Sky and Mace successful in major Court of Appeal decision

(1) Sky UK Limited (2) Mace Limited (Appellants/Cross-Respondents) v Riverstone Managing Agency Limited & Ors (Respondents/Cross-Appellants) [2024] EWCA Civ 1567

Paul Reed KC, Ebony Alleyne, and James Shaw – acting in the case of Sky UK Limited and Mace Limited v Riverstone Managing Agency Limited & Ors [2024] EWCA Civ 1567 have been successful on behalf of Mace in the Court of Appeal on all issues across all parties’ appeals and cross-appeals.

Background

The claims were in respect of extensive water damage to the roof of Sky’s global headquarters in West London (“Sky Central”). The flagship Sky Central building was constructed by Mace as the main contractor, between 2014 and 2016 and was insured under a construction all risks policy (the “Policy”). Mace was a named insured under the Policy. Mace subcontracted the roof design package to Prater Ltd.

Substantial water ingress entered the unventilated timber roof during construction as a result of a failure to incorporate temporary waterproofing into the design, resulting in significant roof damage. The water ingress occurred prior to practical completion and during the period of insurance, but the resulting damage deteriorated and developed after practical completion in April 2016 and after expiry of the period of insurance in July 2017.

Insurers denied coverage including the deterioration and development damage between 2017 and 2019. Sky and Mace each brought claims under the Policy for declarations and indemnities for remediation of all the damage.

The decision at first instance

After a five-week trial in January-February 2023, before His Honour Judge Pelling KC (sitting as a Judge of the High Court) (the “trial judge”), Sky and Mace were successful on liability. The trial judge found that:

• The roof was damaged for the purposes of the Policy at the point water ingress occurred and before that ingress had caused any further damage. The Judge held the meaning of ‘damage’ to be an adverse change which impairs the property’s use or value, rejecting Insurers’ much more restrictive interpretation, requiring that property must need immediate repair or replacement to qualify as damaged.
• Sky was entitled to be indemnified under the Policy for all damage occurring prior to the end of the period of insurance, in an amount to be quantified at a further hearing. Mace was entitled to be indemnified for all damage up to practical completion and was entitled only to declaratory relief. The Judge declined to make a monetary award to Mace effectively dismissing a £198m claim.
• However, Mace and Sky were entitled to be indemnified only for damage which had occurred during the insured period and not for the costs of remediating any damage which, although first occurring in the insured period, had deteriorated or developed thereafter.
• The costs of investigations to locate damage were rejected, save insofar as those investigations revealed physical damage.
• Only one retained liability/deductible of £150,000 applied to the Claimants’ claims. The relevant “event”, was the decision to build to a design without temporary waterproofing and, as such, only one retained liability of £150,000 applied. The trial judge rejected the Insurers’ argument that damage was in fact the event, which dictated that up to 472 deductibles of £150,000 (£70.8m) each applied instead.

All parties appealed to the Court of Appeal and were granted permission on a range of issues. The appeal was heard over four days in October 2024.

The Court of Appeal’s decision

Lord Justice Popplewell (with whom Snowden and Phillips LJJ agreed) determined all key issues in favour of Mace and Sky.

Meaning of ‘damage’

The Court of Appeal rejected the Insurers’ appeal on the meaning of ‘damage’ in the Policy, upholding the trial judge’s construction.

Drawing on authorities concerning the Criminal Damage Act 1967, the Court of Appeal held that (subject to Policy wording to the contrary) ‘damage’ means an adverse change which impairs the relevant property’s use or value. As such, the roof was damaged in this case as soon as it suffered water ingress during construction.

The Court of Appeal rejected the Insurers’ argument that there could be no ‘damage’ unless and until the function of the relevant property had been so compromised that it needed immediate replacement or repair.

Developing and deteriorating damage

The Court of Appeal overturned the first instance Judge, in Mace and Sky’s favour.

It held that Insurers are liable to indemnify both Mace and Sky for all damage that  occurred during the period of insurance but deteriorated or developed thereafter, overturning the trial judge’s decision (and rejecting the Insurers’ argument on appeal) that the Claimants were only entitled under the policy to indemnity in respect of the cost of repair of such damage as existed at the end of the insured period.

The Court reasoned the position from first principles of insurance law, relying on (inter alia) the foundational decisions in Knight v Faith, The Fanti and, more recently, the Supreme Court’s decision in The Renos.

The Court held the trial judge had erred in classifying investigation costs at ‘speculative opening up works’, concluding that investigation costs reasonably incurred to determine how to remediate damage were covered, whether or not damage was revealed.

Aggregation / Retained Liability

The Court of Appeal also had to determine the number of deductibles/retained liabilities which would apply to the Claimants’ claims under the Policy (one retained liability per “any one event”).

Insurers argued on appeal that, properly construed, up to 472 retained liabilities applied to the Claimants’ claims under the Policy, contending that the trial judge had erred in his construction and application of the Retained Liability provision in treating the relevant single ‘event’ as the design decision not to use a temporary roof. The effect of this argument, if correct, would have been to significantly reduce or extinguish altogether the value of the Claimants’ claims under the Policy.

Popplewell LJ dismissed the Insurers’ appeal and upheld the trial judge’s decision. He held that the trial judge had been right to find that ‘event’ refers in the Policy to the cause of the damage and not the damage itself, describing the ‘any one event’ wording as “a classic term for aggregation of losses by reference to the cause of the losses” (paragraph 118) and endorsing the principles set out in Various Eateries and Stonegate in the context of Covid-19 business interruption claims. The Court of Appeal “unhesitatingly” rejected the Insurers’ argument that a decision could not be an event as a matter of principle: paragraph 122.

Mace’s entitlement to monetary judgment

The Court further held that (contrary to the trial judge’s conclusion) Mace had pleaded and proved damage at Practical Completion and was entitled to a monetary judgment in addition to and distinct from Sky. The Court of Appeal rejected the Insurers’ argument (and the decision at first instance) that Mace should be confined only to declaratory relief given the overlap between its claim and that of Sky.

The Court of Appeal therefore remitted the matter to the trial judge for further determination of Mace and Sky’s full monetary entitlements under the Policy.

Representation

Mace was represented both at first instance and on appeal by Paul Reed KC, Ebony Alleyne, and James Shaw, who were instructed by Richard Moody, Bryn Hodges, Celia Lewis, and Guy Davies of Clyde & Co LLP.

Please click here to view a copy of the Court of Appeal’s judgment.