As we awake from the second weekend of severe stormy weather, a number of us will be looking at our insurance policies to check that we can claim against insurers for loss and damage arising from the wind and rain that has struck so many.
As ever, the starting point is to look at the wording of the policy. From the lawyer’s point of view, the more interesting claims tend to be ones where changes to ownership of property are in process at the time that the damage occurs.
In cases of damage or destruction to property arising between exchange of contracts to sell and completion of the agreement, the law is reasonably certain. At the time of exchange of contracts, the beneficial interest in the property passes to the buyer and the seller holds what is called the legal estate on trust for the buyer.
Almost inevitably, the position will be that both the buyer and seller will have insurance cover in respect of damage or destruction to the property. Both parties will be looking at their policies to check their rights under their policies. In cases such as these, the usual procedure is that the insurers will agree with each other the basis on which payment of compensation to the insureds is to be made.
Although the property may have been damaged or destroyed, the buyer cannot merely say, ‘What I agreed to buy is now not what it was, and so I will not complete’. The buyer cannot refuse to complete but it can look to its insurers for compensation to enable it to repair or even reinstate the property in the event that the property is destroyed. Unless the policy says so, there is no obligation on the buyer to repair or reinstate the property which has been damaged or destroyed.
As an incentive to insureds not to try to defraud their insurer by burning down their property, the policies will usually require the insured to use the insurance pay-out to repair or reinstate.
Reinstatement means that the policy holder must so far as possible restore the property to the fullest possible extent to what it was immediately prior to the event giving rise to the damage or destruction.
Insurers will wish to minimise what they are obliged to pay out under the policy. They will look at the market value of the property (after the incident) and compare it with the cost of rebuilding or reinstatement. What if the market value is less than the cost of reinstatement?
In the recent case of Sartex Quilts and Textiles Limited v Endurance Corporate Capital Limited  EWHC 1103 (COMM), the insurers went for market value, the insured for reinstatement. The Commercial Court ordered that the insurer was to indemnify the insured on the basis of the reinstatement value, not on the basis of the market value of the property. It made this decision because it held that it was not necessary for the insured to prove that it had a genuine and fixed intention to reinstate in order to recover on a reinstatement basis.
Surprisingly, the Fires Prevention (Metropolis) Act 1774 still has force today. Section 83 provides that anyone, apart from the insured, who has an insurable interest in a damaged property can require the insurer to reinstate it. This will include, for example, a tenant or mortgagee of the property, or a purchaser of the property in between exchange of contracts and completion.
Of course, the insured will only be able to recover from the insurer if the cause of the damage or destruction is an insured risk. Buildings insurance policies often include cover for the risk of damage or destruction caused by flooding. A ‘flood’ is a natural phenomenon that has some element of violence, suddenness or largeness about it. Accordingly, a seepage of water under a floor from a natural source would not be a flood: see Young v Sun Alliance and London Insurance Limited  1 WLR 104. Unsurprisingly, the Court decided this case on the basis of the amount of water that came through and the size and character of the premises.
As usual, the insurer’s right of subrogation applies in cases of pay-outs for flooding or other weather-related damage. In such cases, however, it is to be expected that the benefit of the right will be limited. The key point is that the insurer ‘steps into the shoes’ of the insured so that if the insured has no right to pursue a claim against a third party responsible for the damage or destruction, the insurer equally will have no such right.
If a property is vacant at the time of the loss, there is a higher risk that the insurer will seek to refuse cover.
Apart from claiming compensation for damage or destruction of a building itself, an insured may be able to claim costs of damage to or destruction of personal property within the building. A business may have insurance cover for business interruption. The basic rule, as in the other types of claim mentioned above, is that the insured should not profit from the damage or destruction.
As ever, if any doubt, take early legal advice and supply your advisor with complete copies of your policies, all schedules and addenda.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.