Rob Goodship

Reach for the Sky? – judgment handed down on Sky Central

Sky UK Limited & Mace Limited v Riverstone Managing Agency Limited & Others [2023] EWHC 1207 (Comm)

Summary

The High Court has handed down the hotly anticipated judgment in Sky & Mace v Riverstone, which concerned a claim by Sky and Mace for the cost of remedial works to the roof at Sky Central, Europe’s largest flat timber roof. The sums claimed for the two remedial schemes put before the Court were both in excess of £100m.

Whilst Sky, as principal insured and loss payee under the building contract, has been awarded an indemnity in principle, the quantum of that indemnity is subject to either agreement or, failing that, determination by the Court, given Mr Justice Pelling’s finding that none of the remedial schemes put before the Court sufficiently represented the remedial works necessary to address the damage as at the end of the Period of Insurance. That said, the Judge found that one of the schemes presented by insurers “most closely approximates” to the damage in need of remediation at the end of the Period of Insurance, and has encouraged the parties to agree the quantum of the appropriate temporary works which need to be added to that scheme.

Issues

The full judgment is worth a read for all CAR practitioners (and enthusiasts) but the real take aways are:

DE5

Whilst Sky is the first court decision anywhere in the world to consider the DE5 defect exclusion, it actually does no more than provide (at paragraph 29) a slightly clearer articulation as, based on the Judge’s findings, he didn’t need to consider what actually constituted an additional cost of any additional improvement works.

The reason for that is because his judgment was premised on one of insurers’ schemes being the most appropriate (in the circumstances) which (unsurprisingly) did not include any improvements to the original design, plan, specification, materials or workmanship.

Co-insurance

Sky follows closely after the Court of Appeal’s decision in RFU that was handed down in April (https://www.fenchurchlaw.co.uk/worth-a-try-judgment-handed-down-on-rugby-football-union-appeal/).

The Judge followed the reasoning in the first instance decision in RFU which Lord Justice Coulson said was “unassailable” by the Court of Appeal. Here, Mace was found to be a co-insured under the project policy but, as a result of the building contract entered into with Sky, only to Practical Completion (“PC”) and not to expiry of the Maintenance Liability Period (“MLP”) - only Sky had the benefit of that cover.

Mr Justice Pelling rejected Mace’s argument that a distinction should be drawn, and that it therefore benefited from, being a named in the policy (as opposed to falling into a prescribed category) as being “unprincipled and unsupported”. He found that there was “ample authority” that when deciding the scope and extent of the insurance cover available, it was necessary to consider the scope that the contracting insured agreed to procure, and that cover will not generally extend beyond what is contained in that agreement.

Mr Justice Pelling confirmed (at paragraph 58), and in line with the thinking of the majority in Gard Marine, that the effect of this particular contract was that neither Sky nor insurers can recover any pre-PC loss or damage against Mace, but that Mace was required to remediate and has no entitlement to a sum beyond that which was recovered under the policy.

Physical damage

The judge rejected insurers' definition of physical damage as occurring at a ‘tipping point’ when “structural change of such severity as to require replacement of the affected timber” as being "impermissibly narrow".

Instead he found that the physical damage occurred once water entered the roof cassettes on the basis that “the entry of moisture into the cassettes during the Period of Insurance is in my view a tangible physical change to the cassette as long as the presence of the water, if left unattended, would affect the structural stability, strength or functionality or useable life of the cassettes during the Period of Insurance or would do so if left unremedied”.

In relation to the timing of the occurrence of damage, this is arguably in line with Tioxide where it was found that damage occurred once the environmental conditions where damage was liable to occur were present.

The articulation in Sky is potentially wider than that though, which is likely to be very helpful for policyholders when there is ambiguity over the timing of the damage occurring, as it permits the earliest possible date on which damage is liable to occur if left unattended, which is frequently a source of dispute, particularly in relation to water ingress claims.

Aggregation/ deductibles

The other major battle ground between Sky/Mace and insurers, and a point that this is increasingly being taken by CAR insurers in relation to modern methods of construction (including cassettes and modular pods), was the applicable number of deductibles which was determined by the number of ‘events’.

Insurers’ position was that the damage to each of the 472 cassettes was an ‘event’, whereas the Claimants said that there was one event, namely the decision not to use a temporary waterproofing system when installing the roof cassettes, which permitted water ingress during construction.

Mr Justice Pelling said that, in this policy, the “single unifying event must be an error or omission in the design plan specification materials or workmanship of the property Insured that has suffered damage as a result of such defect” when a claim was recoverable under DE5.

Applying the unities of time, place and cause, and following Mr Justice Butcher's finding in Stonegate (https://www.fenchurchlaw.co.uk/court-hands-down-judgment-in-much-anticipated-covid-19-bi-cases-the-takeaways-for-policyholders/) that a decision (or plan) was capable of being an event if it satisfied those unities, the judge agreed with Sky and Mace that there was only one event and, therefore, one deductible was to be applied to Sky's claim.Appropriate remedial scheme

The claim presented by Sky and Mace was slightly unusual given that the remedial works had not taken place by the time the claim got to trial, which seemingly resulted in the Judge being in some difficulty when determining the appropriate indemnity. Helpfully for policyholders though, Mr Justice Pelling’s instinct in response to assertions that Sky and Mace’s claims had failed as neither of their schemes were ultimately awarded was that it would be “counter intuitive” that an insured which had proved some damage would be left without remedy.

The actual quantum of Sky’s claim remains unresolved, but the judge saw no difficulty in principle with the various schemes being ‘mixed and matched’ in order to identify the appropriate indemnity.

Comment

Although the judgment does not delve into the correct interpretation and application of DE5 as perhaps hoped, it does contain a number of helpful nuances in relation to typical coverage issues under CAR policies, which will be helpful to property and contract works policyholders generally.

Rob Goodship is an Associate Partner at Fenchurch Law

by Rob Goodship

Worth a Try? – judgment handed down on Rugby Football Union appeal

FM Conway Limited v The Rugby Football Union, Royal & Sun Alliance Insurance PLC, Clark Smith Partnership Limited

The Court of Appeal has handed down its judgment following FM Conway’s appeal of the High Court’s decision that it did not enjoy the same level of cover as its employer. Our previous article commenting on the first instance judgment can be found here.

Summary

The decision regards the potentially complicated factual and legal issues about the nature and extent of insurance cover obtained by one party on behalf of another. It was common ground at the first instance hearing that FM Conway was an insured under the project policy secured for the refurbishment of Twickenham stadium, but the extent of that cover was disputed by insurers.

FM Conway’s appeal was rejected by the Court of Appeal, with the leading judgment from Lord Justice Coulson providing a firm endorsement of Mr Justice Eyre’s decision that FM Conway was not insured under the project policy for damage to existing structures caused by its own defective work, but cover was instead restricted to specified perils in accordance with the (unamended) JCT Option C.

It is clear from the judgment that Lord Justice Coulson was in full agreement with Mr Justice Eyre, referring to his decision as “careful”, “unassailable” and “entirely in accordance with the authorities”.

Issues

The background facts are contained in our previous article but, in short, the underlying claim includes a subrogated claim by RSA in relation to the cost of remediating damaged cables, for which it had indemnified RFU as principal insured. FM Conway raised a co-insurance defence to that claim, asserting that it enjoyed the full benefit of the project policy obtained on its behalf by RFU.

FM Conway appealed the first instance decision on five grounds, albeit ground 1 was clearly FM Conway’s primary argument: whether the High Court applied the correct test for ascertaining the necessary authority and intention of the insuring party, the RFU. It was submitted on behalf of RFU and RSA, and then accepted by Lord Justice Coulson, that if ground 1 failed then so too must grounds 2, 3 and 4 as they were largely variations of the first ground and/ or were contingent on that ground succeeding.

It was held by the Court that Mr Justice Eyre did apply the correct test, given that he “paid particular attention to the underlying contract between the RFU and FM Conway. In that, he was following what Lord Toulson said was the correct approach in Gard Marine”. Lord Justice Coulson went on to say that “in any case where there is an underlying contract … it would be counter-intuitive if that was not at least the starting point for any consideration of authority and intention” to insure.

Lord Justice Coulson went on, as Mr Justice Eyre had in the first instance decision, to make clear that whilst the pre-contractual discussions between representatives for Conway and the RFU, respectively, regarding insurance arrangements could be taken into account (which were the main thrust of Conway’s argument that it had wider cover), they could not displace the clear interpretation of the building contract.

It was affirmed by the Court that “extraneous evidence” of a contrary authority or intention to insure could be relied on (similarly to Mr Justice Eyre’s finding that “compelling evidence” could be relied on), but the relevant investigations “will start (and possibly finish) with the underlying contractual arrangements agreed between the parties”.

The Court also made frequent reference, contrary to FM Conway’s reliance on the witness evidence which it said demonstrated an authority and intention of the RFU to secure wider cover, that both parties were represented by legal and insurance professionals such that had there been an intention to secure wider cover beyond that in Option C of the JCT Contract then it would have been reflected in the building contract ultimately agreed. Lord Justice Coulson said that to adopt FM Conway’s attempt to rely on early/ pre-contract discussions was “untenable” as it would enable a party to “ignore any subsequent stages of the actual negotiations”.

Guidance on co-insurance generally

Following his summary of the law in this area generally, Lord Justice Coulson provided (at paragraph 53 of the judgment) the following guidance in relation to co-insurance:

“53.1 The mere fact that A and B are insured under the same policy does not, by itself, mean that A and B are covered for the same loss or cannot make claims against one another;

53.2 In circumstances where it is alleged that A has procured insurance for B, it will usually be necessary to consider issues such as authority, intention (and the related issue of scope of cover). Such issues are conventionally considered by reference to the law relating to principal and agent …

53.3 An underlying contract between A and B is not a necessary pre-requisite for a proper investigation into authority, intention and scope …

53.4 On the other hand, where there is an underlying contract then, in most cases, it will be much the best place to find evidence of authority, intention and scope …

53.5 That is not to say that the underlying contract will always provide the complete answer. Circumstances may dictate that the court looks in other places for evidence of authority, intention and scope of cover”

Comment

Whilst the result is not surprising (especially as Lord Justice Coulson said that the first instance decision was in accordance with the existing authorities), it represents a clear articulation of the principles in this often complex area.

For policyholders in FM Conway’s shoes, it is key that if there is an intention for contractors to enjoy the same level of cover under the project policy as the employer/ principal insured, that the contractual documents make that clear and, where necessary, any standard forms are appropriately amended. That way, there is no need to look for other compelling or extraneous evidence to demonstrate that wider authority and intention which, as is made clear in the facts of this case, might be difficult to do.

Rob Goodship is an Associate Partner at Fenchurch Law

by Rob Goodship

Co-Insurance, it’s a bit of a scrum

The Rugby Football Union v Clark Smith Partnership Limited & FM Conway Limited [2022] EWHC 956 (TCC)

This recent High Court decision once again shines a light on the tricky issue of co-insurance under project CAR policies, in particular the difficulties faced by contractors of all levels when trying to demonstrate the extent of cover in the face of a subrogated claim from project insurers.

It’s the most noteworthy judgment on the issues since Haberdashers’ Aske’s Federation Trust in 2018 (which, as we’ve stated previously, is a bad decision for policyholders), and is a helpful refresh of the issues, if only to remind parties to construction projects to ensure that the contractual arrangements for any project accurately reflect the intention and authority of the party obtaining insurance cover for others.

Background

The Rugby Football Union (“RFU”) was undertaking significant works at Twickenham in 2012 in order to prepare for the 2015 Rugby World Cup. It engaged Clark Smith Partnership Limited (“Clark Smith”) to design buried ductwork which was to contain power cables, and FM Conway Limited (“Conway”) to install it. RFU and Conway contracted on the basis of a JCT Standard Building Contract without Quantities 2011 (“the JCT”), some of which (but importantly not all) was the subject of agreed amendments.

RFU asserted that the ductwork was defective which caused damage to the cables as they were pulled through (by a third party), which resulted in replacement costs of £3,334,405.26, for which it was indemnified by the project insurers, Royal & Sun Alliance Plc (“RSA”).

The project policy contained a DE3 standard form defects exclusion, which meant that the cost of addressing the defective ductwork was excluded, but the remedial cost of the consequential damage to the cables was covered.

RSA sought to recover those sums from Conway (and Clark Smith) in a subrogated recovery action on the basis that the damage had been caused by its defective workmanship. In response, Conway issued Part 8 proceedings seeking a declaration that it was a co-insured under the project policy and that it had the benefit of cover to the same extent as RFU (as principal insured), which prevented RSA from bringing the subrogated claim against it.

Issues

In relation to the claim brought by RSA (in relation to which it stood in RFU’s shoes), Mr Justice Eyre was asked to consider whether the sums paid by RSA to RFU were irrecoverable because RSA could not exercise subrogation rights and/ or on a proper analysis of the project policy and/ or the contract documents that RFU and/ or RSA were not entitled to claim the insured losses.

The judgment contains a very useful summary of the law regarding co-insurance to date, including the basis on which subrogated claims between parties to an insurance policy can be barred by reason of circuity of action (Co-operative Retail Services Ltd [2002] UKHL 17) and the basis on which one insured may obtain cover for another (Gard Marine & Energy Ltd [2017] UKSC 35).  However, the key aspect here was not the existence of cover in the first place, but the extent of that cover for a co-insured.

The specific consideration here was whether Conway had the benefit of the full cover under the project policy, which provided cover for damage to other property insured caused by Conway’s defective works, or whether its cover was restricted to damage caused by Specified Perils as provided for by the unamended part of the JCT.

Mr Justice Eyre was at pains to stress (guided by the above authorities, but also National Oilwell (UK) Ltd [1993] 2 Lloyd’s Rep 582) that the contract is key when determining the intention and authority of the principal insured when securing cover, stating:

“74. What is important is that the authorities are clear that in order to determine whether the insurance cover which a policy effected by, in my example, the employer or contractor applies to the contractor or sub-contractor and if to what extent (with the latter point determining the extent to which they are co-insured) it is necessary to look to the terms of the contract between those parties. It is those terms which provide the key to the existence and extent of the insurance cover.”

“88. …  when a person becomes a party as a consequence of the actions of another person then the terms of the contract between the insured party and that other govern the extent of the insurance”

In relation to the intention and authority of RFU, Mr Justice Eyre found (despite witness evidence to the contrary relied on by Conway, that the insurance obtained by RFU was intended to be more extensive than envisaged by the JCT), that the contract documents read together (including the JCT) did not demonstrate an intention for the project policy to create a fund which would be the sole remedy for loss suffered by RFU as a consequence of a breach by Conway.

Whilst Conway was an insured under the project policy, the extent of that cover was that as envisaged in the JCT and no wider, such that it was not a co-insured in relation to the damage for which RSA had indemnified RFU. He went on to find (again consistent with National Oilwell) that the waiver of subrogation clause in the policy only related to the matters for which Conway had cover under the policy, and so didn’t prevent a claim by RSA.

Comment

This judgment doesn’t alter the previous state of the law in this area, but is a salutary reminder to make sure that the contractual documents are in line with the expectations of the parties.

Mr Justice Eyre indicated that “compelling evidence to counter the inferences from the natural reading” of the JCT may have altered the result (which is in line with the “other admissible material” referred to in National Oilwell), but that evidence was not present here. Rather, the judge found it “surprising” that the JCT was subject to amendment elsewhere, but not in relation to the insurance for the works. If the parties had intended the extent of cover to be different from that envisaged by the unamended JCT, then presumably it would have been simple enough to reflect that in an amended version of the JCT. The absence of those amendments seems to have been an important consideration in relation to the parties’ intentions.

If there’s an intention for members of the project team to have a benefit under any project policy, it is vital that the underlying contractual documents accurately reflect the full extent of the principal insured’s intention and authority in that regard.

Rob Goodship is a Senior Associate at Fenchurch Law

by Rob Goodship