintiff insured company preparing to manufacture shoddy hard pads. The buildings, plant, and machinery were insured under a policy issued by the Defendant insurer. The Plaintiff occupied the premises under a licence granted by the freehold-owning partners, who had agreed the insured would maintain insurance and upkeep.

Before the fire, the insured had installed most machinery for the new manufacturing venture, with one production line operational. The insurance policy covered buildings and machinery against fire and other risks, with specific reinstatement provisions. Following the fire, the insurer accepted liability for business interruption and paid a sum based on market value for property damage, but the Plaintiff disputed the measure of indemnity, claiming the cost of reinstatement rather than market value diminution.

The case was tried before a deputy High Court judge who awarded damages on a reinstatement basis. The insurer appealed on a limited basis, challenging the legal test for assessing sums payable where the cost of reinstatement had not been incurred and the insured's intention to reinstate was not fixed or settled.

Legal Issues Presented

1. What is the correct legal test for assessing the sum payable under a property damage insurance policy when no term fixes the measure of loss?
2. Is it a legal requirement for the insured to demonstrate a genuine, fixed, and settled intention to reinstate the damaged property to recover reinstatement costs not actually incurred?
3. Does the insured’s intention to reinstate affect the measure of indemnity under the policy?
4. Should any deduction for betterment be made from the reinstatement cost?
5. What is the effect of the policy’s reinstatement clause and its special conditions on the measure of indemnity?

Arguments of the Parties

Appellant's Arguments

• The insurer contends that to recover reinstatement costs not actually incurred, the insured must show a genuine, fixed, and settled intention to reinstate the property on the same site and in the same style.
• The insurer argues that, absent such intention, damages should be limited to the market value diminution of the damaged property.
• They submit that the policy’s reinstatement clause caps recovery at the amount payable without that clause, which must be assessed by default legal principles.
• The insurer relies on case law suggesting intention to reinstate is relevant, particularly where property value has increased due to the loss event.
• They argue the judge erred in not making any deduction for betterment and should have broadly assessed such deduction despite evidential difficulties.
• The insurer submits that the definition of "Reinstatement" in the policy limits reinstatement of damaged buildings to repair on the same site and in the same style, excluding relocation or different style rebuilding.

Respondent's Arguments

• The insured defends the judge’s decision, asserting that the correct legal test was applied and the conclusion reached on the facts is unimpeachable.
• The insured maintains that the measure of indemnity is the cost of reinstatement, reflecting the intended use of the premises for manufacturing shoddy hard pads.
• They argue that the insured did not intend to sell the premises and had no right to do so, making market value diminution an inappropriate measure of loss.
• The insured contends that the question of intention to reinstate the property at the Crossfield Works site is irrelevant to the measure of indemnity where there is no evidence of better or cheaper alternatives.
• Regarding betterment, the insured argues that claiming the cost of the most reasonable and least expensive reinstatement option should not attract deductions, as this would deprive the insured of full indemnity.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by identifying the central legal question as the measure of indemnity payable under a property damage insurance policy when the cost of reinstatement has not been incurred and no express contractual term fixes the measure of loss. It analysed the policy wording, noting that Condition 7 provides for indemnity based on reinstatement cost but caps payment where reinstatement cost has not been incurred at the amount payable in the absence of Condition 7. The court clarified that the issue is the amount of that cap, which must be assessed by applying default legal principles.

The court reiterated established principles that damages for breach of contract aim to place the claimant in the position as if the breach had not occurred, with the measure of loss in property damage insurance typically being either reinstatement cost or diminution in market value depending on the insured's intended use of the property.

Applying these principles, the court found that the insured intended to use the premises for manufacturing shoddy hard pads and was not intending to sell the property. Consequently, the appropriate measure of loss was the cost of reinstatement or replacement for that use rather than market value diminution.

The court addressed the insurer’s argument that the insured must have a genuine, fixed, and settled intention to reinstate the property to recover reinstatement costs not actually incurred. It distinguished the present case from Great Lakes, where the property had increased in value due to the loss and the insured’s intention was relevant. Here, no such increase in value occurred and no evidence suggested the insured should have mitigated loss by relocating or selling. Therefore, the insured’s intention to reinstate the property on the same site was irrelevant to the measure of indemnity.

The court rejected the insurer’s submission that the reinstatement clause’s definition limited reinstatement for damaged property to repair on the same site and style, noting that the clause did not apply to the measure of indemnity in the absence of Condition 7. Moreover, the insured had only claimed reinstatement on the same site and in a similar style, so the insurer’s argument was beside the point.

Regarding betterment, the court distinguished between betterment arising from deliberate improvements and incidental benefits of reasonable reinstatement. It confirmed the established principle that deductions are required for financial benefits reducing the cost of reinstatement but not for non-pecuniary benefits. The insurer failed to quantify any betterment deductions despite expert evidence identifying potential items, and the court held the judge was justified in declining to make any deduction due to insufficient evidential basis.

Overall, the court concluded that the judge’s award based on the reinstatement cost was correct in law and fact, and that the insurer’s appeal lacked merit.

Holding and Implications

The court DISMISSED THE APPEAL.

The direct effect is that the insured is entitled to recover damages based on the cost of reinstating the damaged buildings and plant and machinery to their condition immediately before the fire, calculated on a reinstatement basis rather than market value diminution. No deduction for betterment was warranted on the evidence. The decision confirms that, absent an increase in property value or evidence of mitigation, the insured’s intention to reinstate is not a prerequisite to recovering reinstatement costs not actually incurred under such a policy. No new precedent was set beyond the application of established principles to the facts.