An insurance policy is a contract of indemnity. That bids fair to be the most fundamental principle in our law of insurance. The insured is entitled to recoup his loss, but nothing more. Before an award can be made, his loss has first to be identified and then quantified. One has to keep the two steps of identification and quantification distinct, or confusion arises. Upon any claim for damages it is necessary to identify the heads of loss first and then to put a value on each. It is then open to the other party to contend either that the scheme of heads of loss is improperly collated, or that a particular head of loss is misconceived, or that it is wrongly quantified, or—and this is particularly important in the context of insurance law—that, even if the heads of loss are in themselves unimpugnable, they or some of them do not fall within the range of the defendant’s liability (e.g. are not covered by the terms of the relevant policy).

Thus, if a factory burns down the owner may identify his loss as the destruction of a building and contents and also loss of production. He may quantify the first head by reference to the market value of the building (not including the site value) or by the cost of reinstatement, which may or may not be the same, and the second by reference to actual or estimated profits lost. If his policy is framed to cover consequential loss, the head of lost profits will be acceptable (identification) but its quantification may be the subject of argument. Similarly, as will be seen when we look at the recent decision that prompted this article, the building loss quantification may be challenged. What if the cost of reinstatement far exceeds the market value? Is the excess to be disallowed as betterment? In the case, for example, of motor vehicles, an agreed value operates in the insurer’s interest to disallow a claim for repair when it exceeds the market value. But in the absence of an agreed value are we to say that where the cost of reinstatement exceeds the market value the destruction may not be quantified by reference to the cost of reinstatement? We may perhaps say this where similar property can be purchased by the insured for that market value, but where that consideration is inappropriate, as with land and buildings, it is at least arguable that, if the policy does not in terms deal with the point, the loss is not to be quantified, even for the purposes merely of indemnity, by reference only to market value. That, we shall see, was the issue considered by the Court of Appeal in Leppard v. Excess Insurance Co. [1979] 1 W.L.R. 512.

The locus classicus for the indemnity principle is Castellain v. Preston (1883) 11 Q.B. 380: an insured who had contracted to sell premises quite properly recovered under a fire insurance policy when those premises were damaged before sale. But he then found that his purchaser nevertheless paid him the agreed price. Could he keep the windfall? He argued that the money had been properly paid over by the insurers and that what he later sold the property for was irrelevant, and that, even if it was not irrelevant, it did not affect his right to claim and keep insurance monies representing the damage to the property. With our developed sense of equity we might have regarded his contention as unarguable, but the court, in rejecting, was not prepared simply to say that he must repay the insurance monies: it felt obliged, somewhat legalistically