Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Dingemans,Lord Justice Leggatt,Lord Justice McCombe |
| Judgment Date | 05 March 2020 |
| Neutral Citation | [2020] EWCA Civ 308 |
| Date | 05 March 2020 |
| Docket Number | Case No: A4/2019/1202; A4/2019/1202(C) |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 308
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
Mr David Railton QC, sitting as a Deputy High Court Judge
CL-2017-000301
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice McCombe
Lord Justice Leggatt
and
Lord Justice Dingemans
Case No: A4/2019/1202; A4/2019/1202(C)
Mr Jason Evans-Tovey (instructed by DAC Beachcroft LLP) for the Appellant
Mr Ben Elkington QC (instructed by Edwin Coe LLP) for the Respondent
Hearing date: 21 January 2020
Approved Judgment
The questions raised on this appeal concern the correct legal test for assessing the sum payable under a policy of insurance against property damage when there is no term of the policy which fixes the measure of loss. The main issue is whether, in order to recover the cost of reinstating damaged property under such a policy when this cost has not actually been incurred, the insured needs to show a genuine, fixed and settled intention to reinstate the property and (in the case of a building) to do so on the same site and in the same style and general shape as it was before the damage occurred.
The appellant insurer contends that this is a legal requirement and that, because it was not satisfied in this case, the trial judge was wrong to award damages to the insured based on the cost of reinstating buildings which were very substantially damaged by a fire at its premises and replacing plant and machinery which was destroyed by the fire. Instead, the insurer argues, the sum awarded should have been limited to the (much lower) market value of the buildings, plant and machinery damaged or destroyed.
The respondent insured defends the judge's decision, arguing that he applied the correct legal test and reached an unimpeachable conclusion on the facts found.
Factual background
The claim arises from a serious fire on 25 May 2011 at industrial premises in Rochdale known as Crossfield Works. The premises were occupied by the claimant insured, Sartex Quilts & Textiles Limited, which was preparing to use them as a factory to manufacture “shoddy hard pads”. The buildings and machinery and plant were insured against property loss or damage under an insurance policy underwritten by the defendant (and appellant), Endurance Corporate Capital Limited, which I will refer to as “the insurer”.
The driving force behind the insured's business is Mr Maqbool Ahmed. Other members of his family are also involved. The business was originally conducted as a partnership between Mr Ahmed, one of his brothers and two cousins. The four partners are the freehold owners of Crossfield Works. After the insured company was formed to carry on the business, an agreement was made in writing between the partners and the insured dated 28 April 1995 under which the partners granted the insured a licence to use Crossfield Works for no rent so long as it arranged (at its own cost) appropriate insurance cover for the buildings and contents and ensured that the premises were maintained in a good state of repair. It is on that basis that the insured has since occupied the premises.
The insured's main business, as its name indicates, is manufacturing quilts and textiles. This business was originally carried on at Crossfield Works. However, in 1999 the insured purchased larger premises at Castle Mill (also in Rochdale), to which its production was subsequently moved.
From about 2005, Mr Ahmed became interested in expanding the insured's business by manufacturing shoddy hard pads at Crossfield Works for use mainly in mattresses (as covers for springs) and also for general insulation. Shoddy hard pads are made from a mixture of shredded rags and low melt fibre. Having researched the market and designed a production process, the insured gradually, over several years, acquired the necessary plant and machinery from the USA, Italy and Germany, as well as the UK. Much of the machinery was bought second hand and was refurbished by the insured.
The planned manufacturing process involved three production lines. By late 2010 most of the plant and machinery had been installed at Crossfield Works and, by the time of the fire in May 2011, one of the production lines was in operation. The other two production lines were awaiting the installation of an upgraded electricity supply before they could begin operating.
The insurance policy
The policy under which the claim is made covered the buildings and machinery and plant at Crossfield Works against loss, destruction or damage arising from risks that included fire for a period of 12 months from 11 November 2010. The buildings were insured for £2,020,000 and the machinery and plant for £2,500,000. The policy also provided business interruption cover in a sum of £1,000,000.
There was a dispute at the trial about whether it was orally agreed that the insurance would be subject to a 20% co-insurance excess. The judge found that it was and there is no appeal against this finding.
The policy terms are contained in a document issued on 22 December 2010. The wording is in a standard form used by the underwriting agent. The policy is divided into sections. Material damage to property is covered by Section A. The “Insuring Clause” in Section A provides:
“Subject to the general conditions and exclusions of this Policy, and the conditions and exclusions contained in this Section, we, the Underwriters, agree to the extent and in the manner provided herein to indemnify the Insured against loss or destruction of or damage to Property caused by or arising from the Perils shown as operative in the Schedule, occurring during the period of this Policy.”
The perils shown as operative in the policy Schedule included fire.
Condition 7 of the conditions specific to Section A provides:
“Reinstatement Basis
In the event of loss or damage to or destruction of Buildings, Machinery and Plant or All Other Contents, the basis upon which the amount payable hereunder is to be calculated will be the Reinstatement of the Property lost, destroyed or damaged.
Special Conditions
1. Underwriters' liability for the repair or restoration of property damaged in part only, will not exceed the amount which would have been payable had such property been wholly destroyed.
2. No payment beyond the amount which would have been payable in the absence of this condition will be made:
a) unless Reinstatement commences and proceeds without unreasonable delay;
b) until the cost of Reinstatement has actually been incurred;
c) if the Property at the time of its loss, destruction or damage is insured by any other insurance effected by the Insured, or on its behalf, which is not upon the same basis of Reinstatement.”
Also relevant are the following general definitions:
“ Property means the Buildings, Machinery and Plant, Stock and All Other Contents.
Reinstatement means:
a) the rebuilding or replacement of Property lost or destroyed which, provided the Underwriters' liability is not increased, may be carried out:
(i) in any manner suitable to the Insured's requirements;
(ii) upon another site.
b) the repair or restoration of Property damaged in either case to a condition equivalent to or substantially the same as but not better or more extensive than its condition when new.”
The insurance claims
After the fire on 25 May 2011, the insured made claims under both the property damage and business interruption sections of the policy. The insurer accepted liability in October 2011.
The business interruption claim was settled in May 2013 for a sum of £657,127 (reduced from the £1,000,000 sum insured on account of under-insurance and the 20% co-insurance excess). The claim under the property damage section of the policy was not settled because the parties disagreed – as they still do – about whether the claim should be assessed on the basis of the cost of reinstatement (as the insured contends) or the diminution in the market value of the property caused by the fire (as the insurer maintains).
In November 2013 the insurer paid the sum of £2,141,527 to the insured in respect of the property damage claim. This was the amount for which the insurer accepted liability based on the market value of the buildings, plant and machinery (with deductions made for average and co-insurance).
The insured began these proceedings in May 2017 (shortly before the expiry of the limitation period) claiming additional sums alleged to be due under Section A of the policy. These sums were based on (a) the cost of reinstating the buildings severely damaged by the fire to the condition they were in immediately before the fire, using modern materials, and (b) the cost of replacing the plant and machinery – giving credit in each case for the amount already received from the insurer. The relevant figures were ultimately agreed by the parties with the assistance of expert quantity surveyors. But the proper measure of indemnity remained in dispute.
The judgment below
The action was tried before Mr David Railton QC, sitting as a deputy High Court judge. For reasons given in a clear and careful judgment dated 3 May 2019, the judge decided that the insured was entitled to recover the sums claimed on the reinstatement basis.
It was not in dispute, and the judge found as a fact, that immediately before the fire the insured intended to use Crossfield Works for the purposes of its new venture of manufacturing shoddy hard pads. The judge noted that Mr Ahmed was satisfied that the venture would be profitable and that this conclusion was confirmed by the figures for lost profits subsequently agreed in adjusting the business interruption claim....
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