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
Not so peachy – a disappointing Covid-19 decision for policyholders
Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2023] EWHC 1545 (Comm)
In a month where Covid-19 decisions are coming in thick and fast, policyholders will be disappointed by the most recent judgment concerning a disease wording. A copy of the judgment can be found here.
On this occasion the policyholder, Bellini (N/E) Ltd, was issued with a policy by its insurer, Brit UW Limited, that contained an extension to business interruption cover for business interruption caused by damage arising from a notifiable disease manifested by any person whilst in the premises or within a 25-mile radius.
Disease wordings like these will be familiar to those who are acquainted with the FCA test case and Covid-19 litigation, but in this particular case the quirk is a reference to the defined term “damage” in the introductory paragraph to the extension. Damage within this policy was defined as “physical loss, physical damage, physical destruction”. However, it was common ground between the parties that there had been no physical loss of or damage to the policyholder’s premises or property.
The policyholder argued that policy provided both basic cover for physical damage and also extensions of cover for other matters that would not ordinarily result from or in physical damage. In particular, the provision of a radius clause of 25 miles for the manifestation of disease went beyond the basics of physical damage to the premises or property therein, which the policyholder asserted was reinforced by the court’s analysis of similar wordings in the FCA test case.
Among other arguments on the construction of the policy, the policyholder contended that if the extension only responded to physical damage it would “render any cover it provided illusory, and negate the purpose of the clause in providing cover for a notifiable disease that could manifest itself miles away”.
The court, however, was unpersuaded by the policyholder’s arguments, instead relying upon the “ordinary meaning” of the clause, which provided no cover in the absence of physical loss, damage or destruction. In particular, the court considered it to be significant that the clauses dealt with in the FCA test case were not expressed as to cover interruption caused by damage, and had been recognised as non-damage in that cover was not contingent on physical damage.
The court considered that the policyholder’s arguments effectively required it to re-write the policy contrary to the parties' express agreement and the established approach to contractual construction.
Comment
Recognising that the impact of a notifiable disease will be non-damage related losses, many wordings make it clear that the extension is intended to be triggered in the absence of physical damage, and that is how the clause would be understood to operate.
In circumstances where the parties agreed that a disease at the premises or within 25 miles of the premises does not cause physical damage, it is difficult to see what purpose, if any, can served by a clause that only provides cover for physical damage.
It is therefore difficult to reconcile the court’s attempts to give effect to the wording of the policy with what most policyholders (and we assume those insuring them) would expect to be covered when offering a 25-mile radius clause as part of the policy cover.
It is notable that the courts in the FCA test case grappled with similar difficulties on wordings where the standard form of certain clauses assumed the paradigm case of business interruption by reference to physical damage. The Supreme Court, albeit in the context of trends clauses, came to the view at [257] that the “reference to “damage” is inapposite to business interruption cover which does not depend on physical damage to insured property such as the cover with which these appeals are concerned. It reflects the fact that the historical evolution of business interruption cover was as an extension to property damage insurance. It was held by the court below, and is now common ground, that for the purposes of the business interruption cover which is the subject of these appeals, the term “damage” should be read as referring to the insured peril”. It appears that in the right circumstances the courts are not opposed to manipulating the wording of a policy to give it proper effect, and one might have expected the court in this matter to have taken a similar approach to the 25-mile radius clause.
Undoubtedly the market will be watching this one closely for any signs of an appeal, especially in light of the body of Covid-19 case law that appears to support a disease clause such as the one in dispute here.
Authors:
Anthony McGeough, Senior Associate
Joanna Grant, Partner
AI: The Wizard behind the Data Curtain?
“What is Chat GPT?” is a frequently heard question this year. “What is AI? How does it work?” is occasionally the follow up. And for the sceptics, “Will it take my job? Is it dangerous?” One cheerful BBC News headline recently read “Artificial Intelligence could lead to extinction, experts warn”.
Artificial Intelligence (AI) and Machine Learning Technologies (MLTs) have rapidly gone from the stuff of science fiction to real world usage and deployment. But how will they affect the insurance industry, what are the legal implications, and is the whole issue really that much of a concern?
Taking the final question first, the evidence suggests that jobs are already being lost to this new technological revolution. In March 2023, Rackspace surveyed IT decision-makers within 52 insurance companies across the Americas, Europe, Asia and the Middle East. 62% of the companies said that they had cut staff owing to implementation of AI and MLTs in the last 12 months. In the same period, 90% of respondents said they had grown their AI and MLTs workforce.
It is worth drilling into the specifics of what AI and MLTs actually are. McKinsey & Company define AI as “a machine’s ability to perform the cognitive functions we usually associate with human minds”. MLTs, according to IBM, are best considered as a branch of AI, in which computers “use data and algorithms to imitate the ways that humans learn, gradually improving their accuracy”. So, taking ChatGPT (released 30 November 2022) as an example, Open AI (the developer) has trained ChatGPT on billions of documents that exist online. From news, to books, to social media, to TV scripts, to song lyrics. As explained by Boston Consultancy Group, the “trained model leverages around 175 billion parameters to predict the most likely sequence of words for a given question”. In many ways, it has to be seen to be believed. If you haven’t already, it is worth signing up to ChatGPT. It’s free and takes moments. The author has just asked it to write a Jay-Z song about the London Insurance Market and to write a story about Sun Tzu waking up in the world of Charles Dickens – both with instant, detailed results. The absurdity of the requests was done to demonstrate the power of the MLT: it is quite remarkable.
What is exciting, or scary, depending on your position, is that GPT-4 (the next version of ChatGPT) has 1 trillion parameters. It was released at the end of March and is behind a paywall. But the point is that the never-seen-before power behind the technology released only at the end of last year has become nearly 6 times more advanced in four months. Not unlike the Sorcerer’s Apprentice wielding his axe and doubling and redoubling broomsticks carrying pails of water, MLTs scythe through and consume data at an exponential rate.
So, what does it all mean for the insurance industry? MLTs can sift through data vastly faster than humans, and with far greater accuracy. The tech poses the most immediate threat to lower-level underwriters and claims handlers, as well as general administrative roles. But what about to the wider London Market?
As this firm’s David Pryce has explained*, the London Market does not have as many generalised wordings as do other insurance markets around the world. The policies written here are highly sophisticated and frequently geared towards bespoke risks. The specialism of the London Market means that, in terms of senior underwriters, while they may be informed by AI/MLTs, their judgement, gained through experience, will mean their role is fairly safe – machine learning tech is far superior at analysing past knowns than conceptualizing future risks.
Similarly, in high-value, sophisticated non-consumer insurance contracts that are the norm within Lloyd’s, questions arise about AI’s/MLTs’ potential to remove the broker role. Consider a cutting-edge ChatGPT equivalent that does the role of a broker, but is developed by an insurer for an insured. There is an inherent conflict between acting as an agent of an insured and seeking to maximise profit for the insurer. There would undoubtedly be a data bias in this metaphorical ChatGPT. In the same vein, a ChatGPT equivalent could be developed by London Market brokers, but this would miss the personalised touch that (human) brokers bring to the table (and policyholders enjoy). James Benham, Insurtech guru and podcast host, recently said that AI could stop brokers doing menial form-filing and spend more time doing what policyholders want – stress testing the insured’s policy and giving thought to what cover they need but had not considered. So while in the short term low-level work will likely be made more efficient by AI/MLTs, and lead to reductions in staff, a wholesale revolution or eradication of vast swathes of the London Market broking sector remains unlikely.
Finally, it is worth noting the speech on 14 June 2023 by Sir Geoffrey Vos, Master of the Rolls, given to the Law Society of Scotland’s Law and Technology Conference. After highlighting a recent example of an American lawyer who used ChatGPT for his legal submissions, in which ChatGPT not only grossly misunderstood/misrepresented the facts of some cases but actually made up another one for the purposes of the submissions, he cautioned the use of the MLT in legal proceedings. He further observed dryly that “clients are unlikely to pay for things they can get for free”. Perhaps specific MLTs will be successful developed in the near future to assist or stress test lawyers’ approaches (for example, Robin AI is a London-based startup that uses MLTs to assist lawyers with contract drafting), but ChatGPT is not there yet. A similar point could be made in its application to the insurance industry – simple, concise deployment of the technology will remove grunt work and effectively and cheaply simplify data, but human experience will not be replaced just yet. As with blockchain, in the short term we are likely to see more of an impact on consumer insurance contracts than high-value, bespoke, London Market insurance.
Dru Corfield is an Associate at Fenchurch Law
* See The Potential impact of ChatGPT on insurance policy wordings, Insurance Business Mag
Covid-19 BI claims update: policyholder-friendly judgment in At The Premises litigation
London International Exhibition Centre Plc -v- Royal & Sun Alliance Insurance Plc and others [2023] EWHC 1481 (Comm)
In the latest instalment in the wave of Covid-19 business interruption litigation making its way through the courts since the pandemic, a group of policyholders have been successful in their claim that the Supreme Court’s approach to causation in relation to ‘radius’ wordings should equally apply to the ‘at the premises’ wordings.
This result has a much broader application than simply for the parties to this litigation, and paves the way for large numbers of policyholders on similar wordings to argue that their claims are covered.
The background
While the FCA test case litigation represented a victory for policyholders in many respects, it also left a number of loose ends – one of which this recent ruling ties up in their favour.
With regard to ‘radius’ wordings, that is, business interruption policies that respond to cases of a notifiable disease occurring within a specified radius of the premises, the Supreme Court concluded that that each case of Covid-19 was a concurrent cause of the restrictions. As such, in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of Covid-19, it was sufficient to prove that the interruption was the result of government action taken in response to cases of disease which included at least one case of Covid-19 within the geographical area covered by the clause.
‘At the premises’ wordings, namely clauses providing for cover for losses caused by restrictions resulting from cases of notifiable diseases at the premises themselves – as opposed to within a specified radius of the premises – were not within the ambit of the FCA test case.
As a result, there was uncertainty as to whether the Supreme Court’s causation analysis was equally applicable to such clauses. This judgment now clarifies that it is.
The policyholders’ position
The claimant policyholders, who included the London International Exhibition Centre the restaurant chain, Pizza Express, as well as a number of smaller businesses including a hairdresser, two gyms, and various hospitality venues, had all suffered significant BI losses as a result of the pandemic, and all had ‘at the premises’ cover as part of their business interruption insurance. Applying the same approach to proximate causation as adopted by the Supreme Court in the FCA test case, they argued that their policies should respond to cover their losses.
The insurers’ position
The insurers disagreed. One of the main themes was that ‘at the premises’ clauses and ‘radius’ clauses provided a “fundamentally and qualitatively different” nature of cover: they were “chalk and cheese”. The fact that they are engaged by incidents of disease at a precise location means that a direct causal connection is required, which in turns requires proof of ‘but for’ causation between the occurrence of disease at the premises, the action by the authorities, the consequent business interruption and loss.
The judgment
Mr Justice Jacobs held that the policyholders were correct in their submission that “at the premises” is simply about the geographical or territorial scope of the coverage, and where the parties have chosen to draw the line in that respect - it has no impact on the appropriate approach to causation. In their analysis, the Supreme Court did not draw a distinction between ‘radius’ clauses where the radius was 25 miles, 1 mile, or the vicinity, and there was no reason why the radius could not be further shrunk from the vicinity to the premises itself without making any difference to the causation analysis. He added that this seemed to him to be an appropriate result, since any other conclusion would give rise to anomalies which it would be difficult rationally to explain to a reasonable SME policyholder who read the policy.
Cover for cases pre-5 March 2020
He did however find for insurers in relation to another issue before the court, namely whether cases of Covid-19 that occurred before it was made a notifiable disease on 5 March 2020 were capable of falling for cover. On the basis that a disease must be notifiable at the time of the occurrence or outbreak he found that they did not qualify. He stated that an approach that asks whether the disease was notifiable at the time of the relevant occurrence was straightforward to apply and perfectly sensible. That this meant that some occurrences would, depending upon when they occur, fall outside coverage was simply the ordinary consequence of the application of the words of the policy.
What next?
This is not the end of the story for Covid-19 claims – the next instalments will come towards the end of the year when another group of policyholders with claims against insurers for business interruption losses under policies with ‘denial of access’ wordings will have their cases heard - closely followed by the appeals in the Stonegate, Various Eateries and Greggs cases – it is very much a case of watch this space!
Joanna Grant is a partner at Fenchurch Law
