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Parties to a building contract usually take out insurance to protect the contract works from damage from unintended events such as vandalism or a flood. The policy is intended to cover the cost of repairing the damage, so the project can be completed. Cover is for a fixed period which typically ends when work under the building contract is completed.
A recent decision by the UK Court of Appeal, Sky UK Ltd v Riverstone Managing Agency Ltd [2024] EWCA Civ 1567, considered whether a construction all risks policy covered progressive damage which continues after the project (and period of insurance) has come to an end.
The Sky Central building in West London had a timber roof made of engineered and solid wood components. The roof was not sheltered from the elements during construction, which was held to be a design defect. Although the completed roof was waterproof, rainwater ingress into roof components had already occurred during its construction. Once water was inside the components it could not dissipate. Trapped moisture and water vapour spread through the roof over time, causing swelling of timber, mould and fungal decay.
While swelling and some fungal growth was present prior to practical completion, most of the damage occurred after the policy had expired as components deteriorated and the moisture spread. This later, progressive damage was agreed to be a natural and foreseeable consequence of the ingress of water during the construction period.
The insurer argued there was no damage during the period of insurance, as there had been no physical change which compromised the structural performance or integrity of the roof components during the construction or maintenance (defects liability) period. The trial judge and the Court of Appeal disagreed: damage was suffered during the period of insurance, as a tangible physical change had occurred which impaired the property’s commercial value by making it of less value or utility than would otherwise be the case. The damage was wetting caused by the ingress of rainwater during the period of insurance in sufficient quantities which – if left unremedied – would lead to a lack of structural integrity and decay.
The insurer also argued, and the trial judge agreed, that the policy only covered damage which occurred during the period covered by the policy (i.e. up to expiry of the maintenance period). The progressive damage to the roof caused by the trapped moisture and water vapour was therefore not covered.
The Court of Appeal disagreed. It said that in a contract of indemnity, the insurer promises to hold the insured party harmless (i.e. promises the insured damage will not occur). The contract is breached the moment damage occurs. The insurer – as a contract breaker – must then pay unliquidated damages to put the insured party in the position they would have been in had the breach not occurred. This is subject to the usual rules relating to causation and quantification of damages. The insurer is liable for losses arising in the natural or foreseeable course, subject to considerations such as remoteness and mitigation.
The insurer was accordingly liable for the consequences of the damage that occurred during the period of insurance when water got into the roof components, including the progressive damage caused by that wetting after the period of insurance had expired.
Our Comment
The judgment raises some interesting questions regarding the extent to which cover may be available under a construction policy for damage which occurs a) following completion of the project and/or b) is due to defects in the way the project is built. This will depend on the policy wording, including the scope of any exclusion for defects in materials, design and construction.
The Court of Appeal was careful to emphasise that the water ingress in Sky occurred prior to project completion and therefore during the period of insurance. Liability for water ingress after the expiry of the period of insurance was not in issue.
If you have any questions about this judgment, or construction insurance, please get in touch with our Construction Team or Insurance Team, or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
