Reintegration 101 – (re)state the obvious?

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Reinstatement can be a difficult issue for a policyholder to manage following a claim.

The answers to what might seem like obvious questions such as: what is it? Who did it? and, do the costs actually have to be incurred? are actually far from straightforward and have been the subject of several court cases in recent years.

This short article summarizes some of the key principles that are involved.

What is that?

Restoration is the repair or replacement of property so that it is in the same condition or in a materially equivalent condition to that in which it was before the occurrence of the loss.

In itself, this seems quite clear. However, as always, the devil is in the details and the wording of reinstatement clauses varies from policy to policy with very different outcomes for the insured.

For example, depending on the precise wording, the insured may or may not be entitled to a cash settlement, may or may not be required to rebuild, and may or may not be required to rebuild on the same site. Also, many policies give the insurer the option of reinstatement.

Who did it?

As might be expected, most often the insured reinstates. However, many policies give the insurer the ability to reinstate at their discretion. Why might an insurer choose to do this?

There are several reasons why an insurer may choose to reinstate, rather than asking the policyholder to reinstate or pay them an amount equivalent to the cost of reinstatement. Admittedly, one reason identified by the courts is to avoid what the other could be “the temptation of an ill-intentioned owner to set fire to the building in order to pocket the insurance money” (Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd’s Rep 440).

If an insurer chooses to reinstate, it must give unequivocal notice to the insured, either expressly or by conduct. Following a valid reinstatement election, the policy is no longer treated as a policy under which payment must be made and instead stands as if it were a reinstatement contract in the first place. . The consequence is that if the insurer does not perform the contract correctly, he will be liable to the policyholder for damages.

Should the work take place?

Whether and, if so, when repair work should be carried out, or whether the policyholder is entitled to compensation for what the work would cost if carried out, will again depend on the exact wording of the font.

The starting position is that set out in the following extract from the judgment in Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd ([2020] EWCA Civil 308):

“How the plaintiff chooses to spend the damages and whether he actually tries to put himself in the same situation as if the breach had not occurred – for example by returning lost, damaged or defective goods – or if the plaintiff does anything else with money, is – in accordance with the general principle discussed above – irrelevant for the measurement of compensation.

Therefore, subject to anything to the contrary in the policy, a policyholder is entitled to recover the cost of repairs to his property, whether or not he has actually made those repairs, but decides instead, for example, to sell his property or use the money to build somewhere else on the spot.

Insurers often seek to limit this right and reinstatement clauses often provide that work must be started and performed “with a reasonable delay”, and that “No payment is made until the costs of reinstatement have actually been incurred”. This presents something of a chicken-and-egg situation for policyholders, since an impecunious policyholder will not have the funds available to pay reinstatement without first receiving the reinstatement fee from the insurer.

In Manchikalapati & others against Zurich [2019] EWCA CIV 2163, the insurer argued that where the policy provided compensation for “the reasonable cost of repair or repair of the damage…”, the term “reasonable cost” shall be interpreted to mean “actual” or “incurred” costs. Therefore, since this cost had not yet been incurred, the insurer argued that its liability under the policy had not been triggered. The court rejected this argument, finding that nothing in the wording indicated that the cost had to be incurred before the policyholder was entitled to compensation.

An insurer may limit its liability to the costs Actually committed, provided that clear language is used to this effect. However, in the absence of clear language, or where the clause is neutral as to whether the cost must already be incurred or may be incurred in the future, courts have clarified that insurers are no longer able to withhold compensation pending the work being carried out.

How relevant are intentions?

A thorny issue that comes up time and time again in the context of reinstatement is the relevance of an insured’s intentions. This first happened in a case where the policyholder intended to sell the property at the time of the fire. In this case, the court concluded that the indemnity to which the policyholder was entitled was the price at which he was prepared to sell at the time of the fire. This is because a policyholder is entitled to be compensated for their loss and, in quantifying that loss, an insured’s intentions can affect the assessment of the property’s value to them.

This issue was recently brought before the Court of Endurance against Sartex [2020] EWCA Civ 308. Insured Sartex claimed compensation on a reinstatement basis following a fire at its premises. The insurers claimed this was inappropriate because Sartex had no genuine intention to reinstate, based on the fact that Sartex had not reinstated in the many years following the fire. As such, the insurer said Sartex was only entitled to the significantly lower sums representing the decrease in the market value of the property as a result of the fire. The court found that whether Sartex actually intended to restore the buildings was, in most cases, irrelevant to the extent of compensation.

Repair standard

Another issue that frequently arises, particularly in the context of older properties, is what happens when refinishing results in the property being in better condition than it was before. This is called improvement. The improvement principle requires the policyholder to account to the insurer for improved or better aspects of the new property.

Sometimes an insured has no practical alternative but to replace the original property with a modern, improved property. This is called involuntary improvement and in these circumstances the policyholder is entitled to the actual replacement cost.

If an insurer is seeking to apply an improvement discount, the insured would be advised to require the insurer to specifically identify the improvement the insured would benefit from and provide supporting evidence, as when an insurer fails to adequately quantify and prove its case on improvement, no deduction should be applied.

Summary

Reinstatement clauses aim to place policyholders in a situation materially equivalent to that in which they would have found themselves had the loss not occurred. How this works in practice can be a minefield, but recent case law has helpfully dispelled some misconceptions about the intentions of the insured and the extent to which work needs to be done – which will help policyholders get their claims paid.

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