(a) Legal Principles
44In Leppard v Excess Insurance Co Ltd [1979] 2 All ER 668, Megaw LJ stated at pp 673 and 674:
"The insured may recover his actual loss, subject, of course, to any provision in the policy as to the maximum amount recoverable. The insured may not recover more than his actual loss."
"What the insurers have agreed to do is to indemnify the insured in respect of loss or damage caused by fire. The 'full value' is the cost of replacement. That defines the maximum amount recoverable under the policy. The amount recoverable cannot exceed the cost of replacement. But it does not say that that maximum is recoverable if it exceeds the actual loss. There is nothing in the wording of the policy, including the declaration which is incorporated therein, which expressly or by any legitimate inference provides that the loss which is to be indemnified is agreed to be, or is to be deemed to be, the cost of reinstatement, 'the full value', even though the cost of reinstatement is greater than the actual loss. The plaintiff is entitled to recover his real loss, not exceeding the cost of replacement."
45Megaw LJ quoted Brett LJ in Castellain v Preston (1883) 11 QBD 380 at 386; [1881-85] All ER 493 at 495:
"the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong."
46Kelly & Ball Principles of Insurance Law reads:
"There are two main methods for determining the amount of the insured's loss. The first is by reference to the cost of replacing or repairing the insured property after making allowance for wear and tear. The other is by comparing the market value of the insured's interest in the insured property immediately before the loss with its market value immediately after the loss."
47The learned authors accept the words of Macrossan J in Spina v Mutual Acceptance (Insurance) Ltd (1984) 3 ANZ Ins Cas 60-554 at 78 and 345, the words of Forbes J in Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd's Rep 440 and the decision of Roumeh Food Stores (NSW) Pty Ltd v New India Insurance Co Ltd [1972] 1 NSWLR 227 at 237, and conclude that generally the insured loss is measured by the cost of repair or replacement.
48The authors continue:
"The principle that the insured's loss is measured by reference to the cost of replacing the insured property has three main exceptions. The first is where the insured property has no particular value to the insured other than the price for which it can be sold. An obvious example is where the property is bought as an investment. In that case, the appropriate measure is normally market value.
Second, the insured is not entitled to recover the cost of reinstatement where he or she does not intend to reinstate the insured property or where reinstatement is impossible. For example, in Leppard v Excess Insurance Co Ltd [1979] 2 All ER 668; [1979] 1 WLR 512, the insured property was on the market at the time it was destroyed by fire. The court held that, in that case, the insurer was only entitled to the market value of the property. Similarly, in Kypris v MLC Fire & General Insurance Co Pty Ltd (1981) 1 ANZ Ins Cas 60-451, changes to planning laws prevented reinstatement. In that case, the court assessed the insured's loss by reference to market value. Likewise, in VACC Insurance Co Ltd v Lekkas (1999) 10 ANZ Ins Cas 61-436, a block of shops which was under threat of compulsory acquisition was badly damaged by fire. The Victorian Supreme Court only permitted the insured to recover the block's market value (taking into account the threat of compulsory acquisition) less the amount payable as compensation on the acquisition.
The third exception to the principle that the insured's loss is measured by reference to replacement value is where the insured's desire to replace or reinstate the insured property is unreasonable. The insurer bears a heavy onus to establish that the insured's desire to reinstate is unreasonable."
49Kelly & Ball also state:
"In order to avoid the difficulties associated with assessing the market value of property, some policies contain a term under which the insurer and insured agree on the value of the property. If the insured suffers a total loss, he or she is entitled to recover the agreed value. If the insured suffers a partial loss, he or she is entitled to recover that part of the agreed value which represents the proportionate amount of the loss. An agreed value policy is still an indemnity policy. As Kitto, Taylor and Owen JJ explained in British Traders Insurance Co Ltd v Monson (1964) 111 CLR 86, [1964] ALR 845:
The case of a valued policy is special, but it throws no doubt upon the general principle [of indemnity]. In such a case the application of the principle is affected by the agreement of the parties on value in the same way as any obligation to indemnify may be affected by an agreed pre estimate of the value of property The agreement in the case of a valued policy is as to the value of the subject matter, not the amount of the loss, and its effect upon the assessment of the amount payable to the insured is not for the processes to be directed to anything other than the indemnification of the insured, but only that the assessment of his loss must proceed on a basis of the agreed valuation of the property at CLR 93. [Brackets added by authors]
An agreement on value is not decisive if it was induced by fraud. Whether a contract is an agreed value contract or not depends on its construction. In the absence of clear words, however, a contract is a simple indemnity contract and not a valued one. Valued policies are not to be confused with policies in which the insured simply declares the value of the insured property at the time of taking out the insurance."
50In the present case, Ms Kenwright did not seek to remain living in the home. She had decided to move to Queensland and was in the process of finalising that move. This is not a case where if the fire had not occurred, Ms Kenwright would continue to reside in the property. The property was of no value to her other than what she could obtain by a sale. This approach to her loss is also consistent with her long-held intention to renovate and sell her property.
51The case is similar to Raso v NRMA Insurance t/as NRMA Home Insurance (New South Wales Court of Appeal, Mahoney, Priestley and Handley JJA, 14 December 1992, unreported) involving a policy drafted in similar terms. That policy provided (at 17) that:
"1. COVER FOR THE HOME We will cover you if any of the events which are listed below destroys or damages the home. This means that we may choose to: - pay you the sum insured, or - pay you the cost of repairing or - replacing the home, or - repair or replace the home."
52The Court of Appeal held (at 17):
"The language of the policy ('we may choose to') confers an option on the underwriter to either pay the sum insured or to reinstate or pay the cost of reinstatement. The underwriter did not exercise the option. However it is clear from The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 92-93 and the cases there cited that 'where there are two or more ways in which a defendant might perform the contract, the court in assessing damages adopts the mode of performance which is most beneficial to the defendants.'"
53The Court of Appeal accepted the submission that although the policy did not in terms provide an option of paying the insured the loss of market value nevertheless this was its "necessary legal effect when the option to pay the sum insured is read subject to the overriding effect of the indemnity principle."
54The Court concluded (at 19):
"because an insurance contract is a contract of indemnity, the amount recoverable under the policy could not exceed the sum necessary to indemnify the [Insured] against the loss actually sustained by them in consequence of the fire. An assured is not entitled to recover the amount specified in the policy unless it represents his actual loss. The amount specified fixes only the maximum liability of the insurer under the policy...
It follows that, despite the language of its policy, the respondent was not bound to pay the sum insured. It could have elected to indemnify the insured for the loss of market value."
55This principle must equally apply to Ms Kenwright and the policy in this case. As stated in British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86 at 94:
"[N]o approach can be valid which fails to accept as its first step that a policy showing, as the policy here shows unmistakably, that it is intended as a policy of fire insurance must be construed as a contract for indemnification only."
56It may be that Ms Kenwright would have done further renovations and sold at a higher price than the current value, but there is little evidence of this. Ms Kenwright had decided to move and put her furniture into storage. She had no funds for further renovations and there was no persuasive evidence that further renovations would have produced a greater increase in value than the cost of doing that. Neither Ms Kenwright nor the insurer proposed to rebuild the house.
57For these reasons, Ms Kenwright is not entitled to anything other than the lost value of the house.
58I am not persuaded that the policy is an agreed value policy. It does not say that it is. The mere evidence of the total sum insured is not regarded as sufficient to establish an agreed value policy. Rather, the total sum insured is the maximum sum that the insurer is liable for under the policy. It appears to me that Ms Kenwright is only entitled to receive the diminution in the market value of the home resulting from the fire.
59Accordingly, I find that Ms Kenwright's claim for the loss of building entitles her to be indemnified for the decreased market value of the property occasioned by the fire. The parties agree that if the renovations alleged were carried out the value of the property was $75,000 before the fire and $15,000 afterwards. I have accepted that the renovations were carried out. It follows that the loss of market value is $60,000.