Blog: The measure of indemnity in property damage loss?


Mike Ledgerton, head of major loss at Questgates, reflects on the Court of Appeal decision in Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd., which has potentially far reaching consequences to the measure of indemnity.

In the case of Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd, the Court of Appeal was asked to consider the correct test for measuring the indemnity for property damage loss.

This was a catastrophic fire that occurred in 2011 and which completely destroyed the building and all contents, as well as sadly leading to the death of one of the policyholder’s employees.

The claim was originally agreed on the basis of a cash indemnity settlement, partly due to the presence of underinsurance, but was also influenced by the failure of the policyholder to expend any monies on reinstating either the buildings or machinery at the time the settlement was agreed. Indeed at the time the claim was agreed, the policyholder had shown no real intention to rebuild or replace anything.

The method of settlement, together with an unrelated issue concerning a 20% co-insurance excess (which was found in insurers’ favour), was subsequently the subject of a legal challenge which went to court in 2019.

The crux of the argument hinged on the insured’s intentions at the time of the incident. 

If they had a “genuine, fixed and settled” intention to continue using the building at the time of the loss, in the same way as they did before, then the court considered that the correct measure of indemnity was the reinstatement cost, even if the reinstatement had not actually taken place, rather than a more “traditional” indemnity settlement of reinstatement cost less depreciation, or diminution in market value.

If the policyholder’s intentions had changed following the loss (as in the Great Lakes case) then the position would be different. 

The difficulty this potentially presents is that, at the time of a loss, most businesses would say that their intention was to continue to use the building in the same way that they were prior to the loss.  Determining if this intention had changed post incident is much harder to establish, but in Sartex the judge accepted the insured at their word that they still had the same intentions after the fire and that, therefore, the reinstatement cost was the correct measure of indemnity.  This would not be the case if there was a clear intention to sell the property prior to the loss, if the insured had failed to mitigate the loss or, as in Great Lakes; the property had increased in value as a result of the incident.

The decision also raises questions about the efficacy of some reinstatement clauses and points to a potential need for insurers to tighten policy wordings to deal better with scenarios where reinstatement doesn’t actually take place.

Clearly, each case and policy wording has to be considered on its merits, but Sartex potentially tips the balance in the favour of policyholders when it comes to agreeing cash settlements as they may only need to confirm what their intentions were at the time of the loss, and don’t necessarily need to “put their money where their mouth is” and actually incur the cost of reinstatement in advance of being paid the full reinstatement value.

In my view, this judgment has potentially far reaching consequences to the measure of indemnity. The repercussions for insurers could be significant and it’s a judgment that they need to consider in full when it comes to negotiating settlements in future.

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