Insurers have sought permission for an appeal affecting a number of key principles of property insurance law in Sky UK Limited and Mace Limited -v- Riverstone Managing Agency Limited and Others [2024] EWCA Civ 1567. This Court of Appeal case concerned damage to the roof of Sky’s headquarters in West London during its construction by Mace. The roof is the largest flat timber roof in Europe. The roof suffered extensive water damage during construction (it rained). Rain in England is a fortuity, like death: it is going to happen, you just don’t know when. The mistake here was a design one: the decision by the designer not to have a temporary roof during the construction.
Sky and Mace had a Construction All Risks policy in place. It covered the period of construction plus a one year maintenance period thereafter: 1 February 2014 to 15 July 2017 (the “Period of Insurance”). The insuring clause in the policy provided as follows:
“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 question for the court was about the extent of damage suffered by the time the Period of Insurance concluded. The water ingress during the Period of Insurance had wetted the internal timber components of the roof. The insurer argued two main points: first, that wetting of timber was not of itself “damage” and second, that where the wetting of timber caused irreversible swelling of timbers and structural decay (which was accepted by insurers as “damage”) it was covered only to the extent that such swelling and decay occurred during the Period of Insurance and that neither the worsening of timbers (“Deterioration”) nor the spread of trapped moisture to other timber components (“Development”) were covered to the extent that they occurred after the Period of Insurance.
Is wet wood damaged wood?
Insurers said that to be damaged within the meaning of the policy, the timbers would have had to reach a condition requiring immediate replacement or repair – until then they were not damaged and wetting which could be cured by drying out was not damage. The Court of Appeal disagreed. Reference was made to a case under the Criminal Damage Act 1971 in which the soaking of a blanket and the flooding of cells in a prison with water was damage even though the situation could be remedied (i.e. by drying the blanket and the cells out). The damage was down to the fact that the value or usefulness of the property were impaired. The fact that the impairment was minor or transient did not matter, it would still amount to damage – a wet blanket isn’t very useful, nor is a wet cell. For the Court of Appeal, the meaning of damage in the Criminal Damage Act was analogous to that in the policy. It follows that wetting of the internal timbers in the roof structure amounted to damage to those timbers.
What about Deterioration and Development of damage after the Period of Insurance – is that covered?
The insurers said that they should be liable for the contractual measure of indemnity. The insuring clause limited that to damage to Property Insured “occurring during the Period of Insurance” and they should therefore not be liable for damage occurring after the Period of Insurance.
The Court of Appeal adopted a back-to-basics approach in analysing this question. Insurance against damage to property is treated in law as a promise by the insurer that the insured will not suffer damage to its property. The moment damage occurs the insurer is in breach of its contractual promise and is liable in damages to the insured. As matter of contract law, damages in such circumstances are intended to put the insured in the position it would have been in had the breach not occurred (i.e. had the damage not occurred). In these circumstances the proper measure of damages would, in principle, be the cost of repair caused by the wetting of the timbers. Under contract law, the Deterioration and the Development of damage would be covered because, under relevant contractual principles, they flow from the damage the insurer had contractually promised wouldn’t happen. That is subject, however, to some alternative agreement between the parties in the contract that limits the damages for which the insurer is liable. The policy deductible and limit are examples of this. The insurers pointed to the insuring clause as another. They argued that the parties to the insurance had agreed that the measure of damages for which the insurer would be responsible was defined by the insuring clause as the damage occurring during the Period of Insurance. The Court of Appeal said that this confused damage (the peril insured by the policy) with damages (the liability of the insurers for allowing the peril to occur). The insuring clause had nothing to do with the insurer’s liability for damages. This means that:
“If the insured damage has caused further damage, then subject to the usual principles of mitigation and remoteness etc, the insurer is liable for the loss resultant upon suffering that further damage”.
It didn’t matter if the further damage (in this case the Deterioration and Development) happened after the Period of Insurance.
The principle this confirms was described by Lord Sumption in a case called The Renos:
“The fact that the policy expired before the loss has fully developed will not affect the assured’s right to recover under it in full ”.
The Court of Appeal’s confidence that this was the correct legal analysis was reinforced by an analysis of the commercial consequences of the insurer’s position. On insurer’s reasoning, Deterioration and Development occurring after expiry of cover would be uninsurable even though they flow from the peril the insurance covered. The Court of Appeal observed that no subsequent insurer would be prepared to cover the Deterioration and Development at all or for an economic premium but, in any event, continuing damage would not be insurable since it would not be a fortuity – it was already in motion.
Next Steps – Insurers seek to test whether the Court of Appeal’s reasoning is watertight
Insurers have lodged an appeal with the Supreme Court. They have posed the Supreme Court some humdinging questions that go to heart of the principles of insurance law as they affect property covers. They have asked the Supreme Court to consider whether the Court of Appeal was wrong in holding that:
- Insurers can be liable for damage occurring after expiry of the relevant policy.
- The insurers’ primary obligation is to prevent the occurrence of an insured event.
- The insurers breached their contract with Sky by their failure to prevent water entering the cassettes (the individual components of which the roof was constructed) and damaging the timbers.
Questions 2 and 3 question basic tenets of property insurance. We’ll have to wait and see if the Supreme Court is willing to bring the roof down on these principles. If they do, Sky will definitely make the news.
A copy of the Court’s decision can be found here.
