A ‘Death Blow’ For Insurers? Sky & Mace v Riverstone Managing Agency [2024] EWCA Civ 1567

A ‘Death Blow’ For Insurers? Sky & Mace v Riverstone Managing Agency [2024] EWCA Civ 1567

Introduction

At the tail end of last year, the Court of Appeal handed down judgment in Sky UK Limited v Riverstone Managing Agency [2024] EWCA Civ 1567, a coverage case concerned with a time-limited occurrence-based ‘construction all risks’ policy (the “CAR Policy”) taken out by the co-insured Claimants in respect of the construction of Sky’s flagship headquarters in London (“Sky Central”). Paul Reed KC, Ebony Alleyne, and James Shaw acted for Mace successfully at trial and in the Court of Appeal.

Following a five-week Commercial Court trial in early 2023 ([2023] EWHC 1207 (Comm)), the Court of Appeal gave permission to all parties across a range of grounds and heard the appeal across four days in October 2024, handing down judgment in December 2024. There are several major points of interest arising out of the Court of Appeal’s judgment (a more general summary of the judgment can be found here) but none more important than in relation to whether, in a time-limited occurrence policy, cover extends beyond the period of insurance (“POI”) for ‘deterioration and development damage’ flowing from damage first occurring within the POI?

The answer is that, under a time-limited occurrence policy, an insured can recover for damage that deteriorates and/or develops after the POI, provided that the post-POI damage can be shown to have flowed from indemnified damage sustained during the POI. We unpack this principle and the Court’s reasoning below.

The key facts and claims

Sky and Mace (the main contractor) were co-insureds under the CAR policy underwritten by the Defendants (the “Insurers”). They each made claims under that policy in respect extensive water damage to the timber cassette roof of Sky Central from water ingress occurring during construction.

Specifically, the Claimants alleged and proved at trial that (inter alia):

1. Rainfall had entered the timber cassettes during construction between the commencement of their installation and the application of final waterproofing. Importantly, as set out below, trial judge found (and the Court of Appeal upheld) that the ingress of water during the POI was itself ‘damage’ for the purposes of the CAR policy;
2. As a result of that damage, moisture became ‘trapped’ in the timber cassettes during construction and stayed there for the following years; and
3. The retention of that moisture in the cassettes caused further damage throughout and after practical completion and the end of the POI in the form of (i) developing damage (i.e. damage spreading within the roof from damaged to previously undamaged areas) and (ii) deteriorating damage (i.e. the worsening of damage occurring during the POI in the form, inter alia, of wood rot and other forms of decay.

The CAR Policy provided as follows:

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

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…” (the “Settlement Clause”) (our emphasis added)

The Claimants claimed to be indemnified under the Insuring Clause in respect of both damage occurring within the POI and deterioration and development damage manifesting itself thereafter. Two major issues arose: (i) what was the meaning of ‘damage’ in the CAR Policy, and (ii) does the Insuring Clause extend to deterioration and development damage post-dating the POI.

The meaning of ‘damage’

Insurers contended that in order to constitute damage in this context, the timbers of the cassettes needed to have reached a condition requiring ‘immediate replacement or repair’ and that anything less did not constitute damage within the meaning of the Insuring Clause.

Like the Judge at first instance, the Court of Appeal rejected Insurers’ argument as “untenable”, the Court of Appeal drawing in particular on the authorities concerned with the meaning of damage under the Criminal Damage Act 1971 and holding that ‘damage’ in this context was any change to the physical nature of tangible property which impairs its value or usefulness to its owner or operators. This construction was consistent both with those authorities and the natural and ordinary meaning of the word and there was no reason to take a different approach to its meaning in the Insuring Clause.

Accordingly, the Judge had been correct at first instance to find that ‘damage’ had occurred prior to the expiry of the POI (and, by extension, practical completion) in the form of water ingress to the timber cassettes, irrespective that it would take some time for that damage to develop or deteriorate further.

Development and deterioration damage

On development and deterioration damage, Insurers’ argument (which was accepted by the Judge at first instance) was that the contractual measure of indemnity set out in the Insuring Clause was limited to damage to Property Insured occurring during the Period of Insurance and therefore the development and deterioration damage manifesting itself after the end of the POI was not within the contractual indemnity under the CAR Policy.

At first instance, the Judge treated the issue as having been determined in the Insurers’ favour by the House of Lords decision in Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40 and the statements in the lead judgment of Lord Collins, that in a policy covering losses occurring during a policy period, the policy does not extend to cover damage occurring before or after that period. In doing so, the trial judge distinguished Knight v Faith (1850) 15 QBD 649 and Connect Shipping Inc v Sveriges Angfartygs Assurance Forening (The Renos) [2019] UKSC 29.

The consequences of the judge’s conclusion in this respect were very substantial, in particular the exclusion from the indemnity any deterioration or development of damage to any cassette which deterioration or damage could not be shown to have occurred during the POI itself, even where the cassette in question had suffered damage (in the form of water ingress) in that period the inevitable consequence of which was worsening or spreading damage within the Property Insured.

On appeal, Sky and Mace contended that the first instance judge had erred in law on the following grounds (as summarised by Popplewell LJ) at [41]):

1. It is a foundational principle that insurance claim is a claim for unliquidated damages (Firma C-Trade S.A. v Newcastle Protection and Indemnity [1991] 2 AC 1) and as such the measure of recovery is for loss and damage suffered by reason of the insured event occurring during the POI, including for loss caused thereafter by reason of deterioration or development damage.
2. That was the measure of loss in the Settlement Clause which provided for “the full cost of repairing, reinstating or replacing property lost or damaged” (our emphasis).
3. Where an insurance policy provides cover on a ‘losses occurring basis’ (i.e. where the trigger is, say, physical damage, bodily injury, or a peril occurring during the POI), as a matter of first principles, the loss is attributable to the point in time where it first occurs (UnipolSai Assicurazioni Spa v Covea Insurance Plc [2024] EWCA Civ 1110) and, if the trigger occurs during the POI, the whole of any continuing damage is treated as occurring during the POI: Muncipal Mutual (per Hobhouse LJ); The Renos per Lord Sumption at [10] and Various Eateries Trading Ltd v Allianz Insurance Plc [2024] 2 All ER (Comm) 414.
4. Insurers’ alternative construction of the Insuring Clause was highly uncommercial.

Overturning the first instance judge, the Court of Appeal found in favour of Sky and Mace on the point, setting out the relevant principles and their conclusion (contrary to the trial judge’s view) that none of the authorities relied upon by either the Insurers or the Claimants were inconsistent with those principles. The principles, which Popplewell LJ noted are often misunderstood, can be summarised as follows (see [43]-[50]):

1. An insurer’s promise is in the nature of a warranty that the insured damage will not occur. The insurer’s primary obligation is, therefore, breached the moment the insured damage occurs, per Lord Sumption JSC in The Renos at [10]:“A claim on an insurance policy is a claim for unliquidated damages. The obligation of the insurer is to hold the assured harmless against an insured loss, from which it follows that where the insurance is against physical damage to property the insurer is in breach of that obligation as soon as the damage occurs...”
2. The consequence is that the measure of recovery in a property insurance claim is governed by general common law principles applicable to breach of contract where (inter alia) the general object is to put the innocent party in the same position as if the breach had not occurred, subject to any express policy terms to the contrary, per Leggatt LJ (as he then was) in Sartex Quilts & textiles Ltd v Endurance Corporate Capital Ltd [2020] EWCA Civ 308.
3. Insurance policies will, by their express terms, often have modified the measure of damages, for example by the introduction of policy limits, deductibles, exclusions of certain types of losses, etc.). However, in the usual way, such modification will require clear words. It is a general canon of construction that parties to a contract do not intend to exclude valuable remedies for which the law otherwise provides without clear words to that effect: see Gilbert Ash v Modern Engineering (Bristol) Ltd [1974] AC 689.
4. A temporal limit of the insured damage is insufficient to modify those ordinary principles:“What is required is some clear manifestation of an intention to depart from the normal remedies provided by law by way of unliquidated damages as the secondary liability for failure to prevent insured damage occurring during the policy period. Mr Rigney argued that the parties had made clear the intended measure of recovery in the Policy in this case by defining the insured damage as that occurring during the POI. That does not, however, provide the clear wording necessary to modify the common law entitlement to damages. It is to confuse ‘damage’ with ‘damages’. The Insuring Clause defines the damage to which the insurer’s primary obligation attaches, which it promises will not occur. It does not purport to define or confine the loss for which the insurer is liable in damages when in breach of promise, which is for the sum necessary to hold the assured harmless from having suffered the insured damage in the first place. If the insured damage has caused further damage, then subject to the usual principles of mitigation and remoteness etc, the insurer is liable for the loss resultant upon suffering that further damage. Nothing in the Insuring Clause defining the scope of the primary obligation is itself a definition of the measure of recovery; it is addressed to the insurer’s primary obligation in defining the damage which it promises will not occur; it is not addressed to the secondary obligation to pay unliquidated damages for that breach.”

In other words if the insured damage (damage first occurring during the POI) has, on ordinary causation principles, resulted in further damage (i.e. deterioration and development damage in this case) then an insurer is liable for that further damage, subject to the usual principles of mitigation and remoteness.

The measure of loss in such a claim will ordinarily be the sum required to put the property in the condition it would have been in but for the insured damage it suffered. Indeed, in this case, the Settlement Clause confirmed, if there were any doubt, that the measure of that loss under the CAR Policy was the full cost of such repair or replacement.

Interestingly, Insurers did not plead or pursue any case on remoteness of damage nor any argument that Sky or Mace had failed to mitigate their losses.

The ‘death blow’ principle

The general principle – developed in the context of marine insurance, historically concerned with ships fatally wounded during a period of cover by developing into a total loss after cover expired – is that an insured can recover for damage which develops after a period of insurance provided that this damage developed from damage sustained during the period of insurance: Knight v Faith (1850) 15 Q.B. 649. This is the ‘death blow’ principle.

It has also been described as a situation where, as at the end of the period of insurance, the insured property is within “the grip of the peril”: Scott v Copenhagen Reins Co (UK) Ltd [2003] Lloyd’s Rep. I.R. 696.

Although Knight v Faith did not, on its facts, concern a total loss developing after a period of insurance, it is a first instance decision which is nevertheless routinely relied on in a marine insurance context as authority for the proposition that a total loss of a vessel after the policy period as a result of a peril (a ‘death blow’) sustained during the policy period is recoverable, provided there is no intervening cause.

Further support for that proposition is to be found in the judgment of Lord Sumption JSC in The Renos at [10] (citing Knight v Faith):

“The rule that the loss is suffered at the time of the casualty applies notwithstanding that the loss developed thereafter, unless it developed as the result of something that can be regarded as a second casualty, breaking the chain of causation between the first one and the loss. For that reason, it has been held that the fact that the policy expires before the loss has fully developed will not affect the assureds right to recover in full.”

As above, at first instance, Insurers had submitted and the judge accepted that the decision in Wasa – was determinative of the issue against the Claimants. The Court of Appeal disagreed. On its facts, Wasa concerned contamination caused, whether continuously or continually, by fresh disposal or leakage of waste and so, in so far as the case concerned damage after the policy period, it was not considering deterioration or development damage of the kind in issue in Sky; it was concerned with damage which was caused separately in each calendar year (see [73]):

“If and insofar as it was addressing damage occurring after the policy period at all, it was not addressing development or deterioration damage in the sense which arises in the current dispute. What was said about ‘losses occurring during’ cover being limited to damage occurring during the policy period must be interpreted simply as excluding damage which did not occur, and was not caused by damage occurring, during the policy period, which is what the case was concerned with.”

In any event, the Court of Appeal considered that the obiter comments of Lord Mance in Wasa at [39] were consistent with the proposition – relied on by Sky and Mace in this case – that where the insured peril occurs during the continuance of risk, the “damage materialising or developing from it after the policy period would still be covered” (our emphasis).

Insurers’ uncommercial case

The Court of Appeal also concluded (per the Claimants’ submissions) that Insurers’ argument on this point would, if accepted, have highly uncommercial consequences: see [80]-[82]. In particular:

1. 1. 1. A business person in Sky and Mace’s positions would reasonably expect to be compensated for deterioration and development damage under the CAR Policy, subject to any express contrary terms. Forcing an insured to bear the cost of dealing with deterioration and development damage flowing from insured damage within the policy period would be “the antithesis of what property insurance is for” (per Popplewell LJ at [80]).
      2. A further effect of Insurers’ position would have been to make deterioration and development damage occurring after the expiry of the POI uninsurable under any separate and subsequent property insurance cover. That is so even with respect to a policy obtained before any damage occurred, since the deterioration and development damage would not be a fortuity.
      3. It would present an insured with an unfair and uncommercial dilemma between undertaking a reasonable but time-consuming and measured process of investigation and remedy (at the cost of suffering financial loss from uninsured deterioration or development damage in the meantime) or avoiding that uninsured deterioration or development damage by adopting an urgent solution which the insurers may later contend amounted to a failure to act reasonably in mitigation.

The Court of Appeal thus allowed Sky and Mace’s appeal on deterioration and development damage and remitted the matter to the first instance judge for quantification, together with various other matters.

What next?

The Court of Appeal refused Insurers permission to appeal in January 2025 and a renewed application for permission to the Supreme Court is awaited.

If left undisturbed by the Supreme Court, the Sky decision confirms the centrality of the ‘death blow’ principle in a property insurance context and stands as a very significant win for policyholders of time-limited occurrence policies. Policyholders and insurers in existing disputes may also need to reappraise their positions with respect to any damage manifesting after a period of insurance which can be shown to have deteriorated or developed from insured damage first occurring within that period of insurance.

Article by Aileen McErlean and James Shaw

3 February 2025