In Sky UK Limited & Mace Limited v Riverstone Managing Agency Limited & Ors, the Commercial Court considered claims by Sky UK Limited and Mace Limited (the claimants) against the underwriters of a syndicated construction all risks (CAR) policy (the Policy).
The claims arose from the "widespread failure" of the roof at Sky's global headquarters building, known as Sky Central, in London, which houses up to 4,000 employees.
Whilst the judgment addresses multiple issues, including the technical reasons for the failure of the roof and the necessary remedial works, the key takeaways related to the scope and period of cover of a "third party co-insured" under the Policy, as well as the interpretation of the applicable deductibles and the meaning of "physical damage".
Background
- Sky engaged Mace to construct Sky Central in March 2014 based on an amended JCT Design and Build 2011 form (the Construction Contract), incorporating insurance option B.
- Mace subcontracted the design, supply and construction of the Sky Central roof to another contractor. The roof structure – which covered 16,000 square metres and is said to be the largest flat timber roof in Europe – consisted of a series of glue laminated timber beams on top of which rows of "cassettes" are placed.
- Following their installation between December 2014 and May 2015, the cassettes were left exposed to substantial rainfall pending completion of the permanent waterproofing. Despite the work being undertaken in the winter and spring, no temporary roof structure was installed nor specified as part of the design of the roof.
- It soon became apparent that there had been water ingress into the cassettes. Various attempts were made to dry out the cassettes but were only partially successful. Practical completion occurred on 4 April 2016 without the issue having been resolved.
The Policy and the applicable deductible
The Policy was a joint names policy which named Sky as the principal insured and Mace as one of a number of additional third party insureds, "each for their respective rights and interests".
The parties agreed that the "Period of Insurance" was 1 February 2014 to 15 July 2017. The Policy provided that the underwriters would:
"… indemnify the Insured against physical loss or damage to Property Insured, occurring during the Period of Insurance, from any cause whatsoever …"
As is typical with CAR policies, the cover was subject to a number of standard exclusions and exceptions. In particular, it contained what is known as a design exclusion or a "DE" clause. There are several possible standard DE clauses ranging in numbers one to five.
Despite being called an exclusion, the practical effect of a DE clause, depending on the precise clause in question, is actually to add cover back in for loss or damage caused by the defective property where this would otherwise be excluded. So, a DE "exclusion" actually increases the available cover for the insured.
The Policy included a DE5 clause. Whilst not critical to the Court's decision, given that there are so few authorities where the DE5 is considered (as most disputes are arbitrated), we thought it would be useful to set out the Commercial Court's thoughts on the meaning of the exclusion clause wording.
The wording of the DE5 exclusion provided that:
- The insurers would not be liable for the cost necessary to replace, repair or rectify any insured property which is "defective in design plan specification materials or workmanship".
- Should damage to the insured property result from such a defect, the exclusion shall be limited to the "costs of additional work resulting from and the additional costs of improvements to the original design plan specification materials or workmanship".
The Court commented that:
"Although the language is convoluted, the effect of the provision is reasonably clear: if any Property Insured is defective in any of the ways defined in (a), the Policy will not respond unless loss or damage to the defective Property Insured is caused by that defect, in which case the Policy will respond but subject to a more limited exclusion from recoverability of the additional cost of and incidental to any improvements to the original design plan specification materials or workmanship of the relevant defective Property Insured".
A special deductible applied to claims to which DE5 applied £150,000 for "any one event".
The decision
The key points decided by the Commercial Court were as follows:
1. Co-insurance
It was common ground that Mace was an insured under the Policy, but that the only contracting party to the Policy was Sky – who was expressly defined as the "Principal Insured".
Counsel for Mace submitted that there was a distinction between – and that it therefore benefitted from – being a named insured, instead of an unnamed non-contractual insured. On this basis, it argued that its cover was not limited by reference to the insurance provisions of the underlying construction contract.
The defendant insurers denied that there was any such distinction. They contended that the scope of cover of a third party insured depends on the intentions of the parties to be gathered from the terms of the Policy as well as the terms of any contract between the contractual assured (i.e. Sky) and the relevant third party insured (i.e. Mace) – in this case, the Construction Contract.
Decision: The Court rejected Mace's argument. It followed the reasoning of Mr Justice Eyre in The Rugby Football Union v Clark Smith Partnership Ltd and FM Conway Ltd (which, as we outlined in our previous insight, was upheld by the Court of Appeal in a key decision on the principles of co-insurance) that "a person who is named as an insured 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 Court held that the true distinction is between:
- A contractual assured (whether or not called the "principal") – in this case Sky; and
- All those named, whether individually or as part of a defined class of non-party insureds – i.e. the category of "third party insureds", which Mace fell into here.
The Court also agreed with the insurers as to the relevance of the Construction Contract. There is "ample authority" for the proposition that in deciding the scope or extent of cover available to a third party insured under a CAR policy, it is necessary to consider the scope of cover the principal insured has agreed to procure under its contract with the third party insured.
2. Scope of Mace's cover as third party insured
The defendant insurers submitted that under the terms of the Construction Contract, Mace was only insured in respect of loss and damage:
- To the date of Practical Completion.
- To the extent that it remediated such loss and damage during the period ending at Practical Completion.
Decision: The Court noted that under the Construction Contract, risk and possession of the roof structure passed to Sky on Practical Completion. Mace had also accepted that following Practical Completion, it had no "proprietary or possessive interest in the roof". Mace was insured under the Policy in respect of its "rights and interests", and after Practical Completion, it had no relevant rights or interests in the roof, except to the extent that it had continued liability for work done prior to Practical Completion. On this basis, the Court concluded that Mace was only insured under the Policy regarding loss or damage in the period whilst it had a "possessory interest", i.e. until Practical Completion.
However, the judge held that this did not mean that Mace was only insured regarding remedial works that it carried out before Practical Completion to repair damage, as the insurers contended. If the parties had intended this to be the case, they would have used clear express words in the Construction Contract to that effect.
3. Meaning of "physical damage"
The indemnity provided by the Policy was in respect of "physical loss or damage to Property Insured, occurring during the Period of Insurance". "Physical…damage" was not a defined term.
The defendant insurers argued that physical damage would only have occurred after a "trigger point", at which the performance of each cassette would be so compromised that "in order to perform the function for which it was intended, it requires repair".
The Claimants did not accept this – arguing that it was sufficient to show "any physical alteration that is harmful even if invisible and temporary".
Decision: Having reviewed the authorities, the judge concluded that in order to succeed in showing that physical damage occurred during the period of cover, the claimants would need to show that a "tangible physical change has occurred to the property insured (irrespective of whether that is visible or not) that has impaired the commercial value of that property in the sense of rendering it less valuable or of less utility than would have been the case had it not sustained the damage complained of." In this case, the judge accepted that physical damage occurred once water had entered the cassettes on the basis that the presence of moisture, if left unattended, amounted to a tangible physical change to the cassettes affecting its functionality, stability, strength or use.
The defendants' construction of physical damage requiring the "presence of structural change of such severity as to require replacement of the affected timber or the whole of the cassette to be present during the period of cover (i.e. down to 15 July 2017) if the Policy is to respond" was held to be "impermissibly narrow".
4. What was the meaning of "one event" for the purpose of applying the deductible?
The claimants maintained that the single event giving rise to the damage was the failure to specify the use of a temporary roof structure following the installation of the cassettes, pending completion of the permanent waterproofing. Accordingly, they submitted that this was a single event which limited their Retained Liability under the Policy to £150,000, i.e. the deductible should only be applied once.
The defendant insurers denied this, arguing that the decision not to use a temporary roof could not amount to an "event" and the damage to each cassette should, therefore, be treated as a separate event attracting a separate deductible of £150,000. This interpretation would have drastically reduced the amount that Sky and Mace could recover under the Policy.
Decision: The Court agreed with the claimants that the decision could constitute an event, citing Butcher J's judgment in Stonegate v MS Amlin & Ors [2022]. This earlier case established that a decision (or plan) could be an "event" or "occurrence" if it met the usual test, which is that it happened at a particular time, at a particular place and in a particular way and was an effective cause of the loss, or series of losses, in question.
In this case, the Court accepted that the decision not to install temporary waterproofing was a single event such that if this was an effective cause of the damage, only one deductible should be applied. Accordingly, the Court concluded that the damage for which the defendants would otherwise be responsible would attract a "single Retained Liability of £150,000 rather than £150,000 for each cassette that suffered damage".
Key takeaways
The judgment addresses issues that frequently arise in disputes arising under CAR policies. It is a helpful reminder and affirmation of the approach previously taken by the Courts on a number of these points, particularly the importance of the Construction Contract when it comes to determining the scope of cover available to a third party insured.
The case also serves as a useful refresher that the Court will not necessarily take an overly narrow approach to establishing unity of time, place and cause when it comes to aggregating deductibles under the Policy – a fertile ground for disputes with insurers - and will also look to an over-arching decision or plan so long as it meets the unity test.
Finally, the approach taken by the Court on damage is helpful to insureds not only in the context of a defects claim but more widely where it is difficult to pinpoint the precise moment in time that damage occurred. This decision should mean that insureds are able to establish damage at the earliest point in time that conditions exist which, if left unaddressed or unrepaired, give rise to a physical change in the insured property affecting its use or value.
In a subsequent ruling, the Court confirmed that Sky is entitled to an indemnity and awarded Sky an interim payment of nearly £39 million, pending a determination of quantum.
If you have any questions about the issues raised in this article, please contact Ashley Pigott, Sam Holland or Jatinder Sahota.