David Edwards KC and Simon Kerr of 7 King’s Bench Walk, and Crispin Winser KC of Crown Office Chambers, succeed on behalf of Sky in its appeal in the landmark insurance case, Sky UK Limited & Another v Riverstone Managing Agency Limited & Others [2024] EWCA Civ 1567. An unanimous Court of Appeal (Popplewell, Phillips and Snowden LJJ) has provided authoritative guidance on key principles applicable to property insurance policies, concerning ‘damage’, cover for post-expiry deterioration/development of insured damage, investigation costs, and ‘any one event’ aggregation/deductible provisions.
Introduction
Judgment has been handed down by the Court of Appeal in Sky UK Limited & Another v Riverstone Managing Agency Limited & Others [2024] EWCA Civ 1567 (16 December 2024), Sky’s claim for indemnity under a construction all risks policy for extensive damage to the timber roof of its global headquarters. Sky, its builders and their insurers had all appealed against the decision of HHJ Pelling KC (Commercial Court), on various issues of insurance law principle, construction, and technical fact. By this judgment, Sky’s appeal has succeeded (as has that of its builders), and Insurers’ appeal has failed.
Background
The roof of ‘Sky Central’ is believed to be one of the largest flat timber roofs in Europe. It sustained significant water ingress during construction, as the result of a failure to provide in the design for a temporary roof which would protect it against the ingress of rainfall. Rainwater entered the timber ‘cassettes’ within the roof, causing serious wetting, swelling, decay and other damage to occur during the policy period. Due to the presence and spread of entrapped moisture within the cassettes, the damage continued to deteriorate and develop in the roof after practical completion and after the expiry of the policy.
Insurers disputed Sky’s claim (and that of its builders, Mace Limited), contesting a raft of issues including (in particular): (1) the meaning of the term ‘damage’ within the insuring clause; (2) the scope of cover for deterioration/development damage occurring after policy expiry; (3) the scope of cover for investigation costs; (4) aggregation/deductibles.
The Commercial Court Judgment
Following a five week trial, HHJ Pelling KC (sitting as a Judge of the High Court) held, amongst other things, as follows.
(1) Physical damage. ‘Damage’ required some altered (physical) state, the relevant alteration being harmful in the commercial context in the sense of rendering the insured property less valuable or of less utility. The presence of water or moisture in cassettes which, if left unremedied, would adversely affect their stability, strength, functionality or useable life was itself damage, just as much as any swelling, decay or other deterioration caused by the ingress of water.
(2) Period of insurance. The policy only covered damage that existed (‘as it was’) at the end of the period of insurance in 2017.
(3) Investigation costs. The policy did not cover investigation costs save insofar as the investigation were to reveal damage that occurred during the period of insurance.
(4) Aggregation/deductibles. Only one deductible of £150,000 ‘any one event’ fell to be applied to Sky’s claim for damage to the roof as a whole, not one for each damaged cassette (up to as many as 472 deductibles). The relevant ‘event’ was the design decision not to have a temporary roof.
On appeal, Sky challenged the Judge’s conclusions on (2) and (3), while Insurers challenged (1) and (4).
The Appeal
Each of the issues has been determined in Sky’s favour. Lord Justice Popplewell, giving the leading judgment (with which Phillips and Snowden LJJ agree), holds in particular as follows.
(1) Physical damage. Wetting of timbers in a roof, even if capable of remediation by drying out, can constitute ‘damage’, on the natural and ordinary meaning of the word. Such an approach is also consistent with authorities concerning the meaning of the term ‘damage’ in the Criminal Damage Act 1971, and there is no reason to take a different approach to its meaning in the policy. Insurers were wrong to contend that, in order to constitute ‘damage’, timbers needed to have reached a condition requiring immediate replacement or repair. The Judge made no error in treating wetting as ‘damage’.
(2) Period of insurance. As a matter of principle and authority, the costs of remedying the foreseeable deterioration and development damage which has occurred after the period of insurance (but resulted from insured damage occurring during the period) falls within the scope of recovery of unliquidated damages for insurers’ breach of the promise to hold the insured harmless.
– As a matter of principle, this gives effect to ordinary contractual principles governing the assessment of damages and basic insurance law principles, as articulated in cases such as Chandris v Argo [1963] 2 Lloyd’s Rep. 65, The Fanti [1991] 2 A.C. 1; Sartex v Endurance Corporate Capital [2020] 2 All ER (Comm) 1050.
– In addition, the terms of the ‘Basis of Settlement’ clause recognise the insured’s entitlement to the cost of remedying such damage.
– The conclusion is supported by (other) insurance authorities relied upon by the parties: 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] 4 All E.R. 885; and, most recently, UnipolSai v Covéa [2024] EWCA Civ 1110, where Sir Julian Flaux C accepted that it is a first principle of ‘losses occurring’ (re)insurance cover that loss is attributable to the policy year in which it first occurs.
Finally, the conclusion is consistent with and supported by business common sense. A business person in the shoes of the insured would reasonably expect to be compensated for the consequences of the insured damage deteriorating or developing, absent a contract term excluding such recovery. If the insured were required to bear the additional financial consequences, that would be antithetical to the purpose of property insurance. It would also have serious adverse consequences because deterioration and development damage occurring after expiry would be uninsurable or uninsured under any subsequent property insurance cover. It would also place the insured in an unfair and uncommercial dilemma as to whether to rush into a remedial scheme.
(3) Investigation costs. On the question of principle regarding investigation costs, their recoverability does not depend on the damage which is revealed by the investigation.
– Where insured damage has occurred for which damages are recoverable under the policy of insurance, the costs of investigating the extent and nature of the damage, including any development and deterioration damage, are recoverable if they are reasonably incurred in order to determine how to remediate it. That is because they are part of the loss caused by the insured damage having happened in the first place.
– What is reasonable by way of investigation will be a matter of fact and degree in any given case. However, if reasonably incurred, they are not rendered irrecoverable merely because the result of the investigation may be to identify the absence of damage in certain areas.
– Moreover, insofar as they involve costs which increase the loss because, in the event, no damage is discovered, they fall within the second rule of mitigation.
Further, contrary to Insurers’ argument, there is no need for specific provision within the policy for the recovery such costs: they fall within the Basis of Settlement clause, but would in any event be recoverable as part of the contractual measure of damages, and as reasonable mitigation expenditure.
(4) Aggregation/deductibles. Insurers were wrong to dispute Sky’s case that ‘any one event’ is a classic short-hand aggregation provision in insurance. It is an expression with a well-established meaning, as authoritatively stated in decisions that refer back to the Dawson’s Field arbitration award, quoted extensively in Kuwait Airways v Kuwait Insurance [1996] 1 Lloyd’s Rep. 664. The Judge was correct to hold that ‘event’ denotes the cause of the damage, not the damage itself. His conclusion is supported by background context (including Kuwait Airways), the wording and operation of the retained liability clause, and the defect perils to which the deductible applies. None of these considerations were outweighed by the wording of the 72 hours clause in the policy. Finally, Insurers were wrong to contend that a decision was not capable of being an ‘event’, and the Judge applied the correct principles when conducting his evaluative assessment of the evidence.
Representation
David Edwards KC and Simon Kerr of 7 King’s Bench Walk represented Sky on the appeal, along with Crispin Winser KC of Crown Office Chambers, and all were instructed by Herbert Smith Freehills LLP (Sarah McNally and Katie Collins).
