Raising the roof: Court of Appeal decision in (1) Sky UK Limited (2) Mace Limited v Riverstone Managing Agency Limited & Others
December 2024Introduction:
On 16 December 2024, the Court of Appeal (”CoA”) delivered its highly anticipated decision in (1) Sky UK Limited (2) Mace Limited v Riverstone Managing Agency Limited & Others [2024] EWCA Civ 1567. This matter concerned claims brought by Sky (the employer) and Mace (the main contractor) against the Insurers of a syndicated construction all risks policy (“Policy”), regarding alleged damage during construction of the roof at Sky’s new global headquarters in London. The case included appeals from Sky and Mace, as well as cross-appeals from the Insurers, following the earlier order and judgment of HHJ Pelling KC sitting in the High Court[1]. The appeals, as with the original claim, were managed together, with Sky and Mace allowed to appeal the core issues. The CoA’s decision provides clarity on several points and will interest parties to construction contracts where there is a construction all risks policy in place, as well as those procuring and applying construction insurance on projects.
Background
Sky and Mace entered into an amended JCT Design and Build Contract 2011 for the construction of Sky Central, Sky’s new London headquarters, which included Option B, amended to require Sky to maintain a joint names construction all risks policy. Mace was then named as an additional insured party under the Policy. The building was constructed between 2014 to 2016. Its roof – the largest flat timber roof in Europe – comprised over 470 individual laminated wooden cassettes placed on timber beams. During the construction period and prior to permanent waterproofing, the cassettes became exposed to substantial rainfall, leading to water ingress and “damage”. Amongst other things, it was argued that Mace had failed to provide protection measures, including a temporary roof. By March 2015, rainwater entered the building and drying out works were attempted. By the time Practical Completion (“PC”) was achieved on 4 April 2016, the issue had not been rectified. Further drying out works were attempted during 2018-2019.
The Policy contained a Period of Insurance ending on 15 July 2017 (comprising an initial period and 12-month Maintenance Period) and provided that the Insurers would “… indemnify the Insured against physical loss or damage to Property Insured, occurring during the Period of Insurance, from any cause whatsoever…”. The insured property included permanent and temporary works, equipment, and machinery. The Policy contained a Retained Liability of £150,000 for any one event regarding defective design, materials, or workmanship.
Disputes arose between the parties concerning the technical causes of the damage, the extent of the investigatory and remedial works, and the recovery of costs. The Insurers declined to cover the damage after the Period of Insurance ended in 2017.
Appealing the 2023 High Court order
The parties appealed to the CoA on several issues stemming from an earlier order issued by HHJ Pelling KC in 2023. Sky lodged nine grounds of appeals, while Mace and the Insurers each had five. There was some overlap between certain arguments presented by Sky and Mace.
In summary, Sky sought declarations and claimed for remediation of the further damage which occurred after expiry of the Period of Insurance, as well as the costs of investigation works. Sky also asserted that the High Court Judge had failed to address factual points concerning the damage sustained. Mace sought a monetary award regarding the damage prior to PC and raised points concerning its proposed remedial scheme (which had been rejected). The Insurers cross-appealed and argued that the Judge had applied the wrong test for the meaning of “damage” in the insuring clause and incorrectly applied the Retained Liability clause under the Policy. The CoA heard the appeals during October 2024.
CoA’s December 2024 Decision
We consider the main grounds and aspects of the CoA’s decision below.
Relevant Period of Insurance and development and deterioration damage
Under the terms of the Policy, Sky was entitled to an indemnity for what was termed in the decision as ‘development and deterioration damage’. The CoA discussed the main principle of insurance contracts; the Insurers had promised to ensure that damage would not occur during the relevant Period of Insurance and agreed to indemnify, or hold harmless, the insured against such occurrences. Consequently, “damage” occurring during the Period of Insurance constituted a breach of contract by the Insurers (i.e. a primary obligation), thereby triggering a secondary obligation to compensate the insured for that breach. The CoA reached this conclusion based on earlier case law, whilst noting that the position was subject to the usual legal principles around causation, mitigation, and remoteness.
The principle referred to above was also subject to any clear express terms contradicting it, for instance applicable limits of indemnity, exclusions, or deductibles agreed. However, the limitation within the relevant insuring clause of the Policy (which provided for cover to damage occurring within the Period of Insurance) did not contain clear language to override this principle. The CoA determined that the clause defined the damage to which the Insurers’ primary obligation attached. However, it did not define the specific loss (or damages) for which the Insurers were liable. This indicated that the Insurers were responsible for the loss resulting from further damage, subject to mitigation and remoteness. The Insurers were liable for the losses related to such further deterioration or development of damage after PC and after the Period of Insurance has ended.
The CoA found this approach to be consistent with earlier case law cited by the parties, as well as aligned with business common sense in the context of an insurance arrangement. A businessperson would “reasonably expect to be compensated for the consequences of the insured damage deteriorating or developing, absent a contract term excluding such recovery”[2]. Further, the CoA noted the risk of “serious and unacceptable adverse consequences”[3] since the alternative could make deterioration and development damage post-expiry of the Period of Insurance under any later and separate property insurance cover uninsurable. If the damage was already in progress when cover was sought and obtained, insurers would likely seek to impose exclusions on this (or charge a prohibitively higher premium); however, if cover was obtained for the subsequent period prior to any damage occurring, the subsequent policy would not respond since the continuing “deterioration and development damage would not be a fortuity”[4]. The CoA decision overturned the earlier position that the entitlement to an indemnity under the Policy was for the repair of such damage as had existed at the end of the Period of Insurance. The CoA’s conclusion on this point also rendered other grounds of appeal less significant.
Recovery of investigation works costs
The CoA considered whether the High Court Judge was wrong to characterise investigation costs as irrecoverable “speculative opening up works”[5]. The costs related to investigating the nature and extent of damage, including its development and deterioration, were determined by the CoA to be recoverable in principle. Where damage occurs, the investigation costs should be recoverable where these are “reasonably incurred in order to determine how to remediate it”[6] – this did not depend upon whether damage was revealed as a result of those investigations. This point will naturally depend on the applicable facts of each case and what is deemed reasonable in the given circumstances.
The CoA dismissed the Insurers’ argument that the Basis of Settlement clause excluded investigation costs. Reasonable investigation costs to consider what was necessary to remedy insured damage and deterioration and development damage “self-evidently” fell within this clause and formed part of the “full cost of repairing and reinstating insured damage”[7]. The specific inclusion of coverage for associated professional fees (one kind of investigation cost) did not affect this conclusion.
Correct meaning of “damage”?
The CoA disagreed with the submissions that the High Court Judge had applied an incorrect test when previously considering the meaning of “damage”. The CoA held that “damage” constituted “any change to the physical nature of tangible property which impaired its value or usefulness to its owner or operator”[8]. This view followed the natural and ordinary meaning of the word, the references to criminal law statute and previous authorities, and indicated that the Judge’s earlier decision was accurate. Water ingress into the cassettes forming the roof during construction and the Period of Insurance constituted an adverse physical change (or damage). If not addressed, this would affect the future structural stability, strength, functionality, or future usable life of the cassettes forming the roof.
The Insurers had sought to argue that the relevant damage which had needed to occur before the expiry of the Policy’s Period of Insurance was impacting the function and requiring the immediate repair or replacement of the cassettes (i.e. not the presence of moisture, which could have been sufficiently addressed by drying to restore them to their original condition by expiry of the Period of Insurance). The CoA rejected this assessment, as it incorrectly presumed that recoverable damages would be limited to the damage up to when the Period of Insurance elapsed (which the CoA had already found to be wrong).
Remedial schemes
The parties had proposed different remedial solutions and approaches for the roof, with the values varying significantly. Previously, out of the remedial schemes proposed, the Insurers’ 2019 scheme had been deemed the best approximation for the recoverable measure of loss since the cost of remedying the existing damage in 2019 was no greater than the cost of remedying the damage as at the expiry of the Period of Insurance in 2017. The Insurers appear to have selected that point in time due to the available contemporaneous evidence of the condition of roof cassettes from 2018-2019 via photographs and moisture readings. The extent of damage had increased after expiry of the Period of Insurance, so the remedial works required in 2019 would, on the Insurers’ case, be greater than in July 2017. The Insurers’ 2019 Scheme related to remedial work to 383 of the 428 cassettes forming the roof.
Notwithstanding this, the High Court Judge had determined that a further hearing, supported by evidence, was necessary to determine quantification. This was because the Insurers’ 2019 Scheme required adjustment on four aspects. The Judge required further information to enable the adjustment to quantification and held that if the parties could not agree upon this (which they did not), there would be a further hearing with evidence (for which the Judge gave directions). Sky’s ground of appeal on this adjustment was overtaken by the CoA’s conclusion that the damages fell to be assessed by reference to deterioration and development damage after the expiry of the Period of Insurance.
Application of the Retained Liability clause
The CoA had to determine the position regarding the deductible(s) or retained liabilities which would apply to the claims. The CoA’s judgment acknowledged it was being asked to decide: “(i) whether event refers to damage or to the cause of damage, and (ii) if the latter whether the Judge erred in treating the decision not to use a temporary roof as one event.”[9] The Insurers argued that the High Court Judge had erred in the earlier construction and application of the Retained Liability provision: specifically in light of whether Mace’s decision to not erect a temporary roof could be deemed a single ‘event’ under this clause. Additionally, Insurers argued that the Judge failed to identify each cassette as ‘part’ of the insured property to which the Retained Liability clause applied. If accepted, the overall consequence of such an argument would be to substantially reduce or extinguish the claims made under the Policy.
The CoA held that the reference to “GBP 150,000 any one event” in the Policy was an expression used in aggregation provisions for deductibles and limits. The parties had submitted that the word “event” had a well-understood and established meaning in line with relevant case law. The CoA agreed with the Judge’s earlier conclusion that “event” referred to the relevant cause of damage. In doing so, it dismissed the Insurers’ argument based on the 72 hours clause in the Memorandum, in the context of the Retained Liability clause, that the term referred to “damage”. The CoA “unhesitatingly” rejected the Insurers’ argument that a decision (i.e. the decision not to have a temporary roof) could not be an event as a matter of principle. The 72 hours clause referenced by the Insurers in support of its position was not persuasive in the context of the Retained Liability clause. This was because the 72 hours clause wording had originated from aggregation provisions in catastrophe excess of loss reinsurance, a different type of policy which seeks to protects catastrophe insurers in the event of a significant natural disaster, where the insured peril was the catastrophe. This wording had been transposed into the Policy “without any care as to its language”[1]. Therefore, this suggested that the 72 hour clause failed to provide any “weighty counterbalance to the natural construction of the Retained Liability clause which is that “event” looks to the cause of the loss not the loss itself when the cause of the loss is defective design…”[2].
The CoA noted there is no general rule that a decision cannot be an occurrence. The High Court Judge was entitled to conclude on the available evidence that the decision not to use a temporary roof amounted to a single event – the CoA did not see any other reason to interfere with this conclusion.
Other grounds of appeal raised
In the earlier High Court order, Mace was held to be an insured under the Policy regarding its proprietary or possessory interest in the construction works up until PC, but not after that point. However, contrary to the Judge’s earlier conclusion, the CoA considered that Mace had sufficiently pleaded damage at PC and would be entitled to a distinct monetary judgment in addition to Sky’s own entitlement. Mace’s claim for losses has been remitted to the Judge for further determination as part of the CoA’s decision.
Based on the findings, the CoA allowed the appeals of Sky and Mace and dismissed the Insurers’ appeals. It remitted the matter to the Judge for determination as necessary, including revised declaratory relief and quantum. In light of this, the CoA did not need to address some of the appeals raised by Sky and Mace.
Commentary
The Policy wording used in the insuring clause reflects conventional wording often used in construction all risks policies (“CAR Policies”) and so the CoA’s decision provides helpful clarity on the meaning and application of such wording, especially in respect of investigation costs and deterioration damage which may occur beyond the period of cover. The judgment also addresses several important issues frequently arising in practice in CAR Policy disputes. It also acts as a reminder that case law authorities, CAR Policy terms, the underlying construction contract terms, and the parties’ relationship may inform the courts’ decision when determining the extent of available cover to a third party insured. The applicable insurance position will need to be carefully determined by the parties and their professional advisers and understood in line with the contractual terms and policies available on each project.
For more information on the above and advice on how it might apply to your construction projects or construction insurance matters, please contact Nathan Modell.
[1] Sky UK Ltd & Anor v Riverstone Managing Agency Ltd & Ors [2023] EWHC 1207 (Comm) (22 May 2023)
[2] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 80
[3] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 81
[4] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 81
[5] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 87
[6] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 89
[7] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 90
[8] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 107
[9] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 117
[10] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 121
[11] Sky UK Ltd & Anor v Riverstone Managing Agency Lt & Ors [2024] EWCA Civ 1567 (16 December 2024), paragraph 121
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