Reinstatement Value - Factory Fire Triggers Insurance Test Case

Many insurance policies state that amounts payable in the event of loss or damage to property will be calculated on a reinstatement basis – but what exactly does that mean? The Court of Appeal considered that fundamental issue in the context of a dispute arising from a disastrous factory fire.

A textiles company was in the process of moving its manufacturing operations into the building when it was severely damaged by fire. The premises were covered by an insurance policy which stated that valid claims in respect of loss or damage would, subject to various conditions, be satisfied on a reinstatement basis.

The insurer argued that no reinstatement costs had in fact been incurred. In the eight years since the fire, the premises had not been rebuilt and destroyed or damaged machinery and plant had not been replaced. In order to recover under the policy on a reinstatement basis, it was submitted that the company had to show a genuine, fixed and settled intention to reinstate the premises on the same site, and in the same style and general shape, as pertained before the fire.

The insurer's plea that the company's entitlement under the policy was limited to the market value of the building, plant and machinery which had been damaged or destroyed was, however, rejected by a judge. That was on the basis that, although the company did not have a settled intention to reinstate the building after the fire, it did intend to carry on the manufacturing venture, either by reinstating the building or by establishing an alternative facility elsewhere.

Following the fire, the insurer had paid the company £657,127 in respect of business interruption and £2,141,527 in respect of property damage. The judge, however, awarded the company a further £1,386,172, plus interest, on the basis that it was entitled to recover the full costs of reinstatement.

In rejecting the insurer's challenge to that outcome, the Court found that the question of whether the company actually intended to reinstate the building for the purpose that it had originally planned had no possible relevance to the measure of indemnity to which it was entitled under the policy. It was entitled to be placed in a position materially equivalent to the position it would have been in had the fire not occurred. To limit the company's entitlement to the market value of the destroyed or damaged property would be wrong in principle.