In a welcome decision for insurance policyholders involved in construction projects, the Court of Appeal in Sky UK Ltd & Anr v Riverstone Managing Agency [2024] EWCA Civ 1567 has held that a Construction All Risks policy provided cover for damage suffered during the applicable period of insurance and also foreseeable deterioration and development damage which subsequently occurred.
Background
In 2014, work began on the construction of Sky's new global headquarters. The roof, which is said to be the largest timber flat roof in Europe, comprised hundreds of wooden cassettes placed upon a series of timber beams. Following installation, the cassettes were left exposed to substantial rainfall whilst awaiting permanent waterproofing. This allowed water to enter the cassettes, leading to the wetting of timbers and, the claimants alleged, irreversible swelling and structural decay. Thereafter, moisture spread and the condition of the cassettes worsened. Sky, along with its main contractor, brought claims against the defendant insurers under a Construction All Risks policy.
The policy
Section 1 of the policy covered contract works. The applicable insuring clause provided:
"The Insurers shall, subject to the Terms of this Contract of Insurance, indemnify the Insured against physical loss or damage to Property Insured, occurring during the Period of Insurance, from any cause whatsoever …."
It was common ground that the period of insurance ran from the commencement of the project to one year after its completion.
High Court
In the High Court, Sky advanced its claims on the basis that it was entitled to recover the costs of addressing all damage, including deterioration and development damage that occurred after the end of the period of insurance. However, the judge held that, whilst there was damage within the meaning of the insuring clause, Sky was only entitled to an indemnity in respect of the cost of repair of such damage as existed at the end of the period of insurance.
Court of Appeal
On appeal, the Court of Appeal noted that a contract of insurance against damage to property, such as the policy here, is a contract of indemnity, or a contract to hold someone harmless – the insurer promises that the assured will not suffer the insured damage. If and when the insurer fails to perform the primary obligation, it comes under a secondary obligation to pay damages for breach of the primary obligation. That is why a property insurance claim is not a claim to enforce a promise to pay money, but rather a claim for unliquidated damages. Accordingly, the measure of recovery is that provided for by the common law principles governing damages for breach of contract – the object of which is to put the innocent party in the same position, so far as money can, as if the breach had not occurred, and subject to such principles as causation, mitigation, and remoteness. While this principle may also be subject to express policy terms to the contrary, any such modification must be achieved by clear wording, not simply by the insuring clause identifying the temporal limit of the insured damage.
In the Court of Appeal's view, that analysis pointed inexorably towards the conclusion that the costs of remedying foreseeable deterioration and development damage occurring after the period of insurance, which resulted from insured damage occurring during the period of insurance, was within the measure of recovery under the policy. It also considered that the Basis of Settlement clause, which referred to "full cost of repairing reinstating or replacing property lost or damaged", should be construed as recognising an entitlement to such costs.
This conclusion was supported by the main authorities and accorded with business common sense. As the Court noted, in the context of a major construction project, if damage has occurred during the period of the policy, it will often be necessary to take some time to investigate and remedy it, which may well last well beyond the expiry of the period of insurance (indeed, such damage may not even be discovered until after expiry). The Court considered that a business person in the shoes of the assured would reasonably be expected to be compensated for the consequences of the insured damage deteriorating or developing (in the absence of an applicable exclusion). If a policyholder was obliged to bear those additional financial consequences, and not the insurer, that would be regarded as the antithesis of what property insurance is for.
Other issues
The Court of Appeal noted that following its finding on the damage covered by the insuring clause, the first instance decision that the costs of investigation were not recoverable would need to be re-examined. However, in doing so it emphasised that whether investigation costs are recoverable does not depend on the damage discovered by the investigation, but rather whether those costs are reasonably incurred in order to determine how to remediate the damage.
The Court went on to reject the insurers' cross-appeal that, in order to constitute damage within the meaning of the policy, the cassettes needed to have reached a condition by which they required immediate replacement or repair, because anything short of that would not be damage. That submission was untenable in light of the authorities on the meaning of damage, including decisions made pursuant to the Criminal Damage Act 1971 concluding that any change to the physical nature of tangible property which impaired its value or usefulness constituted damage.
The Court also rejected arguments from Insurers that a deductible of £150,000 "any one event" was applicable to the damage suffered to each cassette, not the cause of the damage, noting that "any one event" is a classic term for aggregation of losses by reference to cause of the losses. In this case the cause of the loss was the defective design, specifically the decision not to use a temporary roof. The Court "unhesitatingly rejected" insurer's argument that a decision was not capable of being an event.
Conclusion
The potential risks of construction projects mean that a Construction All Risks policy is a vital consideration for both employers and contractors and, indeed, is a requirement under many standard form contracts such as the NEC4 and FIDIC 2017 construction contracts. The Court of Appeal's judgment has now provided helpful clarity on the operation of such policies and, in particular, the scope of damage that may be covered.