Property insurance is generally written to cover damage caused by an insured peril during the period of indemnity. What if the damage is progressive or liable to spread? Will the insurance cover damage that worsens or spreads to further parts of the property after the policy expires?
The general principle developed in the context of marine insurance is that the insured can recover for damage that develops after the period of indemnity, provided that this post-indemnity damage has developed from damage sustained during the period of cover (Knight v Faith (1850) 15 Q.B. 649). This is sometimes referred to as the “death-blow” principle, in reference to ships that are fatally wounded during the period of cover only to sink, becoming total losses, afterwards. It may better describe some situations of this kind to say that at the end of the period the insured property is within “the grip of the peril”; Scott v Copenhagen Reins Co (UK) Ltd [2003] Lloyd’s Rep. I.R. 696 (Rix LJ at [47]).
The property addressed by the Court of Appeal’s judgment in Sky UK Limited & Another v Riverstone Managing Agency Limited & Others [2024] EWCA Civ 1567 was the Sky Campus in Osterley, West London. Completed in 2016 the building is said to have the largest timber flat roof in Europe, spanning 16,000 m2 and made of 472 three and a half ton wooden cassettes. During construction many of the cassettes were damaged by exposure to rainfall. This was due to defective design work that should have provided for the installation of temporary roof structures to protect the cassettes until they were weather proofed.
Between 1 February 2014 (the start of the project) and 15 July 2017 (one year following completion) the property was insured: “against physical loss or damage to Property insured, occurring during the Period of Insurance, from any cause whatsoever…” The insureds argued that the progression of pre-existing decay and the spread of damage to new areas after 15 July 2017 (described by the parties as ‘deterioration’ and ‘development’ damage) were within the scope of indemnity. At first instance, HHJ Pelling KC rejected that argument, holding that the insurance covered only water damage in the period of insurance ([2023] EWHC 1207 (Comm)).
Various interesting issues were raised by the parties’ appeals and cross-appeals. This note will focus on four which are often encountered and/or of particular significance in the property insurance field:
- The definition of damage under the policy;
- Cover for deterioration and development damage;
- Cover for investigation costs;
- Aggregation/deductibles.
The meaning of damage under the insuring clause
Insurers argued that in order for the timber of the cassettes to have suffered damage within the meaning of the policy they needed to reach a condition where they required immediate replacement and the wetting could not be cured by drying out works.
The Court of Appeal dismissed this submission with reference to authorities that considered the meaning of damage in the context of the Criminal Damage Act. These included R v Whiteley (1991) 3 Cr App R 25, where the Court of Appeal Criminal Division endorsed the entry in then-current Concise Oxford English Dictionary (largely replicated in the current online edition): “injury impairing value or usefulness”. The Judge had been right to find that the timber suffered sufficient wetting and decay during the period of insurance to sustain damage in this sense.
Deterioration and development damage
In overturning the first instance decision and rejecting insurers’ argument that cover was restricted under the insuring clause to damage caused to the Property within the period of insurance, Popplewell LJ (with whom Phillips and Snowden LJJ agreed) started from first principles, stating at [43]:
“A contract of insurance against damage to property is a contract of indemnity, which is often described as a contract to hold someone harmless… in the sense that the insurer promises that the assured will not suffer the insured damage. …If and when the insurer fails to perform the primary obligation, it comes under a secondary obligation to pay damages for breach of the primary obligation… That is why a property insurance claim is not at common law a claim to enforce a promise to pay money… but has by long and well-established authority been held to be a claim for unliquidated damages.”
The consequence is that the measure of recovery in a property insurance claim is determined by the common law principles governing damages for breach of contract, including causation, mitigation, and remoteness. The measure of loss in a claim in respect of damaged property will generally be the sum of money required to repair the property to the condition it would have been in if the damage had not occurred.
These general principles are subject to the express terms of the policy, however, “because it is open to the parties to a contract of insurance to modify the measure of damages for which the general law provides” (at [46]).
Nonetheless, Popplewell LJ rejected insurers’ submission that the insuring clause (quoted above) sought to restrict the measure of recovery by defining insured damage as that occurring during the policy period. This was “to confuse ‘damage’ with ‘damages’” (at [48]). The insuring clause was addressed to insurers’ primary obligation and the damage they promised would not occur. It did not seek to define the measure of loss or provide sufficiently clear words to abrogate the insureds’ entitlement to the common law measure – including the recoverability of further damage proximately caused by insured damage.
Popplewell LJ took support for his conclusion from the policy’s basis of settlement clause and his detailed analysis of the authorities relied on by the parties (including in particular Wasa International Insurance Co Ltd v Lexington Insurance Co [2010] 1 AC 180, which had been relied on heavily by HHJ Pelling KC in reaching his first instance decision). The Court of Appeal took further support from the uncommercial consequences of insurers’ position, including that development or deterioration damage occurring after the period of insurance is almost certainly uninsurable, leaving an impractical gap in cover, and that insureds would otherwise be pressured to rush their investigations and adopt urgent and potentially unreasonable solutions solely to avoid further uninsured damage sustained outside the period of indemnity.
Investigation costs
The Judge had disallowed certain investigation costs for what he described as “speculative opening up works” in light of his findings on the scope of cover. Popplewell LJ held that the costs were recoverable, and made the following statements of principle (at [89]):
“…whether investigation costs are recoverable 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… The costs will be part of the costs of repairing or replacing that part of the building which is damaged because they are costs reasonably incurred in ascertaining the scope of the insured damage and therefore in remedying it.”
Clear echoes can be seen of the generous principles applicable to a claimant seeking the costs of mitigation. Popplewell LJ recognised that, insofar as the investigation costs increase the loss because in the event no damage is discovered, then they fall within the second rule of mitigation.
Insurers submitted that investigation costs would not be recoverable unless covered by a specific and separate clause. That was rejected by the Court of Appeal (at [90]) on the basis that the reasonable costs of investigating what is required to remedy insured damage fell within both “the full cost of repairing or reinstating” insured damage and the policy’s basis of settlement clause. Popplewell LJ held such costs are “all part of the contractual measure of damages which is necessary to put the assured in the same position as if the insured damage had not occurred. It would also be recoverable as reasonable mitigation expenditure.” Specific provisions in the policy concerning “Professional Fees” and expenditure for emergency action to prevent physical loss or damage did not alter that analysis.
Aggregation/deductibles
The policy’s deductible or retained liability clause included the following:
“GBP 10,000 each and every loss,
However in respect of defective design, materials or workmanship the following will apply where option is selected by the Principal: –
GBP 150,000 any one event…”
Insurers appealed the Judge’s treatment of the single relevant event as the design decision not to use a temporary roof such that a single deductible of £150,000 applied, and hence his failure to find that a separate deductible should apply in respect of damage to each individual cassette.
Popplewell LJ endorsed HHJ Pelling KC’s finding that the ‘event’ referred to by the clause was the cause of damage and not the damage itself. His analysis was grounded in the similarity between the “any one event” wording of the retained liability clause and the language often encountered in aggregation clauses where losses are aggregated by reference to their cause: e.g. Kuwait Airways v Kuwait Insurance Co [1996] 1 Lloyd’s Rep 664 where Rix J addressed a clause providing for the aggregation of losses caused by “any one occurrence, any one location”.
The Court of Appeal further relied, amongst other considerations, on the distinction within the clause between the word ‘event’ as used in the relevant deductible and the use of ‘loss’ in the others (as the word ‘loss’ would have been used in place of ‘event’ in the relevant deductible if the parties’ intention had been to address incidents of damage). Another persuasive factor was that the £150,000 deductible is applied to claims by reference to something which, by its very nature, is liable to be a cause of loss in this context, namely defective design.
Insurers’ strongest point was the wording of a different provision in the policy (a 72 hour clause) which grounded an argument that ‘event’ in the deductible clause referred to damage rather than cause of damage. Popplewell LJ held that the 72 hour clause had been transposed into the policy from elsewhere “without any care as to its language” (at 121). With some straining, whilst giving it substantive content, the 72 hour clause could be construed consistently with the Court of Appeal’s interpretation of ‘event’, so as to neutralise insurers’ argument.
Insurers also failed in their submission that a decision (in this case the decision against the installation of a temporary roof) could not amount to an event. Popplewell LJ endorsed the conclusion of Butcher J in Stonegate Pub Co Ltd v MS Amlin Corporate Member Ltd [2022] EWHC 2548 (Comm) [2023] Bus LR 28 that a decision at a COBRA meeting in relation to COVID was an occurrence.
