In its judgment in Sky UK Ltd v Riverstone Managing Agency Ltd [2024] EWCA Civ 1567 the Court of Appeal has provided welcome clarification on several key issues relating to policy interpretation.

Background

Sky engaged Mace as the main contractor for its new headquarters under a Design and Build Contract. Mace was a named insured under a CAR policy underwritten by Riverstone and other insurers (the “Policy”).

Section 1 of the policy covered contract works, and 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 ….”

The focus of the claim related to issues on the newly built wooden roof. This was made up of 472 individual cassettes, into a number of which water had entered and remained for periods during construction. Mace had failed to erect a temporary roof to protect the partially installed cassettes, and the water ingress caused wetting of internal timbers, irreversible swelling and structural decay by the end of the period of insurance (“Deterioration Damage”). Further damage occurred after the period of insurance, including the worsening condition of the timbers and the spread of moisture (“Development Damage”).

Sky and Mace claimed under the Policy for the cost of replacing the roof and the associated investigation costs to determine the extent of the damage. Insurers disputed the claim, contending that;

  1. liability under the Policy was confined to the damage occurring within the period of insurance,
  2. each cassette constituted a separate event necessitating individual deductibles; and,
  3. investigation costs were not recoverable.

First instance decision

The judge at first instance held that:

  1. ‘Damage’ within the meaning of the policy was defined as any tangible physical change to the insured property that impaired its commercial value or use.
  2. Sky was entitled to indemnity for the cost of repairing the damage existing at the end of the period of insurance, but not for Deterioration or Development Damage occurring thereafter.
  3. A single deductible applied to Sky’s claim, as the failure to provide a temporary roof during construction was considered a single event under the retained liability provision.
  4. Investigation costs were not recoverable unless they revealed physical damage that occurred during the period of insurance.

Court of Appeal decision

Sky and Mace appealed point 4 above, and Insurers cross-appealed against the Court’s findings in respect of points 1, 2 and 3. The Court of Appeal allowed the Sky / Mace appeal and dismissed Insurers’ cross-appeal, holding that:

  1. The judge correctly adopted the definition of ‘damage’ as being any change to the physical nature of tangible property that impaired its value or usefulness to its owner or operator, in line with authorities interpreting the Criminal Damage Act 1971. This interpretation was key in determining the scope of coverage under the CAR policy.
  2. Sky was entitled to an indemnity for the cost of remedying not only the damage that occurred during the period of insurance but also the foreseeable development and deterioration damage occurring after the period of insurance, resulting from the insured damage. This application of contractual principles underscored the policy’s recognition of the ‘full cost of repairing, reinstating, or replacing property lost or damaged.’
  3. The judge concluded that it was correct that one deductible applied to Sky’s claim, on the basis that the word ‘event’ referred to the cause of the damage and not the damage itself. This interpretation is crucial in determining the application of deductibles in insurance claims.
  4. The Court found that investigation costs were recoverable if reasonably incurred to determine how to remediate the insured damage and the Development and Deterioration Damage. This was the case even where in certain areas the investigations revealed the absence of damage.

Comment

The Court of Appeal’s decision provides clarity for policyholders on several core issues which make up the foundation of claims under CAR policies.  It gives a policyholder comfort that they can claim for Deterioration and Development damages after the policy period has expired (subject to the express terms of the policy), under their CAR policy, as well as for the costs of any investigation to uncover the extent of the damage and remedial works required.

This closes a gap between CAR and buildings policies where the construction work has concluded prior to any buildings insurance being taken out, but the damage caused by that work may evolve over time.  Not all damage is immediately physically present during the policy period. It accords with business common sense, that any such damage which could be shown to have been caused by the construction work and then continued to get worse, should be covered under a CAR policy, unless subject to specific restriction.