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In Sky UK Limited and Mace Limited v Riverstone Managing Agency and others [22.05.23] the Technology and Construction Court has recently provided clarification on a number of key coverage issues under a construction all risks (CAR) policy.
Sky’s global headquarters building in West London (Sky Central) was constructed in 2014-2015 by Mace under a design and build contract. It included a 16,000 square metre roof said to be the largest timber flat roof in Europe. The roof consisted of a series of glue-laminated timber beams on which 472 cassettes were placed. The roof suffered widespread failure due to water ingress.
While awaiting permanent weatherproofing, the cassettes were left exposed to the weather including over the winter period. Rainwater entered the cassettes. Attempts were made on several occasions to dry out the cassettes, but when practical completion occurred, the issue remained unsolved.
Sky and Mace sought indemnity under the CAR policy for the cost of remediating the roof on the basis that it had been damaged by water ingress. The judgment considered a number of issues relevant to CAR insurance.
1. Meaning of "physical damage"
The cassettes had no aesthetic or intrinsic commercial value and so, when assessing whether they were damaged, thus triggering the policy, the sole focus was utility, particularly the impact the water ingress had on the utility of the cassettes.
The claimants submitted that the entry of water into the cassettes constituted damage. Insurers, however, submitted that physical damage to the cassettes could only occur once moisture content reached a “trigger point” (being, they said, 25% - the point at which decay/rot could cause impairment of structural performance or integrity).
The court rejected insurers’ arguments, stating that the entry of moisture into the cassettes was a tangible physical change (damage) as long as the water, if left unattended, would affect the structural stability, strength or functionality or useable life of the cassettes during the period of insurance.
2. Co-insurance
The case was heard before the Court of Appeal decision in FM Conway Limited v Rugby Football Union & Others [19.04.23], but the judgment was handed down after the Court of Appeal decision. Whilst the judgment makes no new law in relation to co-insurance defences, the court reaffirmed the position that a person who is named as an insured in the policy but who is not otherwise a party to the insurance contract does not become a party to the contract simply by reason of having been named in it. The key is to assess whether a third party insured benefits from insurance taken out by the principal insured or contractual insured. If so, to what extent is the underlying contract with the third party (e.g. the building contract or subcontract etc).
The court found that, whilst Sky (as the principal insured) had the benefit of full insurance cover, Mace’s cover (as a third party insured) ended on practical completion. Consequently, Mace could be liable to indemnify Sky in respect of any damage to the roof occurring after practical completion.
3. Aggregation
An excess of £150,000 “any one event” applied to claims where DE5 applied.
Sky submitted that the single proximate cause of damage was the failure of the designers and/or contractors to specify the need for waterproofing arrangements, meaning only one excess applied. Insurers submitted that a decision or plan is not an event or an occurrence. The court rejected insurers’ argument.
Referring to Midland Mainline & Ors v Commercial Union Assurance Co Ltd [2003] and Stonegate v MS Amlin & Ors [2022], the court found that a decision not to take any temporary waterproofing measures satisfied the unities of time, place and cause required for there to have been one event which caused the damage such that only one excess applied. Accordingly, the claim was subject to one excess.
Comment
The judgment covers a number of issues relevant to those with an interest in construction insurance. The court’s comments on damage and the point at which it can occur and the finding that a decision can be an “event” for the purpose of aggregation may be of particular interest. The judgment is also consistent with earlier decisions in relation to co-insurance, again emphasising that the underlying contract is key to assessing the scope of cover available to a third party seeking cover under the policy and/or to rely on a co-insurance defence.
We understand that the decision may be appealed, in which case any appellate decision will be closely monitored by the insurance market given the important issues which may be considered on appeal.
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Construction and engineering
Insurance and reinsurance
United Kingdom