The recent landmark judgment has provided Sky UK Limited & Another v Riverstone Managing Agency Limited & Others clarity on the interpretation of Construction All Risks (CAR) insurance policies. Looking at the High Court and the Court of Appeal judgments, the decisions addressed critical issues such as the definition of damage, post-policy period liability, co-insurance coverage, deductibles and remedial schemes highlighting the interplay between contractual obligations and insurance policy interpretations. 

Background of the Case

Sky UK Limited (Sky) constructed its global headquarters, ‘Sky Central’ which featured one of Europe’s largest flat timber roofs. The Works ran between 2014 and 2016 with Mace Limited (Mace) appointed as the main contractor under an amended JCT Design and Build Contract 2011 (the Contract).

To provide you with a summary, the structure of the roof relied on 472 laminated timber cassettes and the roof was left without temporary weather protection during the construction which exposed it to heavy rainfall. This caused rainwater ingress and damage to the roof structure (i.e. wetting, swelling and decay of the timber cassettes). Despite drying attempts, the damage continued to deteriorate beyond the building’s practical completion in April 2016 and beyond the expiry of the insurance policy.  

Sky sought to recover the estimated £200 million required to rectify the roof from its CAR policy which was underwritten by Riverstone Managing Agency Limited and other insurers (the Insurer). The insurers contested the claim and Sky issued proceedings to challenge their refusal of the claim.

High Court Findings

In the first instance, HHJ Pelling KC ruled , that while there was damage during the policy period, the Insurers were only liable for the cost of repairing the damage that existed at the end of the policy period excluding any deterioration or development of damage occurring after practical completion in April 2016. To provide you with a high-level summary of the judgment: 

1. Scope of Coverage
The Court ruled that Mace’s coverage under the CAR policy ended upon the building’s practical completion (as defined by the Contract). This affirmed that the scope of the coverage for third-party insurers is determined by the construction contract. 

2. Definition of Damage 
Physical damage was defined as any tangible change impairing stability, strength, or usability. Water ingress during the policy period was deemed sufficient to constitute damage, even before the structural failure of the roof. 

3. Aggregation of Claims
Damage was attributed to a single event, the decision not to use temporary waterproofing, leading to the application of a single deductible/excess (otherwise known as excess). 

4. Remedial Scheme
The Court evaluated the remedial schemes put forward by the parties and endorsed one proposed by the insurers, encouraging further agreement on the associated costs of the same.

Sky requested permission to appeal, and the appeal hearing was heard on 15 October to 18 October 2024. The judgment was subsequently handed down on 16 December 2024.  

Court of Appeal

The Court of Appeal’s judges (LJ Popplewell, Phillips and Snowden) found in Sky’s favour. The judgment found: 
 

1. Scope of Coverage
The definition of damage within the insuring clause encompasses any tangible physical change that impairs the commercial value or utility of the insured property. This includes wetting that, if unremedied, would lead to structural issues, even if the consequences have not become apparent by practical completion (and therefore the expiry of the policy). As such, the policy covers not only the damage that occurred during the policy period but any foreseeable deterioration or development of that damage occurring as a consequence. This is as long as the initial cause was within the policy period. 
 
2. Recoverability of Investigation Costs
Sky could recover its reasonable expenses incurred in investigating potential damage even if the investigations reveal no damage in some areas. The court emphasised that investigation costs are integral to mitigating and managing the effects of an insured event and denying the recovery of investigation costs would discourage proactive management of potential risks and losses. 

3. Clarification on Deductibles
The absence of temporary waterproofing was the underlying cause of all the damage, making it a single event under the policy (which in turn meant that only one deductible/excess was applicable). The court emphasised that the term ‘Event’ in insurance policies typically refers to a single, causative incident, not the resultant damage. In these circumstances, the damage to the timber cassettes (even thought it manifested in multiple locations) all stemmed from the same root cause, the lack of waterproofing. 

What happens now? 

The Court of Appeal's role in the judicial system is to decide points of law only. Therefore, the case will now be referred to the Commercial Court for further proceedings. The first-instance judge will now determine the specific application of these principles to the facts and the amount payable under the policy (i.e. the value of Sky and Mace’s losses considering damages, any causation issues, and any deductible/excess amounts).

Conclusion 

The case clarifies the definition of damage under CAR’s policies to include any physical alteration that diminishes the value or utility of the property, even if the full extent of the harm is not immediately apparent. It also extends the liability to cover deterioration and development of damage occurring after the policy period, provided the initial cause transpired within the insured timeframe which highlights the importance of understanding the full scope of coverage (especially latent or progressive damage).  

We recommend you consider the terms of your CAR policy in full and seek advice from your broker or a solicitor if you are unsure about the coverage being provided, especially when considering the definition of damage and what constitutes an ‘Event’ or ‘occurrence’ and when deductibles/excess applies. 

References

[1] https://knyvet.bailii.org/ew/cases/EWHC/Comm/2023/1207.html