Court of Appeal delivers landmark judgment in Sky's insurance claim

The Court of Appeal has handed down judgment in a major Construction All Risks insurance claim brought by Sky in respect of damage arising out of the construction of its flagship building in 2014.  We are pleased to confirm that Sky's appeal was successful on all grounds, while Insurers' cross-appeal was dismissed. 

The key points of law and principle for policyholders are:

• Recovery is not necessarily confined to damage that was physically present at policy expiration.  Subject to applicable limitations (such as the obligation to mitigate) an insured can recover the cost of remediating damage which starts during the policy period and then develops or deteriorates after the period of cover has expired.
• Once it is established that there is insured damage, the reasonable costs of investigating and identifying the nature and scope of that damage are in principle recoverable, regardless of whether damage is found in every location investigated.
• Damage in the context of a construction insurance claim means "any change to the physical nature of tangible property which impaired its value or usefulness to its owner or operator" and in this specific case, that included water ingress. Property can be damaged even if such damage is transient or capable of being remediated.
• A decision can be an "event" for the purposes of an aggregation clause that refers to "any one event".  Whether a decision meets Lord Mustill's 'unities' test in Axa v Field will be a factual evaluative assessment in each case. An appellate court should not interfere unless such an assessment is plainly wrong, which was not the case here.
• The Court of Appeal reaffirmed that it will not generally involve itself in case management decisions, affording High Court judges a wide scope of discretion in that regard.

There were also various factual issues which the Court of Appeal agreed had not been addressed at first instance, which now fall to be reconsidered by the Commercial Court.

The claim will now be remitted to the first instance judge to determine, in light of the conclusions of the Court of Appeal, the damages payable by Insurers to the insureds.

We explore some of these important points of law and principle in further detail below.

BACKGROUND

The case concerned a claim under a Construction All Risks insurance policy for damage arising out of the construction of the Insured's flagship building. It was generally accepted on the facts that damage to the property had started to occur in 2014/2015 and had continued to develop, hidden within the structure of the building and without the knowledge of the Insured, until beyond the end of the policy period in 2017.  Given the scale and the nature of the insured property, it was also accepted that the work required to identify and arrest the damage alone would take a number of years.

DECISION

Developing damage under a time-limited policy

It was held at first instance that recovery was confined to damage which was physically present on the day the policy period ended.  This in effect put in place a "hard stop" on recovery which applied even if developing damage was unknown to the insured or if deterioration had continued while an appropriate remedial scheme was being devised and implemented.  Sky argued on appeal that, on these facts, the judge ought to have held that cover was available for the costs of remedying all damage which was the natural development of insured damage occurring during the policy period.

In his lead judgment upholding Sky's appeal, Lord Justice Popplewell applied the fundamental principle of insurance law that an insurer's obligation to pay damages is merely a secondary obligation, triggered by breach of the insurer's contractual promise that insured damage will not occur. The insurers' responsibility is to put the insured in the same position as it would have been in had the insurer not breached that promise, i.e. had the insured damage not occurred.  By identifying a "policy period" the insurer promises only that insured damage will not occur within a specified time period; it is not placing any limitations on the measure of damages for which it will be responsible.  Following that through, the costs of putting the insured back in the position it would have been in had the insured damage not occurred will inevitably include the costs of remediating the resulting loss from the original insured damage.  This means that subject to the usual principles of mitigation and remoteness etc., the insured is in principle entitled to the costs of remediating the development and deterioration of insured damage after the end of policy expiration.

The judgment made clear that this conclusion was consistent with previous authorities, including Knight v Faith (1850) 15 Q.B.D. 649, Andersen v Martin [1908] A.C. 334; Municipal Mutual v Sea Insurance [1988] Lloyd’s Rep. IR 421; Wasa v Lexington [2010] 1 A.C. 180; The Renos [2019] UKSC 29; and UnipolSai v Covéa [2024] EWCA Civ 1110.

Finally, Lord Justice Popplewell considered that the conclusion was consistent with commercial common sense.  He explained that a businessperson in the insured's position would reasonably expect to be compensated for the consequences of insured damage deteriorating or developing both before it was discovered and while it was investigated and remedied, absent an express contractual term to the contrary.  If instead an insured was forced to bear the financial consequences of any deterioration of damage after the end of policy expiry, in circumstances where such deterioration had occurred through no fault of its own, and where other insurance would be unavailable given the ongoing deterioration, that would in Lord Justice Popplewell's words be "the antithesis of what property insurance is for".

Investigation costs

Insurers argued throughout the trial and the appeal process that investigation costs were only recoverable to the extent that any particular investigatory work revealed insured damage.  They succeeded on this argument at first instance, with the effect that the costs of works to identify the scope and nature of the damage across the structure were only recoverable to the extent that each individual opening-up exercise showed damage in that location. 

The Court of Appeal rejected Insurers' position, holding that investigation costs are part of the loss caused by insured damage having happened in the first place.  Whether such costs are recoverable does not depend on whether insured damage was found in each location investigated, but instead it is a matter of fact and degree depending on the specific circumstances.  Further, the court was clear that there was no requirement for a specific and separate clause providing cover for investigation costs: the reasonable costs of investigating what is reasonably necessary to remedy insured damage (and its development and deterioration) is all part of the contractual measure of damages necessary to put the insured back in the same position as if the insured damage had not occurred.

Meaning of damage

Insurers appealed the finding at first instance that the meaning of "damage" within a property insurance policy included the presence of water which if left unattended would affect the structural stability, strength or functionality or usable life of insured property during the period of insurance.

The Court of Appeal held that there was no reason to draw a distinction between the meaning of damage for these purposes and the definition of the same within the meaning of the Criminal Damage Act 1971, as interpreted by relevant authorities including A-G's Reference (No 1 of 2022).  The established principles from those authorities were that damage means any physical change to tangible property which impairs its value or usefulness, and that damage can be minor or transient, such as the soaking of a blanket, even if capable of remediation. The court considered this definition was consistent with the natural and ordinary meaning of the word.

Insurers put forward at trial an alternative argument based on the proposition that only what was 'relevant' damage in the context of the specific factual matrix could be recovered, but this was rejected by the court.

Aggregation

Insurers also appealed the first instance judge's key findings in relation to aggregation.  The trial judge had held that a decision to build the roof without adequate temporary weatherproofing was an "event" within the relevant provisions regarding the applicable deductible, which referred to "any one event".  Insurers argued that each individual instance of damage to each individual part of the structure was a separate event and that therefore multiple deductibles applied.  If successful, this would have meant that up to as many as 472 deductibles of £150,000 would apply to insurance proceeds.

Insurers' appeal was rejected.  The Court of Appeal held that:

• "any one event" can constitute aggregating language without any requirement for additional wording such as "arising out of";
• the question of whether something constitutes an "event" must be considered in light of the contractual context – here, where the relevant cover was provided by a quasi-extension for losses caused as a result of a defective design, methodology, specification etc. (i.e. Design Exclusion 5), the court considered that the natural reading of the specific aggregation provision was to look back to the cause of the loss;
• a decision can constitute an "event" for the purposes of aggregation, with Lord Justice Popplewell stating expressly in this regard that he agreed with the analysis of Butcher J in Stonegate v MS Amlin that a decision could constitute an occurrence; and
• whether a particular decision fulfils the unities and therefore constitutes one single event is a factual evaluative assessment in each case.

The Court of Appeal considered that on that basis the judge was entitled to make the assessment that he did and that an appellate court should not interfere with such an assessment unless it was plainly wrong in the sense that the judge made an error of principle or reached a conclusion which was not reasonably open to him.  Given this did not apply in this case, the court upheld the judge's decision that only a single deductible should be applied.

COMMENT

The judgment provides welcome clarity for all policyholders on some key insurance principles including cover for developing damage under a time-limited policy, the meaning of damage, and aggregation.  The decision is firmly rooted in established principles and authorities, but also in business common sense.  The result is a win for policyholders, demonstrating that the courts will account for commercial consequences and what an insured can reasonably expect in terms of the cover provided by their property insurance.

This firm acted for Sky in the High Court and the Court of Appeal.  David Edwards KC and Simon Kerr of 7 King’s Bench Walk and Crispin Winser KC of Crown Office Chambers represented Sky on the appeal.

To view or download a copy of the Court of Appeal's judgment, please click here.

To view or download a copy of the first instance judgment, please click here.

Please click here for the article on this decision published by 7 King's Bench Walk, and here for the article on this decision published by Crown Office Chambers.