Sky UK Ltd and another v Riverstone Managing Agency Ltd and others

Insurance – Building contract – Indemnity – Appellants claiming under construction all risks policy for extensive damage to timber roof of building – Judge holding appellants only entitled to indemnity for repair of damage existing at end of period of insurance not deterioration occurring afterwards – Appellants appealing – Whether terms of policy covering costs of remedying later deterioration and development damage – Appeal allowed The appellants brought claims under a construction all risks policy underwritten by the respondent insurers. The claims were in respect of extensive water damage to the roof of the first appellant’s global headquarters building, known as Sky Central, built on the Sky campus in Osterley, west London. The building was constructed for the first appellant by the second appellant as main contractor under a JCT 2011 Design and Build Contract. The second appellant was the named insured under the policy. The roof was made up of 472 individual wooden cassettes. During the construction (the period of insurance) water entered some of the cassettes leading to wetting of internal timbers and irreversible swelling and structural decay. The spread of entrapped moisture within the cassettes resulted in the damage continuing to develop in the roof after practical completion and after the policy expired. The first appellant claimed the cost of addressing all damage to the roof structure including deterioration and development damage. Disputes arose concerning the extent of damage at the end of the period of insurance and the quantification of recoverable loss in respect of any such damage. The judge held, amongst other things, that there was “damage” within the meaning of the policy if a tangible physical change occurred to the property insured which impaired its commercial value. However, the first appellant was only entitled to indemnity for the repair of damage which existed at the end of the period of insurance, not deterioration or development occurring afterwards: [2023] EWHC 1207 (Comm). The appellants appealed. Held: The appeal was allowed. (1) The wetting of timbers in a roof could constitute “damage” on the natural and ordinary meaning of the word, even if remediable by drying out. That was consistent with authorities concerning the meaning of “damage” in the Criminal Damage Act 1971, and there was no reason to take a different approach to its meaning in the policy. The judge did not err in treating wetting as “damage”. A contract of insurance against damage to property was a contract of indemnity, It involved a promise to hold the assured harmless in the sense that the insurer promised that the assured would not suffer the insured damage. It was in the nature of a warranty that the insured damage would not occur, such that the insurer was in breach of the promise the moment the damage occurred. That promise represented the insurer’s primary obligation under the contract of insurance. If and when the insurer failed to perform the primary obligation, it came under a secondary obligation to pay damages for breach of the primary obligation. That was why a property insurance claim was not at common law a claim to enforce a promise to pay money, but had by long and well-established authority been held to be a claim for unliquidated damages. (2) As a matter of principle and authority, the cost of remedying the foreseeable deterioration and development damage which occurred after the period of insurance which resulted from insured damage occurring during that period was within the measure of recovery under the policy. That was simply an application of the contractual principles governing assessment of damages and basic insurance law principles. Furthermore, the terms of the “basis of settlement” clause recognised the insured’s entitlement to the cost of remedying such damage. It was also a first principle of “losses occurring” (re)insurance cover that loss was attributable to the policy year in which it first occurred: Chandris v Argo [1963] 2 Lloyd’s Rep 65, The Fanti [1991] 2 AC 1, Sartex v Endurance Corporate Capital [2020] 2 All ER (Comm) 1050 and UnipolSai v Covéa [2024] EWCA Civ 1110; [2024] PLSCS 175 considered. That conclusion accorded with 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 the antithesis of what property insurance was for. It would also have serious and unacceptable 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 undertake a reasonable but time consuming and measured process of investigation and remedy. (3) Where insured damage occurred for which damages were recoverable under the policy, the costs of investigating the extent and nature of the damage, including any development and deterioration damage, were recoverable if they were reasonably incurred to determine how to remediate it. They were part of the loss caused by the insured damage having happened in the first place. What was reasonable by way of investigation was a matter of fact and degree in any given case. If reasonably incurred, the costs were not rendered irrecoverable merely because the result of the investigation might be to identify the absence of damage in certain areas. Moreover, insofar as they involved costs which increased the loss because, in the event, no damage was discovered, they fell within the second rule of mitigation. There was no need to provide specifically in the policy for the recovery of such costs as they fell within the scope of the basis of settlement clause. It was all part of the contractual measure of damages and would also be recoverable as reasonable mitigation expenditure. (4) The judge was correct to hold that “event” referred to the cause of the damage, not the damage itself. The important background context known to the parties included the fact that “any one event” was a classic term for aggregation of losses by reference to the cause of the losses: Kuwait Airways v Kuwait Insurance [1996] 1 Lloyd’s Rep. 664 considered. The judge had applied the correct principles. His evaluative assessment applying those principles was one to which he was entitled to come on the evidence. David Edwards KC, Crispin Winser KC and Simon Kerr (instructed by Herbert Smith Freehills LLP) appeared for the first appellant; Paul Reed KC, Ebony Alleyne and James Shaw (instructed by Clyde & Co LLP) for the second appellant; Andrew Rigney KC, Simon Goldstone and Patrick Maxwell (instructed by DAC Beachcroft LLP) appeared for the respondents. Eileen O’Grady, barrister Click here to read a transcript of Sky UK Ltd and another v Riverstone Managing Agency Ltd and others