Contractors all risks insurance – Application of Deductibles (Sky and Mace v Riverstone and others)

Background

In a previous article on the case of Sky UK Limited and Mace Limited v Riverstone Managing Agency Limited and others [2023] EWHC 1207 (Comm) we covered the Commercial Court's judgment to the extent that it addressed the scope of cover available to a third party insured under a construction all risk policy ("the Policy").  A further key issue addressed by the Judge was the number of deductibles applying to Sky and Mace's claim for an indemnity for the remedial works to the defective roof at Sky Central.

The roof, covering 16,000 square metres and said to be the largest flat timber roof in Europe, consists of a series of glue laminated timber beans known as Glulams on which 472 cassettes sit forming a secondary roof structure.  The roof was damaged and required replacement due to exposure to substantial rainfall prior to the completion of the permanent waterproofing installation. As no temporary weather protection was provided during this period rainwater entered the cassettes. Sky and Mace contended that the principal means of the water ingress was attributable to the way the gutters were constructed, with a gap created underneath the underlay without any protection from a temporary roof, described as a "fundamental flaw", as well as other means such as the holes in the cassettes.

Applicable Deductibles

The insurers argued that a 'Retained Liability' under the Policy of £150,000 applied to the replacement of each cassette separately (which for all 472 cassettes would equate to £70.8 million), whereas Sky and Mace argued there was one deductible of £150,000 to be applied to the entire claim for remedial works to the roof as a whole. Sky and Mace succeeded in their argument that only one deductible applies.

As is fairly standard in relation to projects such as Sky Central the Policy incorporated standard form exclusions for damage caused by defects in design, plan, specification, materials or workmanship but which included write backs for differing degrees of cover.  In this case, the applicable standard exclusion was Design Exclusion 5 the effect of which the Judge described as follows:

"Although the language is convoluted, the effect of the provision is reasonably clear: if any Property Insured is defective in [design plan specification materials or workmanship], the Policy will not respond unless loss or damage to the defective Property Insured is caused by that defect, in which case the Policy will respond but subject to a more limited exclusion from recoverability of the additional cost of and incidental to any improvements to the original design plan specification materials or workmanship of the relevant defective Property Insured".

The description of the wording as "convoluted" may resonate with practitioners who have had to grapple with such policy wordings! Reflecting the wide nature of the cover under DE5 a special deductible of "GBP 150,000 any one event" applied. In all other cases a deductible of £10,000 each and every loss applied.

Whilst there was common ground between the parties that the damage to the cassettes had been caused by water ingress, they disputed "how, why and when the water that caused the damage entered the cassettes" and the parties' technical experts disagreed as to the nature of the defects giving rise to water ingress.  However, a key part of Sky and Mace's position was that the water ingress would not have occurred at all had a temporary roof system been in place pending the installation of a permanent waterproof membrane across the affected areas and that this was the "event" giving rise to the damage. The Insurers appeared to dispute this on two bases namely that i) a decision or plan (in this case not to use a temporary roof) could not amount to an "event" and ii) that the nature of the defects giving rise to the water ingress mean that the temporary roof would not have prevented it.

The Judge rejected both points. In terms of the defects giving rise to the ingress the Judge was not persuaded by the Insurers' expert whose opinions were described as "theoretical possibilities" by Sky and Mace and "implausible" by the Judge. This was in contrast to the approach of Sky and Mace's expert who identified causes supported by "intrusive investigations" and testing and the Judge found the explanation given by the expert to be convincing. Furthermore, the water ingress caused by the issues accepted by the Judge would not have occurred had the temporary roof been in place.

Regarding whether the decision not to install a temporary roof (that such a roof was required was not seriously in dispute) could be an event meaning that only one deductible of £150,000 would apply was also determined in Sky and Mace's favour.

The Judge referred to Axa Reinsurance (UK) Plc v Field [1996] 1 WLR 1026 which defined "event" in an insurance context as  meaning something that happens at a particular time, at a particular place and in a particular way. That covered a decision with regard to the use or not of temporary roofing. On the basis that the Judge found that but for the decision not to utilise the temporary roof the damage would not have occurred during the period of insurance he had no difficulty in determining that the decision satisfied the unities of time, place and cause required for an event and that it was the event causing the loss.  Therefore, one deductible of £150,0000 applied.

This was clearly a significant decision on the basis that the application of separate deductibles to each cassette would have obliterated the quantum of the claim.