Clarity on CAR Insurance recovery: Sky UK and Mace v Riverstone

Background

Appeals were brought by all parties following the 2023 High Court judgment of HHJ Pelling KC (the Judge) in Sky UK Ltd and Mace Limited v Riverstone Managing Agency Limited and others [2023] EWHC 1207 which centred on the 2016 construction by Mace of Sky's headquarters in West London, known as 'Sky Central'. The roof of Sky Central, at 16,000 square metres, is said to be the largest timber flat roof in Europe and comprises a series of glue laminated timber beams on which 472 cassettes sit forming a secondary roof structure.

During construction, the cassettes were exposed to substantial rainfall over several months due to lack of a temporary roof. Resulting water ingress occurring prior to the sealing of the cassettes and an absence of ventilation caused timbers to swell and decay, a condition that subsequently worsened. Sky sought recovery of the cost of rectifying the damage by replacement of wooden components from Insurers under a construction all risks policy (the “Policy”) which named both Sky and Mace as Insured parties.

Key issues in the case were the degree of damage that needed to be suffered during the Period of Insurance to trigger cover and, crucially, the extent to which the Policy responded to reimburse Sky for damage occurring after the Period of Insurance had ended on 15 July 2017, a year after Sky Central's completion.  Importantly, the Insuring clause provided that Insurers were liable to indemnify the Insured against physical loss or damage to the Property Insured, occurring during the Period of Insurance.

At first instance, the Judge held that the Policy Insuring clause imposed a temporal limit on the damage that would be covered finding that remediation costs were only recoverable in respect of damage arising up to the end of the Period of Insurance. This meant that Sky's entitlement under the Policy would be limited to the cost of repairing such damage as had existed at the end of the Period of Insurance leaving the cost of rectifying the further damage arising after that date as the timbers deteriorated and the water continued to spread to be funded from other sources.

Decision

In determining the appeals, Popplewell LJ (with Snowden LJ and Phillips LJ agreeing), helpfully clarified the principles applicable to the measure of recovery in property insurance claims, the foundation of which is that on the occurrence of damage (against which an Insurer has agreed to hold an Insured harmless) the Insurer is in breach of contract.  Thereafter, the Insurer is obliged to pay damages with "common law principles governing damages for breach of contract, the general object of which is to put the innocent party in the same position, so far as money can do it, as if the breach had not occurred, subject to express terms in the policy".

Whilst an Insurer may limit its liability by excluding for example liability for certain losses, such liability limits will 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".  In this regard, Insurers relied on the Insuring clause provision that they were liable to indemnify the Insured against physical loss or damage to the Property Insured occurring during the Period of Insurance as demonstrating the parties' intention to limit the Insured's remedy to the cost of repairing damage occurring during the Period of Insurance.

Popplewell LJ disagreed and stated that the Insuring clause served only to define the damage which the Insurer promised would not occur and did not "purport to define or confine the loss for which the insurer is liable in damages when in breach of promise, which is for the sum necessary to hold the assured harmless from having suffered the insured damage in the first place".  Accordingly, once damage occurs which falls within the scope of the Insuring clause, the Insurer will be responsible for the loss flowing reasonably and foreseeably from that damage unless excluded by clear words in the Policy.  For Sky and Mace this means that the cost of rectifying the further damage arising after the Period of Insurance as the timbers deteriorated and the water continued to spread would be covered.

Popplewell LJ's reasoning is reinforced by his view that such a result is aligned with business common sense explaining that time would often be needed to investigate and remedy damage occurring to a construction project and that such investigations may continue beyond the expiry of a period of insurance.  He speculated that damage might only be identified after expiry even though it had occurred before and stated that "It would be readily foreseeable that in some circumstances the passage of time would increase the scope of the damage, whether to the already damaged part of the building (deterioration) or to some other part (development), without any fault on the part of the assured.  A business person in the shoes of the assured would reasonably expect to be compensated for the consequences of the insured damage deteriorating or developing, absent a contract term excluding such recovery."

Sky and Mace also challenged the Judge's ruling that investigations to determine the extent of damage and to devise a remediation plan were speculative where no damage was found and that the costs of such exercise were irrecoverable. Popplewell LJ disagreed determining that investigation costs to ascertain the type and extent of the insured damage were recoverable if carried out to ascertain how to remediate the damage and if reasonably incurred.  He determined this to be the case whether or not such investigations actually revealed further damage. Investigations to assess safety and structural integrity of a building suffering damage are imperative, not just reasonable, even when found to be sound.

Commentary

The consequence of the Court of Appeal's rigorous application of first principles in it's analysis of the measure of recovery under the Policy is that business common sense has prevailed.  The judgment is likely to result in both Insurers and Insureds reappraising existing claims with Insureds closely scrutinising policy terms which seek to modify the measure of damages to which Insureds would, under the general law, be entitled. Insureds will be seeking to challenge such terms for lacking sufficient clarity to oust their common law remedies and Insurers for their part may well be reviewing standard exclusions.

With thanks to co-author, Solicitor Natasha Leo.