Court of Appeal decision on scope of cover under a Construction All Risks policy

The Court of Appeal recently handed down Judgment in a number of appeals concerning the cover afforded by a Construction All Risks policy (Sky UK Limited & Mace Limited v Riverstone Managing Agency Limited and Ors [2024] EWCA Civ 1567).

Background

The dispute involved claims by Sky UK Limited (Sky) and Mace Limited (Mace) against a syndicate of insurers (“Insurers”) of a Construction All Risks policy (the “CAR policy” or “policy”) in relation to damage within the roof of Sky’s global headquarters, Sky Central, located in West London.

Sky Central was constructed by Mace for Sky between 2014 and 2016 under an amended JCT 2011 Design and Build Contract. The roof of Sky Central is composed of 472 individual wooden cassettes covering a total area of c.16,000 square metres. 428 of those cassettes were on the main roof and sloped towards perimeter or valley gutters created by the alignment of cassettes with each other.

Both Sky and Mace had brought claims under the CAR policy and, in the first instance judgment (Sky UK Limited & Mace UK Limited v Riverstone Managing Agency & Ors [2023] EWHC 1207 (Comm)), the Judge had found that the damage to the roof was caused by the absence of a temporary roof to prevent water getting into the cassettes during construction, before the cassettes were fully sealed.

A further hearing had been ordered to assess the cost of a remedial design based on damage held to have existed in the gutter areas of 383 cassettes at the end of the  Period of Insurance. That hearing was stayed pending the appeals.

A number of the first instance Judge’s conclusions were upheld on appeal, including as to the meaning of “damage” on which the Insurers (unsuccessfully) appealed, but other findings were successfully appealed by Sky and Mace.

Among the various issues, the following three areas from the Court of Appeal (“CoA”)’s Judgment may be of the greatest interest.

Development and deterioration of damage post PC/POI (practical completion/period of insurance):

The CAR policy provided insurance from 1 February 2014 to 15 July 2017 which included an initial period of construction up to practical completion (“PC”, 4 April 2016) and a further maintenance period of around one year thereafter.

At first instance, it was held that Sky was insured in respect of damage up until the expiry of the POI on 15 July 2017. Mace, while a named insured, was held to be insured in respect of its proprietary/possessory interest in the works up to PC, but not thereafter.

In broad terms, Sky and Mace argued that the Judge erred in treating the policy as confined to the cost of remedying only such damage as existed at the expiry of the POI (or PC in the case of Mace) and that he ought to have held that it covered the cost of remedying development and deterioration damage, i.e. damage first occurring within the POI (or PC) but deteriorating and/or developing thereafter.

The Insurers argued that they agreed to provide a contractual measure of indemnity confined to “damage to Property Insured occurring during the [POI]”. The first instance Judge accepted the Insurers’ argument that damage deteriorating or developing after the POI was not covered and not within the contractual indemnity which Insurers had agreed to provide.

The CoA deals with the issue of deterioration and development damage at paragraphs 41 to 87 of the Judgment and concluded there was cover provided to Sky and Mace in relation to the deterioration and development of damage which occurred after expiry of the POI and PC respectively (and which resulted from insured damage occurring during the POI and PC respectively). Mace’s claim was not therefore confined to resolving the extent of damage at PC, but included the cost of remedying the development and deterioration damage to which it gave rise thereafter. The measure of recovery in a property insurance claim was that provided for by the common law principles governing damages for breach of contract, the general object of which is to put the innocent party in the same position, so far as money can do it, as if the breach had not occurred, subject to express terms in the policy. It was not alleged  that Sky or Mace failed to take reasonable steps to mitigate loss. 

In reaching this conclusion, the CoA also referred to the uncommercial consequences of the Insurers’ argument that deterioration or development damage was uninsured loss, stating that this would be considered the antithesis of the purpose of property insurance of this nature. It could leave the insured either unable to take out any separate and subsequent property insurance cover, having to pay higher premiums for such cover, or having to foot the bill for the uninsured loss themselves. The CoA added that an insured would reasonably expect to be compensated for the consequences of the insured damage deteriorating or developing even after the POI, absent an express and clear term excluding such recovery (not achieved merely by the insuring clause identifying the temporal limit of the insured damage). It would moreover often be necessary to take some time to investigate and remedy damage, which may very likely last well beyond the expiry of the period of insurance. 

Investigation costs

At first instance, the Judge found that recovery of investigation costs was contingent on any such investigations actually revealing physical damage that occurred during the POI. Therefore, if investigations reasonably undertaken did not in fact go on to reveal physical damage that occurred during the POI, the costs of those investigations would constitute an uninsured loss under the CAR policy.

Whilst Sky and Mace contended that investigation costs were reasonable and necessary in order to identify and remediate the insured damage to the roof, the Insurers argued that the “Basis of Settlement” clause within the CAR policy did not provide cover for investigation costs at all and that such costs would be irrecoverable unless allowed for by a specific and separate clause providing cover.

The CoA determined that whether investigation costs are recoverable does not depend on the damage which is revealed by the investigation. It held that where insured damage has occurred for which damages are recoverable under a policy of insurance, the costs of investigating the extent and nature of the damage, including any development and deterioration damage, are recoverable if they are reasonably incurred in order to determine how to remediate it. What is reasonable by way of investigation will be a matter of fact and degree in any given case.

The CoA concluded that investigation costs are part of the contractual measure of damages which are necessary to put the insured in the same position as if the insured damage had not occurred. 

Retained Liability

There was a further issue as to the application of a Retained Liability provision ( “GBP 150,000 any one event”). 

Insurers argued that the Judge erred in his construction and application of the Retained Liability provision in (a) treating the relevant single event as the design decision not to use a temporary roof; and (b) in failing to identify each individual cassette as the ‘part’ or ‘parts’ of the Property insured to which the Retained Liability applied. Ultimately, the issue before the CoA became  (i) whether “event” refers to damage or to the cause of damage, and (ii) if the latter, whether the Judge erred in treating the decision not to use a temporary roof as one event.

The CoA upheld the first instance decision. The term “any one event” was described as a classic term for aggregation of losses by reference to the cause of the losses. There was also a default deductible £10,000 “each and every loss”, but the higher £150,000 deductible was specifically addressed to claims by reference to a particular cause of the loss, defective design in this case. For these and other reasons, the “event” was looking to the cause. The Insurers’ argument that a decision was incapable of being an event as a matter of principle was “unhesitatingly” rejected. The Judge’s evaluative assessment was one to which he was entitled to come on the evidence.

Conclusion

There were many specific issues debated within this CoA case, Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), but the above three topics should be of wider interest to both insurers and insureds in not only CAR insurance policies, but property insurance policies more generally.

Some headline takeaways are summarised below:

1. CAR policies may seek to expressly and clearly exclude deterioration and development damage going forward, but insureds will want to ensure they are covered.
2. Reasonable investigation costs are an insured loss whether or not physical damage is found. What is reasonable by way of investigation will be a matter of fact and degree in any given case.
3. A decision (in this case, the design decision not to use a temporary roof in the construction works) can, and in this case did, amount to a single event for the purpose of an “any one event” retained liability clause.

Bryn Hodges, Guy Davies, Celia Lewis, Victoria Coffey and Lara Kneeshaw of Clyde & Co acted for Mace in these proceedings.