AFG Insurances Ltd v City of Brighton

The basis of the appellant's principal contention is that the respondent being the lessee from the Crown of the land upon which the restaurant has been erected by or for the respondent should now exercise rights conferred by the lease with the Crown and remove whatever is left of the building after the fire in order to defeat any right of the Crown to require the reinstatement of the premises. This exercise of the respondent's rights would, at the same time, leave it in the position of having to pay rent for vacant land. Assuming that the course which commends itself to the appellant would defeat any claim by the Crown for reinstatement, the notion is that an insurance company can force an insured against its will and to its own disadvantage to exercise rights against a third party not related to the occurrence of the loss merely in order to give the insurance company an answer to a claim by the insured which would otherwise fall squarely within the indemnity for which premiums have been paid.

The appellant's uninviting notion was not surprisingly rejected by Adam J. in the Supreme Court of Victoria.

I agree with Adam J. and Mason J. in their rejection of the insurance company's contentions for limiting its liability to $37,000 and do not desire to add further to what they have said. Here the indemnity should cover the reinstatement of the premises.

The respondent City of Brighton held a lease dated 1st July 1957 from the Crown for a term of thirty-five years of certain land having an area of two acres approximately, fronting Beach Road, Brighton and extending into Port Phillip Bay. The Municipal City Baths were erected on the site as was a building known as Captain Cook's Restaurant. The building consisted of two distinct units. One was a modern restaurant with its amenities, the other a residential flat constructed above the restaurant and used for the accommodation of the manager of the baths. The respondent had been lessee of the land for many years before the grant of the lease. In that time the building had been erected and improved by the respondent and contractors working for it.

By an agreement dated 25th September 1967 the respondent granted a sub-lease to J. & B. Levin Nominees Pty. Ltd. of the restaurant section of the building. The term of the sub-lease was co-extensive with the whole of the unexpired term of the Crown lease. By the agreement the sub-lessee was required to expend not less than $100,000 in renovating and improving the restaurant. The rent was fixed at a nominal sum but was reviewable by the respondent at five-year intervals. The sub-lease contained a covenant to repair, damage by fire being excepted. It was provided that should the restaurant become unfit for occupation and use in consequence of damage by fire payment of rent was to be suspended until the damage was made good; in the same event the respondent was given an option to cancel the sub-lease.

On 6th September 1969 Captain Cook's Restaurant was severely damaged by fire. The respondent exercised its option to cancel the sub-lease. The building was covered by a policy of fire insurance which the respondent had with the appellant A.F.G. Insurances Ltd. and which issued on 29th October 1968. By the policy the appellant engaged to

pay to the Insured the value of the Property at the time of the happening of its destruction or the amount of such damage or at its option reinstate or replace such Property or any part thereof. By an endorsement made on 25th March 1969 the policy was amended. By the endorsement it was provided: It is hereby declared and agreed that this policy has been amended and henceforth covers as follows:

On property as hereinafter specified the Insured's own or held by them in trust or on commission or for which they are responsible situate anywhere within the Municipal boundaries of the City of Brighton and Victoria.

Item 1: Buildings, including Landlord's Fixtures and Fittings therein and thereon $1,041,200 Item 2: Plant, Machinery and all other Contents including Leasehold Improvements in and on the said Buildings and in and under the yards belonging to the premises or elsewhere as specified excluding Landlord's fixtures and fittings $ 256,100 Item 3: Cost of re-writing records (as per clause herein) $ 24,500 Item 4: Fusion Damage (as per clause herein) $ 10,000 Item 5: On Removal of Debris (as per clause herein) $ 3,000 Item 6: On Loss of Rent (as per clause herein) $ 4,320 Total $1,339,120

The liability of the Insurers in the event of loss in respect of property covered under this Policy shall not exceed the limit at each of the premises set out below: -

Location Limit Municipal Offices and Chambers $420,000 Town Hall $168,000 Library $166,000 Depot-Centre Road, Brighton $115,000 Captain Cook's Restaurant - Beach Road, Brighton $120,000 Any other location $ 45,000

The respondent brought an action on the policy in the Supreme Court of Victoria against the appellant. It was found that the building was a total loss and that the respondent was entitled to recover the cost of reinstatement of the building from the appellant. The respondent was held to be entitled to recover up to the limit of the insurance with respect to the building but judgment was given for $117,053 with interest because the appellant had already paid to the respondent an amount of $2,947 on account of the fire damage for the removal of fire debris.

The appellant submitted at the trial that the respondent could not recover beyond the limit of its loss which did not exceed the cost of reinstatement of the manager's flat and the present value of the future rent payable under the sub-lease. Although the learned judge rejected this submission, he stated that had he been disposed to accept it he would have found a verdict for the respondent for $37,500 consisting of $17,500 for the cost of reinstatement of the manager's flat and $20,000 as the present value of the loss of future rent under the sub-lease.

In support of its appeal the appellant submitted that the policy of insurance constituted an insurance of the value of the respondent's interest in the building and not an insurance of the property as such. The appellant then submitted that the value of the respondent's interest under the Crown lease did not exceed $37,500 because in the case of the restaurant section of the building the value of the respondent's interest consisted of the value of the future rent payable by the sub-lessee. Central to the appellant's argument was the proposition that the respondent was under no obligation to the Crown to restore or repair the restaurant section of the building.

It may be a question of some difficulty to determine whether an insurance of property effected by a person having a limited interest in that property is an insurance of the property for the benefit of all persons having a beneficial interest in it or is an insurance of the insured's limited interest. Here the question has no practical importance because it is not suggested that the respondent effected the insurance with the authority of, or on behalf of, others having beneficial interests in the building. If the policy on its true construction is an insurance of the building to the limit of $120,000 set by the endorsement, the respondent cannot recover more than the measure of the loss which it sustained, the contract being one of indemnity (see British Traders' Insurance Co. Ltd. v. Monson [1] ). Conversely, if the policy is an insurance of the limited interest of the respondent, then it cannot recover more than the value of that interest.

Had it not been for the existence of a covenant to repair contained in cl. 2 (e) of the Crown lease and a liability under cl. 2 (g) to reimburse the Crown for the cost of repairs which it carries out, the value of the respondent's interest as lessee and the measure of its loss would have been restricted to the cost of the reinstatement of the manager's flat and the present value of the loss of future rents. The appeal turns therefore on the extent of the respondent's liability under the covenant to repair.

as often as is necessary and to the satisfaction of the Board [the Melbourne & Metropolitan Board of Works] without being thereunto required repair maintain and keep in good order and substantial repair and condition all buildings erections extensions and improvements for the time being on the said land. Clause 2 (g) provides that in the event of the Board repairing defects following the failure of the lessee to comply with a notice to repair defects given to it by the Board the cost thereof (in case the same shall not be repaid by the lessee within one calendar month after a notice in writing in that behalf shall have been given to the lessee by the Board) shall be a debt due by the lessee to Her said Majesty and recoverable as rent due and payable under these presents. Clause 3 (e) confers on the respondent a right to remove improvements it has made. It is expressed as follows: that upon or at any time prior to the expiration or sooner determination of the said term it shall be lawful for the lessee to take down and remove from the said land all buildings erections extensions and improvements now or hereafter built created constructed or made by the lessee on the demised premises doing as little injury as may be to the demised premises by the removal and making good such injury as may unavoidably be done.

The appellant submitted that, as cl. 3 (e) of the Crown lease confers on the respondent a right to remove all buildings which it has erected, the covenant to repair should as a matter of construction be held not to apply to buildings erected by the respondent. Such a construction is required, so it was said, to avoid an inconsistency between the two provisions. In my opinion there is no such inconsistency. Each provision is capable of an operation according to its terms without conflicting with the other. The covenant to repair applies, in accordance with its language, to all buildings and improvements on the land. The respondent's right to remove extends to all buildings and improvements which it has erected or made. Once exercised, it removes the building and improvements from the operation of the covenant to repair. But, unless and until the right is exercised, the obligation to repair attaches. I am unable to perceive in the operation which the two provisions have according to their natural and ordinary meaning any inconsistency which would justify the restricted interpretation proposed.

The appellant's principal submission was that the respondent was under a duty to minimize its loss and that in the discharge of that duty it should have avoided its liability to the Crown under the repairing covenant by exercising its right to remove the building under cl. 3 (e) of the lease. How the right of removal could be exercised in the case of a building which had been totally or substantially destroyed by fire, was not explained. This difficulty may be put to one side for it is necessary to examine the broader aspects of the argument. Initially it was submitted that the insured was under an absolute duty to exercise any legal right which he possessed where its exercise would diminish his loss. Subsequently, however, it was put that the duty was qualified in the sense that it arose only where in all the circumstances it was reasonable that the right should be exercised.

It has often been said that the insured owes a general duty to his insurer to avert or minimize loss. The nature and extent of this duty have not been explored. Sometimes it is put that the duty is but an instance of the duty of the insured to the insurer to observe good faith (see Welford & Otter-Barry, Fire Insurance, 4th ed. p. 275). At other times the opinion is expressed that a breach of the duty will, or may, amount to a cause of loss which is independent of the fire (see Preston & Colinvaux, Law of Insurance, 4th ed. (1970) pp. 78-79, 326). In City Taylors Ltd. v. Evans [1] , Scrutton L.J. drew a distinction between the cause of the fire and the loss, acknowledging that the insurer was responsible even if the fire were caused by the negligence of the insured, but expressing the view that once the fire occurred, "the insured must do his best to extinguish it and to carry on his output" at the insured premises.

The present case does not call for a comprehensive examination of the extent of the insured's duty to avert or minimize loss and the consequence of a breach of that duty. It is sufficient to point to the very considerable differences between the circumstances in which the duty has been said to arise and the operation which the appellant now seeks to give it, an operation which falls significantly short of the full indemnity to which the respondent is entitled.

To say, as it has been said, that the insured should take reasonable steps to extinguish the fire, to allow firemen access to the fire, to remove his property to a place of safety and (in the case of an insurance against loss of profits) to keep up his output is to say no more than that the insured should take those practical and reasonable steps as a matter of self-help which his own self-interest would dictate. It is quite another thing to say that after the fire has taken place and caused loss the insured should exercise a legal right in circumstances where its exercise will work a radical change in the nature of the property of which the insured is lessee and will diminish the value which the right would otherwise have for him. The consequence to the respondent would be to make it the lessee of unimproved land for the balance of the lease and to leave it liable on the covenant to pay rent. Plainly it would be to the advantage of the respondent to obtain the insurance moneys and rebuild the premises. The respondent would in that event be restored to his enjoyment of a lease of premises with the same improvements as before the fire. The right of removal attaching, as it would, to the entire building, would, if exercised, have a greater value than the right if exercised in relation to the charred remains of the existing structure.

When regard is had to these circumstances it cannot be said that the respondent was under a duty to the appellant to exercise the right conferred by cl. 3 (e) of the lease. To so hold would be to compel the respondent to pursue a course which was disadvantageous to it and which would work a detriment to it.

Although an insured person is in general not entitled to recover more than an indemnity under a policy of fire insurance, he is entitled to recover a full indemnity. If effect be given to the appellant's submission, the respondent would recover less than a full indemnity. The respondent by taking a course designed to avoid liability under the covenant to repair would continue as lessee of premises without benefit of the valuable improvements forming part of the premises. The respondent terminated the sub-lease with the consequence that it could not look to the sub-lessee for payment of rent during the balance of the term of the Crown lease. Even if the sub-lease had not been terminated by the respondent, payment of rent was suspended during such time as the premises were unfit for occupation and use in consequence of fire damage.

The doctrine of subrogation gives no support to the appellant's case, although counsel suggested otherwise. The doctrine comes into operation when the insurer meets his liability under the policy by making payment to the insured in respect of his loss. The insurer is then subrogated to the relevant rights of the insured. Unless and until the insurer makes good the loss the doctrine has no application. It therefore provides no support for the view that the respondent should before the appellant meets the loss, exercise the right conferred by cl. 3 (e) of the Crown lease.

I would reject entirely the notion, implicit in the appellant's argument, that once the respondent meets its liability under the policy it becomes subrogated to the respondent's right under cl. 3 (e) of the Crown lease. The rationale of the doctrine is the avoidance of a double indemnity. Here, as I have already pointed out, the respondent recovers no more than a full indemnity if it recovers the insurance moneys and rebuilds. It is then restored to its enjoyment of its rights as a lessee of the demised premises, with all improvements, and the right of removal which attaches to those improvements under cl. 3 (e).

The appellant sought to find some comfort in the remarks of Brett L.J. in Castellain v. Preston [1] , where his Lordship, in rejecting the notion that subrogation applied to rights of action only, said:

as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished. 1. (1883) 11 Q.B.D. 380, at p. 388.

These remarks say no more than that there passes to the insurer such rights of the insured as may be necessary to ensure that he receives no more than a full indemnity in respect of the loss. They give no support to the notion that by virtue of the doctrine there passes to the insurer rights of the insured in and over the insured property when the continued enjoyment of those rights by the insured is not inconsistent with the principle of indemnity.

For these reasons I am of the opinion that the appeal should be dismissed.