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Ruling tipped to increase cause of building defects disputes with insurers

A new ruling by the High Court in London could spur a rise in the number of disputes over the cause of building defects between businesses insured under ‘construction all risk’ (CAR) policies and their insurers, an expert has said.

James Ladner of Pinsent Masons was commenting after the court ruled in a dispute between Sky, its construction contractor Mace and the underwriters of a syndicated CAR policy. The dispute concerned claims for loss and damage arising from the “widespread failure” of the roof at Sky’s global headquarters, Sky Central, in London.

The precise amount of the damages was not specified by the court, which has, in the first instance left it to Sky, together with Mace, to agree the sum with the insurers.

In its ruling, the High Court considered the scope and effect of the CAR, the technical reasons for the failure of the roof, the scope and cost of the work necessary to remedy the failure and the date at, or date range within which, that was to be assessed.

The court determined the scope of the coverage under the policy by reference to the intention of the parties, as gleaned from the terms of the policy and the terms of the JCT contract between Sky and Mace. It held that it did not matter in this case that the construction contract between Sky and Mace was signed and took effect after the insurance policy was agreed since all relevant parties were aware of the material terms on which the construction contract was to be entered into.

In considering the impact of the construction contract, the High Court accepted submissions from the CAR underwriters that Mace was only insured in respect of loss and damage to the works done to the date of practical completion. This was because possession of the roof and legal interest in it passed to Sky from that date. Mace’s insurance from that point was under any insurance they had taken out under the building contract, not the CAR policy.

The court said that while Mace was only insured down to practical completion, this did not mean that it was only insured in respect of remedial works for loss and damage if carried out prior to practical completion. The judge said that if the parties had intended Mace to be covered only in respect of remedial work carried out by it prior to practical completion, the parties could and would have used clear express words in the construction contract to make that clear. As a result, Mace would be covered for remedying loss and damage executed after practical completion provided that the cause of the loss or damage was due to acts or omissions by Mace or its subcontractors prior to practical completion.

The judge held that while Sky and Mace had to show a tangible physical change had occurred to the property insured, the insurers’ liability for the costs of investigation entailed in that was limited and did not extend to the costs of opening up each of the 472 cassettes fixed to the roof.

The court also considered whether retained liability provisions under the insurance policy, which effectively capped the insurers’ liability for loss for any one event, applied – in effect, Sky and Mace’s ‘excess’. It said that what may constitute an event in the context of the provisions “… must take colour from the contractual context, including the perils insured against and must be …” a single occurrence that is “… causally relevant to the loss or losses in question scrutinised from the point of view of an informed observer placed in the position of the insured. … on the basis of the true facts as at that time”.

The judge accepted in principle that if at least an effective cause of the damage that occurred during the period of insurance was the decision not to take any temporary waterproofing measures after placement of the cassettes on the Glulams – glue laminated timber beams – but before final waterproofing works were carried out, then that would constitute a single event for the purposes of the retained liability provisions and that the insurers in that case would only be liable for a single retained liability of £150,000. Had the £150,000 sum applied to each of the cassettes that the insurers accepted required repair, the retained liability, or ‘excess’, would have exceeded £57 million.

The judge further considered that the insurance policy covered the cost of relocating Sky’s staff within the Sky building to continue business operations while remedial works to the roof were being carried out – including the extra cost of working out of hours. It would not have covered moving them elsewhere as the court considered that would have been consequential loss.

Ladner said: “This decision ties the extent and duration of insurance under the CAR policy very closely to the provisions of the building contract. If policy wording and building contract drafting are materially similar to those in this case, then an act or omission which occurs prior to practical completion will still be covered under the CAR policy even if the remedial works take place during the defects liability period, but where the cause is after practical completion it will not be. We can foresee many arguments about causation of defects between insurers and insured as a result.” 

Editor's note 06/07/23: This story was amended after publication to remove an inaccuracy relating to the facts of the case.

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