The Court of Appeal of England and Wales recently considered the scope of coverage under a “construction all risks” (CAR policy). The Court’s decision provides welcome clarity on a number of issues and a useful precedent for insureds. One of the key findings concerns whether a time-limited ‘occurrence’ policy provides cover for deterioration and damage that occurred beyond the period of insurance, for initial damage that first occurred within that period.

The case is Sky & Mace v Riverstone Managing Agency [2024] EWCA Civ 1567.

What the case was about

Sky UK Limited and Mace Limited were co-insureds under a CAR policy. It provided cover in relation to Mace’s construction of Sky’s West London headquarters in 2016, known as Sky Central. During construction, Mace failed to erect temporary roofing over a newly constructed wooden roof, which was made up of 472 individual cassettes. Water ingress resulted in swelling of internal timber and structural decay during the period of insurance. Efforts to remediate the initial moisture ingress proved unsuccessful and further damage occurred after the period of insurance due to the spread of moisture internally.

Sky and Mace claimed an indemnity under their CAR policy, which read:

“The Insurers shall, subject to the Terms of this Contract of Insurance, indemnify the Insured against physical loss or damage to Property Insured, occurring during the Period of Insurance, from any cause whatsoever ….”

“In settlement of claims under the Section of the Contract of Insurance the Insurers shall, subject to the terms and conditions of the contract of insurance, indemnify the Insured on the basis of the full cost of repairing, reinstating or replacing property lost or damaged (including the costs of any additional operational testing, commissioning as a result of the physical loss or damage which is indemnifiable hereunder) even though such costs may vary from the original construction costs…”

Sky and Mace also sought an indemnity for the costs of investigating the extent of the damage.

Insurers declined the claim on the basis that only damage occurring during the period of insurance was covered under the insuring clause. They argued that the deterioration and further damage occurring after the period of insurance was not covered. The insurers also contended that the cassettes needed to have deteriorated to a condition requiring immediate replacement and repair to meet the threshold of damage in the CAR policy. Sky and Mace’s claim for its full investigation costs was declined on the basis that only investigation costs that revealed damage that occurred during the period of insurance were insured.

Following a five-week hearing in 2023, the Commercial Court found largely in the insurers’ favour, determining that:

1. Sky and Mace were entitled to be indemnified for damage occurring within the period of insurance, but not the deterioration and damage occurring after the period of insurance.
2. The roof had suffered damage within the meaning of the policy.
3. The policy required the insurers to indemnify Sky and Mace for investigation costs only insofar as those investigations revealed damage during the period of insurance.

Sky and Mace appealed the Commercial Court’s findings in (1) and (3) above, while the insurers cross-appealed the Court’s findings in (2).

Court of Appeal decision

The Court of Appeal allowed Sky and Mace’s appeal on items (1) and (3) above and  dismissed the insurers’ cross appeal on (2).

Cover for deterioration and damage

In the Commercial Court, the Judge had applied the House of Lords’ decision in Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40, which held that in occurrence-based policies, the indemnity does not extend to cover damage occurring before or after the period of insurance. On this finding, deterioration or damage to any cassette that could not be shown to have occurred during the period of insurance, even where the initial damage in the form of water ingress had occurred during the period of insurance, could not be covered.

The Court of Appeal overturned that decision on the following grounds:

1. The Court held that an insurance claim is a claim for liquidated damages. On this analysis, an insurer’s promise is that the insured damage will not occur, meaning its primary obligation is breached the moment the damage occurs. The measure of recovery is governed by general contractual law principles, meaning that the objective is to place the insured in the same position as if the breach had not occurred, subject to express policy terms to the contrary. The result of this approach was that the insurers were required to indemnify Sky and Mace for loss and damage arising from an insured event occurring during the period of insurance, including for loss caused after the period of insurance by reason of deterioration of damage that first occurred during the period of insurance.
2. Any deviation from this general principle would require clear wording in the policy. This was consistent with the policy wording indemnifying Sky and Mace for the full cost of repairing, reinstating or replacing property, which included deterioration and damage arising from the insured event occurring during the period of insurance.
3. An occurrence-based policy indemnifies an insured for perils occurring during the period of insurance. If the loss first occurred during the period of insurance, all continuing damage is treated as occurring during the period of insurance.
4. The insurers’ construction of the CAR policy in this regard was uncommercial.

In making its findings, the Court of Appeal referred to the “death blow” principle. Developed in the context of marine insurance, the principle is that an insured can recover for damage developing after the period of insurance so long as the damage developed from damage sustained during the period of insurance. It was therefore possible to distinguish Wasa, where the damage was continuously occurring separately within each calendar year by way of fresh disposal of leakage or waste, as opposed to the ongoing effects of leakage or waste occurring during the period of insurance.

Meaning of “damage” in the policy

The insurers contended that, in order to constitute damage, the timbers of the cassettes must have deteriorated to a point requiring “immediate replacement or repair”.

The Court of Appeal agreed with the Commercial Court that this argument was untenable. It held that damage is any change to the physical nature of tangible property impairing its value or usefulness.

As such, the Commercial Court was correct to conclude that damage had occurred prior to the expiry of the period of insurance through water ingress, even though the full extent of the damage did not crystallise until later.

Cover for investigation costs

The Court of Appeal overturned the Commercial Court’s finding that only investigation costs revealing damage occurring during the period of insurance would be covered because such a finding would be inconsistent with the Court of Appeal’s findings about the scope of cover under the policy. The Court of Appeal determined that, where insured damage has occurred for which damages are recoverable under the policy, 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.

Our view

The Court of Appeal’s decision provides welcome clarity on the meaning of “damage” and the scope of an indemnity under an occurrence-based policy.

Commerciality is central to the Court of Appeal’s reasoning. Without clear contractual terms to the contrary, an insured can reasonably expect to be indemnified for damage arising from an insured event during the period of insurance. Additionally, the Commercial Court’s interpretation would have resulted in deterioration and damage occurring after the period of insurance essentially uninsurable, including under subsequent cover. Insureds would be placed in the unenviable position of having to choose between undertaking a reasonable but time-consuming investigation at the risk of suffering financial loss from uninsured deterioration damage, or avoiding uninsured deterioration damage by adopting expensive and urgent solutions that insurers may later contend amount to failure to reasonably mitigate.

The Court of Appeal was careful to make clear that the deterioration damage was a continuation of damage arising from the insured event during the period of insurance. It is therefore distinguishable from cases like Wasa where the damage after the period of insurance resulted from separate and continuous occurrences.

The Court of Appeal’s decision reaffirms the requirement for insurers to use clear policy wording. Where cover for losses is to be excluded from the scope of the insuring clause, clear wording must be used through the use of exclusions or sub-limits.

The United Kingdom Supreme Court has granted the insurers’ application to appeal the Court of Appeal’s findings. We await the outcome of any further appeal.