Sky & Mace v Insurers: Court of Appeal judgment
The Court of Appeal has handed down judgment in relation to the appeals in Sky UK Limited and Mace Limited v Riverstone et al against the order and judgment of HHJ Pelling KC at [2023] EWHC 1207 (Comm). The lead judgment was given by Lord Justice Popplewell, with whom Lord Justice Phillips and Lord Justice Snowden agreed. The appeal by Sky UK Limited (“Sky”) was successful, and Insurers’ appeal was dismissed.
Sky and Mace claimed an indemnity for damage to the roof of Sky’s global headquarters in Osterley, West London under a Construction All Risks policy of insurance to which the various Insurers subscribed. The roof is the largest timber flat roof in Europe and covers 16,000m2. It comprises 472 wooden cassettes placed on a series of glue laminated timber beams, and those cassettes suffered damage caused by the ingress of water resulting from exposure to substantial rainfall during the period of construction. The water was able to enter the cassettes because Mace (the main contractor which designed and constructed the roof) had failed to provide a protective temporary roof.
The insuring clause in the policy was in conventional form and provided that Insurers would “indemnify the Insured against physical loss or damage to Property Insured occurring during the Period of Insurance from any cause whatsoever” which was not the subject of an exclusion.
The Period of Insurance (“POI”) expired on 15 July 2017. However, it was anticipated that the remedial works would not be completed until 2029, and following the expiry of the POI, further damage occurred.
Amongst other things, Sky claimed to be entitled to an indemnity in respect of such further damage, and for the costs of investigating the extent of the damage which had occurred, and alleged that the Judge had failed to address various factual aspects of its case as to the extent of the damage which had been sustained. Amongst other things, Insurers contended that the Judge had applied the wrong test in relation to the meaning of “damage”, and had reached the wrong conclusion as to the application of the Retained Liability.
The chief findings of the Court of Appeal were as follows:
Period of Insurance
1. Sky was entitled to an indemnity in respect of what the Court of Appeal referred to as “development and deterioration damage”. The promise which was made by Insurers was that damage within the POI would not occur (and thereby to hold the insured harmless). The occurrence of such damage placed Insurers in breach of contract (see The Fanti [1991] 2 AC 1 per Lord Goff at p35), and, as a result, Insurers were under a secondary obligation to pay damages for the consequences of such breach (see Chandris v Argo [1963] 2 Lloyd’s Rep 635 at pp73-74 per Megaw J, The Fanti [1991] 2 AC 1 per Lord Goff at p35 and The Renos [2019] 4 All ER 885, per Lord Sumption at [10]), subject to the usual rules as to causation, mitigation and remoteness.
2. This principle was subject to any express terms of the policy to the contrary (see Sartex v Endurance [2020] 2 All ER (Com) 1050, per Leggatt LJ at [34] and [35]) such as limits of indemnity, deductibles and exclusions. However, clear words were required to displace it (see Gilbert Ash v Modern Engineering [1974] AC 689 per Lord Diplock at p717), and the limitation contained in the insuring clause which confined cover to damage occurring within the POI did not amount to such words, because, although the clause defines the damage to which Insurers’ primary obligation attaches, it does not purport to define the loss for which Insurers were liable in damages. Accordingly, if the insured damage caused further damage, then, subject to the usual principles of mitigation and remoteness etc, Insurers were liable for loss resultant upon such further damage; and, accordingly, as a matter of principle, they were liable for the losses resulting from the deterioration or development of damage after the POI.
3. The Court of Appeal considered that such an approach was supported by the main authorities upon which the parties relied. Although Knight v Faith [1850] 15 QBD 649 was not, in truth, a case which was concerned with damage which occurred outside the POI (but rather with the ascertainment after the POI of damage which had occurred within it), it had, nevertheless, been treated in subsequent cases as providing authority for the proposition that damage occurring after the expiry of the POI as a result of a peril occurring within the POI was to be indemnified – see Municipal Mutual v Sea Insurance [1988] Lloyd’s Rep IR 421, at p432 per Hobhouse LJ, Wasa v Lexington [2010] 1 AC 180 at [39] per Lord Mance and Arnould (21st Ed) at paragraph 13-08. In Wasa, although all five Law Lords made it clear that, as a fundamental principle of English law, a policy providing cover of damage occurring within a defined period did not cover damage (by way of contamination) which occurred before that period, Wasa was not concerned with deterioration or development damage resulting from damage which had occurred within the POI, but rather with a continuous or continual series of fresh leakages occurring separately in each calendar year. That is why, at [39] of Wasa, Lord Mance referred to damage “developing” after the expiry of the POI, and why Lord Sumption, who was counsel in Wasa, stated in The Renos at [10] in relation to development and deterioration damage that “the fact that the policy expires before the loss has been fully developed will not affect the insurer’s right to recover under it in full…”, relying on Knight v Faith and [39] of Wasa.
4. The Court of Appeal held that such a conclusion accords with business common sense. Lord Justice Popplewell had “little doubt” that business people would expect such in insurance claim to “yield such a result”. A business person in the shoes of the insured would “reasonably be expected to be compensated for the consequences of the insured damage deteriorating or developing, absent a contract term excluding such recovery…” Moreover, if this was not the case, the Court of Appeal considered that there would be “serious and unacceptable adverse consequences” because it would make deterioration and development damage occurring after the expiry of the POI uninsurable under any separate and subsequent property insurance cover. If cover were sought after the damage was in progress, insurers would impose exclusions; and if it had been obtained prior to damage occurring, the subsequent policy would not respond to continuing damage because the deterioration and development damage could not be said to be fortuitous.
Investigation Costs
5. The Court of Appeal held that (in principle), where damage has occurred, costs incurred in investigating the extent and nature of the damage (including development and deterioration damage) were recoverable as part of the indemnity afforded by a property policy, provided that they are “reasonably incurred in order to determine how to remediate it…” However, what is reasonable by way of investigation is a matter of fact and degree in each case. The Court of Appeal rejected Insurers’ submission that the Basis of Settlement clause (which provided for an indemnity based on the “full cost of repairing, reinstating or replacing the property lost or damaged”) did not cover investigation costs: the reasonable costs of investigation of what is reasonably necessary to remedy insured damage and deterioration and development damage was “self-evidently” part of the “full cost of repairing and reinstating” insured damage, and this conclusion was not undermined by the extension of cover to professional fees “incurred in the repair replacement or reinstatement of such Property Insured…”
Damage
6. The Court of Appeal rejected Insurers’ submission that the Judge had applied the wrong test in relation to the meaning of “damage” and held that, in line with criminal law authorities, “damage” meant “any change to the physical nature of tangible property which impaired its value or usefulness to its owner operator”. Accordingly, the Judge had been right to hold that the entry of moisture into the cassettes during the POI was a tangible physical change to the cassettes as long as the presence of water, if left unattended, would affect the structural stability, strength or functionality or useable life of the cassettes during the POI, or would do so if left unremedied.
7. The Court of Appeal also rejected Insurers’ submission that the Judge’s formulation did not identify relevant The claim advanced by Sky was for the repair or replacement of the cassettes, and so, Insurers submitted, the relevant damage (which had to occur before the expiry of the POI for cover to attach) was damage which required the cassettes to be repaired or replaced, not the presence of moisture which, as at the expiry of the POI, did not require the cassettes to be repaired or replaced: drying them out would have been sufficient to restore them to their original condition, but Sky’s claim was not a claim for the costs of drying them out. The Court of Appeal held that this was to assess damage by reference to the measure of damages which is payable for the failure to hold harmless, and, moreover, wrongly assumed that recoverable damages were limited to damage occurring up to the expiry of the POI (which the Court of Appeal had already held was wrong).
Retained Liability
8. So far as the Retained Liability was concerned, the Court of Appeal held that the expression “GBP 150,000 any one event” was an expression used in aggregation provisions both for the purposes of deductibles and limits, and, as both parties submitted, the word “event” had a well-established meaning – see, for example, Axa v Field [1996] 1 WLR 1026, at p1035G-H (per Lord Mustill) and the analysis of Michael Kerr QC in his well-known Dawson’s Field arbitration award cited by Rix J in Kuwait Airways v Iraqi Airways [1996] 1 Lloyd’s Rep 664. The Court of Appeal held that the Judge was right to hold that the word “event” referred to the cause of damage, and rejected Insurers’ argument based on the 72 hours clause that it referred to “damage”. The 72 hours clause owed its origins to aggregation provisions in catastrophe excess of loss reinsurance where the insured peril is the catastrophe, and had been transposed into the policy “without care as to its language” and it could not provide any “weighty counterbalance” to the “natural construction” of the Retained Liability clause which is that “event” looks to the cause of the loss and not the loss itself when the cause of the loss is defective design. The Court of Appeal rejected Insurers’ contention that the decision to carry out the works without a protective temporary roof could not amount to an event, and agreed with the analysis of Butcher J in Stonegate Pub v MS Amlin [2022] EWHC 2548 (Comm) that there is no general rule that a decision cannot be an occurrence. Accordingly, the Judge was entitled to have concluded on the evidence that the decision not to have a temporary roof was a single event and this was a conclusion with which the Court of Appeal would not interfere.
9. The Court of Appeal remitted the case to HHJ Pelling KC to determine, in the light of the findings summarised above, the revised declaratory relief and quantum of damages, and costs, to which Sky was entitled. As a result of the conclusions set out above, it was not necessary for the Court of Appeal to determine two of Sky’s grounds of appeal, and the grounds of appeal concerned with factual findings of the Judge were to be reconsidered upon remission. Mace’s claim for its own losses has also been remitted.
Andrew Rigney KC and Patrick Maxwell appeared on behalf of Insurers, instructed by DAC Beachcroft LLP. Crispin Winser KC appeared on behalf of Sky, instructed by Herbert Smith Freehills LLP.
