What is the measure of recovery under a property loss or damage policy: loss of value or reinstatement cost?

In Sartex Quilts & Textiles Limited v Endurance Corporate Capital, the court looked at the principles applicable to the measure of recovery for property loss, including questions of betterment.

Summary

Two perennial issues arise in property insurance.

  • What is the appropriate basis of recovery for property damage: is it the cost of restoring property (reinstatement) or the loss of market value of the property affected (loss of value)? and
  • Is there a deduction to be made in recovery for the fact that the insured may be getting new for old (a new or improved property)?

In Sartex Quilts & Textiles Limited v Endurance Corporate Capital, reinstatement was preferred to loss of value as the default measure of recovery, and no deduction for betterment was made.

Measure of property loss indemnity

The two alternative approaches to measuring the level of indemnity for an insured who suffers property damage are either:

  • the cost to the insured of repairing or reinstating the property, or
  • the difference between the market value of the property in its damaged condition and its value in an undamaged state.

Many policies contain express clauses allowing the insured to claim either on a reinstatement basis. However, these tend to contain wording to the effect that the right only engages where reinstatement works have been started promptly, and where the costs have been incurred and can be evidenced. This can, naturally, cause difficulties for an impecunious insured who is relying on the insurance monies to start or complete reinstatement or repair work.

Significantly, the cost of reinstatement generally greatly exceeds the amount which would be payable on a loss on a market value basis, so this can be a fertile area for disputes between insureds and insurers, as illustrated by the Sartex decision which we consider below.

Betterment

It is commonly the case that where an insured replaces or repairs damaged property, it may end up better off - with a “new for old” property potentially worth far more than the previous one. Many policies contain express clauses dealing with betterment either permitting it or allowing a deduction. However, in the absence of express terms the Courts will seek to avoid betterment by applying a deduction - betterment is an inherent element of the indemnity principle.

However, in property loss and damage insurance there is no automatic or accepted percentage deduction. 

Sartex Quilts & Textiles Limited v Endurance Corporate Capital

A policy covered buildings, plant and machinery at a factory. A fire occurred causing one fatality; buildings were severely damaged, and plant and machinery destroyed. Liability was admitted in principle.

It was common ground that an express reinstatement clause was not engaged, as this clause required reinstatement works to commence and proceed “without unreasonable delay” and for the costs of reinstatement actually to have been incurred. No reinstatement works had begun by the time of the trial, some eight years after the fire. Instead, indemnity was sought under the main insuring clause, by which Insurers would “indemnify the Insured against loss or destruction or damage to Property caused by or arising…”.

The Insured sought recovery on a reinstatement costs basis, in response to which Insurers argued that for reinstatement the Insured had to prove a “genuine, fixed and settled intention to reinstate”, and in the absence of such proof would be is limited to its loss in market value.

The Court found that the underlying principle was to determine the value of the relevant property to the insured at the date of the event causing loss. An insured’s intentions in relation to the property immediately before and at the time of the insured event were important factors in determining the value of the property to him at that date. Later intentions were largely irrelevant. An insured was not required to prove that it continued to have a “genuine, fixed and settled intention” to reinstate in order to recover on the reinstatement basis. The primary focus was on the position as at the time of (and immediately before) the insured event. Unless at the time of (and immediately before) the insured event the Claimant either intended to sell of demolish the property then in general the reinstatement measure would apply.

The Court declined to make any deduction for betterment on the basis that deductions for betterment ought to be unusual where the insured had chosen (or had received) the most reasonable and least expensive option available to him and any benefit or betterment was an unavoidable consequence of the loss.

Conclusions

An analysis of the facts, in particular of the Insured’s intentions both before and after the loss, is always going to be key in a dispute about the basis of property loss indemnity. In Sartex, although there was a significant delay in commencing reinstatement, the fact that the insured needed the insurance monies in order to start reinstatement works may have been a significant factor in the choice of the reinstatement measure.

The unattractive results of the case for insurers may be avoided by a proper review of insuring clauses and policy terms. Such a review should include specific provision for the basis of calculation of an indemnity and for a deduction for betterment. In the absence of express provisions, insurers may find themselves stuck with much higher indemnities.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.