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Reinstatement: A Claimant

SIG Perspective
by the CILA Claimant SIG
Opened by:
Jonathan Clark, CILA President

Speaker:
Roger Franklin, Partner, Edwin Coe LLP

Tuesday 22nd November 2016


Edwin Coe LLP, London
Western Trading Ltd v Great Lakes Reinsurance UK Plc
Developments in the
Law of Reinstatement
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Western Trading Ltd v Great Lakes Reinsurance UK Plc


Background
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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Boak Building

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Boak Building

 Historic and listed

 Industrial use (originally a tannery, then rag trade)

 Approximately 30,000 square feet

 Planning permission for conversion into 31 flats (along with neighbouring


sites)

 Stripped out and awaiting development (but development plans mothballed


in 2008)

 Currently used for rough storage

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Ownership

Mr Singh – Freehold Owner

Western Trading Ltd (owned by Mr Singh)

Tenants

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Ownership

 Boak freehold registered in name of Mr Singh

 Mr Singh director and sole shareholder in Western Trading Ltd

 Western Trading Ltd vehicle for Mr Singh’s property portfolio (approximately


£20m)

 Western Trading Ltd “let” Mr Singh’s properties from him (for which it paid a
“rent”), and “managed” them (i.e, was responsible for maintenance and
upkeep, arranging insurance - in its own name - and letting the properties)

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Policy

 The Policy included material damage, loss of rent and liability cover. The
sum insured for buildings was £2,121,800.

 The sum of £2,121,800 represented what was understood to be the


rebuilding cost of the Property (the market value was much less).

 The premium charged by the Insurer included a percentage of the rebuilding


cost of £2,121,800

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

 The insuring clause of the Material Damage section of the Policy provided
as follow:
“Subject to the General Conditions and Exclusions of this Certificate… we the
Underwriters agree to… to indemnify the Assured against loss of or damage to
the property specified in the Schedule (hereinafter referred to as ‘the Property’)
caused by or arising from the Perils shown as operative in the Schedule, occurring
during the period of this insurance.

“Underwriters shall not be liable for more than the Sum Insured stated in the
Specification or in the Certificate in respect of each loss or series of losses arising
out of one event at each location as stated in the Schedule.”

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

 The material cover included a reinstatement clause in the following terms


(with emphasis added):
4) It is hereby agreed that in the event of the property insured under item 1 of this
Section of the Certificate being lost, destroyed or damaged by any peril insured
hereunder the basis upon which the amount payable under each of the said
Items of the Certificate is to be calculated shall be the reinstatement of the
property lost, destroyed or damaged subject to the following special
provisions and subject also to the terms and conditions of the Certificate except
in so far as the same may be varied. For the purpose of the insurance under this
Memorandum ‘reinstatement’ shall mean:

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

a) The carrying out of the following work, namely,

i. Where property is lost or destroyed, the building of the property, if a building… in


a condition equal to but not better or more extensive than its condition when
new.

5)
a) The work of reinstatement (which may be carried out upon another site and
in any matter suitable to the requirements of the Assured subject to the
liability of the Underwriters not being thereby increased)…

c) No payment beyond the amount which would have been payable under the
Policy if this memorandum had not been incorporated therein shall be made
until the cost of reinstatement shall have been actually incurred.”

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

 Thus the material damage cover in the Policy included two significant
benefits to the Claimant:

˗ First, the cover was written on a reinstatement basis. The policy defined
“reinstatement” as “the rebuilding of the property… in a condition equal to but not
better or more extensive than its condition when new.”

˗ Second, the Policy provided that the work of reinstatement “may be carried out
upon another site and in any manner suitable to the requirements of the Assured
subject to the liability of the Underwriters not being thereby increased.”

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Claim

 The Primary relief sought by the Claimant was for a declaration

 The Alternative relief sought by the Claimant was an award of damages in


respect of (i) the cost of reinstating the Property and (ii) loss of rent

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Defence

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Defence

 Lack of insurable interest;

 Misrepresentation as to occupancy;

 Non disclosure as to insurable interest and occupancy;

 Non disclosure as to need for loss of rent;

 Non disclosure as to intention to develop the property;

 Breach of warranty of basis clause (occupation);

 The Claimant in any event had suffered no loss because:

˗ Had not reinstated; and

˗ No diminution in value

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Defence
The issue of Value and Loss:

 Pre Fire Value – £75,000

 Post Fire Calculation – the “Argus Developer” for Residual Valuation


˗ GDV less

˗ (Acquisition costs i.e land value)

˗ (Construction costs)

˗ (Professional fees)

˗ (Marketing fees)

˗ (Finance)

˗ (Developers Profit)

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Defence
The issue of Value and Loss:

All of this designed to show that:


 No loss (absence of listed carbuncle has in fact improved site)

 No intention to reinstate (because not economic)

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Claimant’s Response


The issue of Value and Loss:

But…
 Proposed development keystone for larger development

 GDV ignores fact that site already owned and doing nothing

 Claimant had history of holding property for rental income

 Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC)

 Policy provided for reinstatement

˗ On another site

˗ In any manner suitable to the requirements of the assured subject to U/W


liability not being increased

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Claimant’s Response


The issue of Value and Loss:

Furthermore…
 Where, as here, the insured is a tenant who is obliged to replace lost property,
then the amount of the insured’s loss is the cost of reinstating the lost property

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC)

Party Reinstating has three options

1. To reinstate the property to a lay-out and condition that, as closely as possible,


mirrors what was there before

2. To reinstate the property, but, at the same time, to take advantage of its
destruction to make certain minor changes so as to improve what was therefore
before

3. So long as made clear to insurer, to make significant changes to improve what


was there before

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Judgment at First Instance

 No misrepresentation

 No non disclosure

 No breach of warranty

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Judgment at First Instance

 As to the issue of insurable interest, the Judge concluded that the


underlying fiscal reasons for the structure of the family business was “none
of the Defendant’s business” if the “Claimant must account to Mr Singh for
the Property”.

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Judgment at First Instance


The Claim for relief:

 The prima facia rule is that the assured’s loss in the event of damage to
buildings is the cost of reinstatement (Colinvaux (2013 supplement)

 Furthermore, the Defendant owes an express contractual duty to


indemnify the Claimant on that basis

 The facts of this case do not require a departure from the prima facia
rule

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Judgment at First Instance


The Claim for relief:

 A declaration was therefore a particularly suitable remedy “as it should


protect the interests of the Defendant as well as the Claimant”

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Appeal
1. The Judge failed to decide whether Insurers were in breach of indemnity, and if they were, in
respect of what damage.

2. The Judge was wrong to hold that where an Insurer has repudiated the Policy, the Insurer
cannot rely on the proviso to the reinstatement clause, that the costs of reinstatement will
only be paid once they have been incurred.

3. The Judge was wrong to grant a declaration that the Claimant is entitled to be indemnified
under the terms of the Policy in respect of losses it has suffered, because the Claimant has
not suffered any loss and there is no realistic prospect that such a breach will occur in future.

4. To the extent that the Judge decided that the Claimant intended to reinstate the insured
property, he was wrong to do so, and/or misdirected himself in law as to the meaning of
reinstatement in the context of the policy.

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Appeal Judgment


Where real property is destroyed, the measure of indemnity depends on:

a) The terms of the policy;

b) The interest of the insured in, or its obligations in respect of, the property
insured; and

c) The facts of the case including, in particular, the intention of the insured at the
time of the loss

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

The Appeal Judgment


In light of Authorities:

a) Reynolds v Phoenix Assurance Co Ltd [1978]

b) Leppard v Excess Insurance [1979]

c) Mclean Enterprises Ltd v Ecclesiastical Insurance [1986]

d) Lonsdale & Thompson v Black Arrow Group [1993]

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Reynolds v Phoenix Assurance Co Ltd [1978]


 Insured purchased old property (maltings) for £16,000

 Sum insured £550,000 based on reinstatement cost, but no specific reinstatement


insuring clause in policy. Value of modern equivalent was £55,000

 Following loss, insurers argued (i) loss was only £5,000 (i.e, DV); alternatively (ii) loss
should be measured on market value or cost or modern replacement (iii) no
commercial person would spend £250,000 rebuilding an obsolete building if modern
equivalent was faction of the price

 Court said, no, insured had genuine intention to reinstate which was not eccentric

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Leppard v Excess Insurance [1979]


 Claimant owned cottage insured for £14,000

 Policy provided indemnity for full value of loss with reinstatement at insurer’s option.

 Property purchased as investment for subsequent sale

 Court held that it was evident that insured never intended to live in the cottage, which
had a sale price of £4,500 at the time of loss

 Therefore, market value was correct basis of indemnity, which was the advertised
price less the site value of £1500

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Mclean Enterprises Ltd v Ecclesiastical Insurance [1986]


 Claimant owned loss making hotel

 Agreed to sale of business and property, subject to contract and survey

 Fire occurred, insurers repudiated on grounds of fraud and disputed the basis of
indemnity

 Court said not proved that insured would have reinstated if insurers had paid
promptly; the insured had sold the property, and had not done so as a result of the
fire.

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Lonsdale & Thompson v Black Arrow Group [1993]


 Landlord under lease covenanted to insure demised premises

 Policy provided for indemnity calculated as the cost of reinstatement

 Landlord contracted to sell freehold, but premises destroyed before completion.


Completion nevertheless proceeded and full price paid

 Insurers argued that disposal of interest and payment of full completion price meant
Landlord was fully indemnified

 Court said Landlord had a liability to the tenant to reinstate, and therefore could
recover the full indemnity calculated as the cost of reinstatement

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Applying these principles


 The Policy provided for indemnity on reinstatement basis

 Western Trading Ltd had a contractual obligation to reinstate

 There was no failure to reinstate with reasonable dispatch while liability not admitted
and the measure of indemnity in dispute

 Therefore, judgment at first instance upheld

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Western Trading Ltd v Great Lakes Reinsurance UK Plc

Conclusions
 In particular circumstances, the court will recognise informal commercial relations

 The measure of indemnity depends on (i) the policy, (ii) the insured’s interest in, and
obligations in respect of, the property, and (iii) the facts of each case including the
intention of the insured

 The intention must be genuine, fixed and settled

 Intention is assessed at the time of the loss, and on the assumption that the
insurance proceeds are paid promptly

 Time for reasonable dispatch does not run until insurers confirm (i) liability, and (ii)
that the measure of indemnity is the cost of reinstatement

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Questions

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Contact

Roger Franklin “Roger Franklin is known to be excellent


Partner and has wide-ranging technical
knowledge”.
Edwin Coe LLP Legal 500 2016
t: 020 7691 4044
e: roger.franklin@edwincoe.com

Please follow are regular Insurance blog – www.edwincoe.com/blogs

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Reinstatement: A Claimant
SIG Perspective
by the CILA Claimant SIG
Opened by:
Jonathan Clark, CILA President

Speaker:
Roger Franklin, Partner, Edwin Coe LLP

Tuesday 22nd November 2016


Edwin Coe LLP, London