Understanding construction all risk insurance

The recent Court of Appeal decision in the case of Sky UK Limited and Mace Limited v. Riverstone Managing Agency Limited and others [2024] EWCA Civ 1567 has significant implications for the interpretation of construction all risk insurance.

Background of the case

In 2014 Sky UK Limited (Sky) appointed Mace Limited (Mace) to design and construct Sky’s global headquarters, Sky Central, in West London. During construction extensive water damage occurred to the roof, owing to a lack of temporary roof structure. Water ingress caused swelling and structural decay to the 472 wooden cassettes which made up the roof.

Sky and Mace pursued claims under their construction all risks policy (the Policy) which was underwritten by several insurers (the Insurers). The period of insurance under the Policy covered the initial period of construction, together with 1 year maintenance period (the POI). It was common ground that the POI expired in July 2017. Mace was a named insured under that policy.

Both Sky and Mace sought an indemnity from the Insurers for all costs associated with the proposed schemes to repair damage caused by the water ingress. Their claims included the cost of all development damage and deterioration after the POI, up until those remediation works had been completed – with costs of investigations in the region of £10million and anticipated remediation costs in the region of £56million.

However, the Insurers argued that Mace was not insured under the Policy in respect of any of the sums which it claimed and that any relief would in any event be a duplication of sums due to Sky. Furthermore, the Insurers’ case was that Sky was entitled only to an indemnity in respect of the costs of addressing damage as it existed at the end of the POI, not any subsequent deterioration.

At first instance, HHJ Pelling QC held that whilst the damage to the roof had occurred during the POI:

• Sky had incorrectly assessed the scope of the indemnity to which it was entitled under the Policy and could only recover the cost of repairing the damage as it existed at expiry of the POI – subject to payment of any policy deductibles. Sky could not recover the costs of repairing any subsequent deterioration; and
• Mace was not entitled to any monetary relief under the insurance policy, since it’s interest in the Policy was only proprietary up to the point of practical completion of the works. The judge held that Mace had made no effort to quantify losses it had sustained at that date.

All parties referred the judgment to the Court of Appeal.

Key points of the judgment

In reaching his conclusion:

1. Definition of damage: Popplewell LJ determined that the definition of “damage” was any tangible physical change that impairs the value or utility of the property. This included the wetting of timbers which led to structural decay, even if the damage was not immediately visible.
2. Period of insurance: He rejected the Insurers’ position that the Policy covered damage caused during the POI: no more no less. Instead, the Popplewell, LJ agreed with Sky and Mace that an insurance claim is a claim for unliquidated damages. “As such the measure of recovery is for all the loss and damage suffered by reason of the insured event of damage occurring during the POI, including compensation for loss caused thereby and thereafter as a result of deterioration or development damage.”
3. Measure of indemnity: Popplewell LJ clarified that the measure of indemnity includes the full cost of repairing, reinstating, or replacing the damaged property. This encompasses the cost of addressing all damage, including deterioration and development damage occurring after the POI, provided it was a foreseeable consequence of the initial damage.
4. Investigation costs: He emphasised that reasonable investigation costs to determine the extent and nature of the damage were recoverable under the Policy. These costs were part of the loss caused by the insured damage and were necessary to devise an appropriate remedial scheme.
5. Deductibles and aggregation: Finally, he addressed the application of deductibles, specifically the “Retained Liability” clause, which applied a £150,000 deductible for defective design claims. He concluded that the decision not to use a temporary roof during construction was a single event, meaning only one deductible applied to the entire claim.
6. Mace: Crucially for Mace, Popplewell, LJ confirmed that:

• because the correct measure of damages included deterioration and development damage occurring after the POI, where the same was consequent on damage occurring during the POI; all Mace had to do was establish that damage existed at practical completion. Mace had sufficiently pleaded its case on this.
• The fact that Mace had not evidenced the costs of repairing only damage at practical completion was of no relevance given the correct measure of damages.
• As Mace had established its own property claim against the Insurers, it mattered not that it’s claim overlapped with Sky’s.  The Insurers were required to indemnify both parties separately under the composite insurance policy, which constituted a separate contract with each insured.

Implications for employers and contractors

This case provides important clarity on how construction all risk insurance should be interpreted. In particular, it highlights that:

• Comprehensive coverage: Employers and contractors should expect construction all risk insurance to cover not only immediate physical damage caused during the POI, but also subsequent deterioration and development damage where it is a foreseeable consequence of the initial damage.
• Importance of detailed documentation: As always, it is crucial to accurately document construction processes and any incidents of damage. This will help support claims and establish that the extent and cause of damage was within the POI.
• Reasonable investigation costs: Contractors should be aware that reasonable costs incurred in investigating damage should be recoverable. This includes costs for assessing the extent of damage and determining the necessary remedial works.
• Understanding deductibles: Both parties should clearly understand the application of deductibles and aggregation clauses in their insurance policies. The decision in this case highlights that a single event, such as a design decision, can aggregate multiple instances of damage under one deductible. However, that may not always be the case.

The Birketts view

The decision of Popplewell, LJ is clearly a great win for Mace and Sky. But it does reinforce the importance of understanding the scope and application of insurance policy terms. Whilst it is possible for insurers to limit their liability, Popplewell LJ noted that this can only “be achieved by clear wording because it is a general canon of construction that parties to a contract do not intend to exclude valuable remedies for which the law provides without clear words”.

As such, we anticipate that insureds and insurers alike will re-evaluate their policies. On the one hand insureds may wish to reassess recent insurance claims which have been rejected, and on the other; insurers may look to tighten policy terms to ensure all exclusions are abundantly clear.

Whatever the result, by ensuring comprehensive coverage, maintaining detailed documentation, and managing risks proactively, parties can better navigate the complexities of construction insurance and protect their interests.