JB Leitch’s Philip Parkinson and Katie Edwards (Legal Director and Associate Solicitor respectively), discuss how Georgian legislation on fire safety established a time-honoured approach to insurance, repair & reinstatement.
In 1774 the British government responded to the previous December’s Boston Tea Party uprising in Massachusetts, USA by passing The Intolerable Acts 1774 – commonly recognised as a trigger for the core events of the American War of Independence. In the same year, and arguably of less historical significance, the British parliament also passed a little-known act, known as the Fires Prevention (Metropolis) Act 1774 (FPMA 1774).
The FPMA 1774, perhaps surprisingly, remains partially in force and applicable law (in England only) dealing with insurance provisions in respect of fire. A key principle of which is that careful consideration must be given to the use of proceeds and the entitlement of insurance money whereby reinstatement is not possible.
Rebuilding and Reinstatement
The insurance covenants within leases can be complex in respect of compliance with the requirements of the insurance policy, what is to be included within the insured risks, who is to be named within the policy and what should be done with insurance monies in the event that a claim is made.
The insurance covenant will generally, and should in most cases, include details as to what happens in respect of insurance proceeds in the event of a successful claim and how such proceeds should be applied in the rebuilding or reinstatement of the premises. Compliance with the terms of the lease and the insurance policy is essential to ensure that the insured does not breach the obligations within the lease and the terms of settlement where the insurer has accepted liability.
Interestingly, FP(M)A 1774 and in particular section 83 remains in force in respect of the use of insurance proceeds caused by fire damage. Section 83 requires the insured to apply insurance proceeds to the repair or reinstatement of the building as applicable to the claim in the event of fire.
The purpose and aim of section 83 FP(M)A 1774 is primarily to deter those able to make a claim from fraudulently making a claim and purposefully setting fire to their premises to obtain a pay out. The provision provides that the insurer may require that the insurance monies be paid and expended towards rebuilding, reinstating, or repairing damage because of fire.
Despite this, it is advisable to include an express provision in the insurance covenant as to the application of insurance monies. Clear provisions are vital in dealing with, for example, insurance claims on large developments and mixed-use premises. This is also particularly important where the rebuilding or reinstatement of the building could be practically impossible.
Entitlement to Insurance Money
Most modern commercial leases, and many residential ones, place an obligation on the tenant to pay ‘insurance rent’ or include insurance to be payable within the service charge provisions. Usually the landlord is required to insure the property or the building and is usually obliged to rebuild or reinstate the property if damage occurs. Difficult issues can arise if rebuilding is prevented and particularly with regard to who is entitled to receive and keep the insurance money. Two notable cases deal with this issue.
In Re King, Robinson v Gray [1963] 1 All ER 781, the rebuilding was impossible and it was held that the tenant should keep the insurance monies as the tenant had covenanted to insure and had paid all the premiums.
This would clearly be unfair in many situations, especially in respect of large developments with multiple residential and commercial tenants.
In Beacon Carpets v Kirby [1984] 2 All ER 726 the Court of Appeal distinguishes Re King. In this case the landlord was to insure and reinstate, with the tenant paying insurance rent. Unfortunately, the sum insured was insufficient to reinstate the premises.
When dealing with reconstruction, the landlord was unable to obtain planning permission for a building of the same size which would not meet the tenant’s requirements.
The tenant claimed to be entitled to all or a proportion of the insurance money.
It was decided by the Court of Appeal that, because the insurance was expressly for the benefit of both parties, with both parties being noted on the policy, the insurance money that was not to be used to reinstate should instead be distributed according to the respective interests of each party.
What is evident is that both cases turned very much on their own facts, and the conduct and intention of the parties after destruction. What is important, is that the terms of the leases in respect of the provision of insurance and the dealing of insurance proceeds may require scrutiny whereby repair and reinstatement is required but may be impossible.
As intended 247 years ago, and still very much of contemporary relevance, is ensuring that risks are mitigated through clearly covenanting and comprehensively defining the obligations, limitations and feasibility of undertaking repair or reinstatement.
