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Claim costs and its adjustment fundamentally flawed Insurer not entitled to make full recovery from negligent party

1) BRIT INNS LTD (In Liquidation) (2) VINCENT BARBER (3) LINDA LAWLESS (Claimants) v BDW TRADING LTD (Defendant) & J REDDINGTON LTD (Third Party/Part 20 Defendant) : (1) VINCENT BARBER (2) LINDA LAWLESS (3) STEPHEN KATZ (LIQUIDATOR OF BRIT INNS LTD) v (1) BDW TRADING LTD (2) J REDDINGTON LTD (2012)

[2012] EWHC 2143 (TCC)

QBD (TCC) (Coulson J) 31 JULY 2012

DAMAGES - INSURANCE

FLOODS : INSURANCE CLAIMS : LOSS ADJUSTMENT : LOSS OF PROFITS : MEASURE OF DAMAGES : REASONABLENESS : REINSTATEMENT : SUBROGATION : RESTAURANT BUSINESS MAKING INSURANCE CLAIM FOLLOWING DAMAGE CAUSED BY NEGLIGENCE OF THIRD PARTY : INSURER SEEKING TO RECOVER SUMS PAID ON CLAIM : REASONABLENESS OF SUMS CLAIMED

In a subrogated claim by which the Insurer of a restaurant business sought to recover monies paid out on a claim for the cost of remedial works necessitated by the negligence of a construction company, the court awarded damages in a sum significantly less than that claimed. The Insured's claim had been grossly exaggerated and the Insurer had not properly investigated it.

The claimants (B, V and L) claimed damages for losses arising from flooding of their restaurant caused by the admitted negligence of the defendant construction company (X). B was a company in liquidation; V and L were its directors. B had engaged X to demolish a public house that it had operated and to construct a new building in its place, comprising a ground-floor bar and a basement restaurant. When X completed the shell of the basement and ground floor, B took charge of the fitting-out works, which were largely completed by December 10, 2006. There was some dispute about the cost of those works, but the available and possibly incomplete documentation put it at around 279,229. On December 11, the basement was flooded as a result of the negligence of Thames Water, which paid B just over 255,000 in compensation. Some remedial work was carried out, but in January 2007 the basement flooded again. On that occasion, the flooding was the result of X's negligence. X did not dispute liability. B re-fitted the basement and the restaurant opened for business in mid-October 2007. Until December the restaurant was quite successful, but in the first half of 2008 its takings began to decline. There were problems with foul smells which, in mid-2008, were traced to a soil vent pipe which one of X's contractors had punctured. In June 2008, B closed the restaurant. It made an insuranceclaim of just under 400,000 for the material damage caused by the flood, and also claimed loss of profits. Its Insurers paid 355,070 for the material damage, plus 240,905 for loss of profits. The central claim before the court was a subrogated claim, by which B's Insurers sought to recover from X the monies it had paid to B.

The issue was whether the sums claimed were reasonable.

HELD: (1) A claimant in B's position was entitled to recover the reasonable costs of reinstatement. Where the reinstatement works were complete by the time of trial, the actual cost of the works would almost always be the starting point in assessing what was reasonable. If a sum had been assessed as reasonable by an experienced loss adjuster, it would ordinarily take good evidence to demonstrate that it was not in fact reasonable. However, everything turned on the facts of the case.

In respect of the second fit-out, B's claim was grossly exaggerated and had not been properly investigated by the Insurer. There was no schedule of works and no record of the work carried out, and it was therefore impossible to say with certainty what had, and had not, been done. The invoices were inadequate, unreliable and impossible to analyse retrospectively: they failed to identify what work was the subject of the claim, did not identify the instructions pursuant to which the work had been carried out, and contained nothing to indicate to the way in which the sums claimed might be assessed. Moreover, the experts agreed that many of the invoices did not relate to remedial works properly undertaken. There was no evidence as to how payment for the work had been assessed, there had been no checks that work invoiced for had actually been done, and there was no proper record of invoices having been paid. The experts agreed that the 400,000 claimed by B was at least 100,000 too much, but alarm bells should have been ringing for the Insurer much sooner. The cost of the original fit-out works for two floors was, on the balance of probabilities, less than 300,000. On that basis alone, the 400,000 claimed for the basement should have looked much too high.

There was no evidence to justify the sizeable nature of the discrepancies, the loss adjuster had not consulted a quantity surveyor, and there had been no forensic investigation of the claim. Both the claim and its adjustment were fundamentally flawed. The proper quantum of the subrogated claims for material damage was 136,688.89 (see paras 13, 23, 29-32, 45, 48-56, 58, 61-62, 65, 71-72, 76-77, 92, 188-189, 296 of judgment). (2) B's claim for 240,905 loss of profits assumed that the restaurant would have been profitable immediately. Since the restaurant was a new business, that assumption was inappropriate. The claim appeared to calculate a loss of profit caused by both the first and the second floods, with an arbitrary reduction for the first flood. That approach was not legitimate, giving rise to the risk that X was being made liable for matters that were not its responsibility. Finally, the figures underpinning the claim did not come from the restaurant's own trading figures, but were instead extrapolated from those of a comparator. The actual figures were not even used for the purposes of comparison, which was surprising and erroneous.

The experts agreed that where actual profit and loss figures were available, they ought to form the starting point for any calculation for loss of profit, unless there were good reasons for disregarding them. None of the reasons given by B justified disregarding its actual profits. On B's actual profit and loss figures, the appropriate quantum of the loss of profits claim was 20,779 (paras 190-191, 194-195, 200-203, 206, 229 297).

Damages assessed

END