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All Risks insurance: damage not accidental but gradual deterioration and defective design

19 April 2017

Leeds Beckett University v Travelers Insurance Company limited

11 April 2017, TCC, High Court, Mr Justice Coulson

A recent decision by the Technology & Construction Court ('TCC') has considered the meaning of ‘accidental’ damage, ‘gradual deterioration’ and ‘faulty or defective design’ for the purposes of an All Risks property policy.

Facts

Between 1993 and 1996 the University carried out an ambitious building project on the site of the former Kirkstall Brewery on both sides of the Leeds-Liverpool canal in the north-west of Leeds. The project involved not only the refurbishment of the existing brewery buildings but also the design and construction of several new accommodation blocks.

The eastern wall of the largest of the newly constructed buildings ran adjacent to the canal and consisted of a concrete beam laid across pile caps, with courses of concrete blockwork on top of the beam to support the inner and outer leaves of the wall.

In August 2011, approximately 15 years after the construction was completed, the University took out an All Risks insurance policy with Travelers. Just a few months later in early December 2011 large cracks appeared on some of the internal walls and ceilings on the eastern (canal) side. The building was excavated and investigations showed that an area of concrete blockwork below ground level had turned to ‘mush’, due to the effects of sulphate attack caused by flowing water, leaving no structural strength at all. In 2012, the decision was taken by the University to demolish the entire building.

The University claimed under the policy for its costs of reinstating the building and for loss of income, estimated to be in the region of £10m.

Travelers declined the claim, relying on the following exclusion:

“The insurance provided under this Section does not cover
1. Damage caused by or consisting of
(a) Inherent vice latent defect gradual deterioration wear and tear frost change in the water table level its own faulty or defective design or materials…
but this shall not exclude subsequent Damage which itself results from a cause not otherwise excluded”

'Damage' or 'Damaged' was defined in the policy as:

“..accidental loss or destruction of or damage”

Decision

Head of the TCC, Mr Justice Coulson, held that:

  • 'Damage' - The building had not suffered "damage" as defined in the policy. The definition of damage in the policy referred to “accidental” loss or destruction of or damage. "Accidental" meant an event that occurred by chance, which is non-deliberate. By contrast, the evidence demonstrated that the blockwork had been subject to the ground water since completion of the building in 1996 which had caused it to weaken over time. Consequently, when the policy was taken out in August 2011 the "damage" was already inevitable and therefore not "accidental" or "fortuitous". As the judge found that the cause of the damage was not accidental, he found that the policy did not respond. Nevertheless he went on to consider the application of Exclusion (1).
  • 'Gradual deterioration' - The judge held that had the policy responded (which he had already held it did not) then Exclusion (1) relating to "gradual deterioration" would have excluded the loss. Gradual deterioration was not restricted to where the property deteriorates of itself but rather could occur when caused by the interaction between the property insured and the circumstances in which that property exists. Accordingly, he rejected the University’s argument that gradual deterioration cannot occur from an interaction between the property insured and its environment (i.e. the ground water). Furthermore, the judge clarified that 'gradual' deterioration is intended to convey something which develops over time and denotes a process that develops slowly.
  • 'Faulty or defective design' - The judge confirmed the well-established principle that an insurer is not required to prove negligence in order to rely on an exclusion for faulty or defective design. All that the insurer needs to show is that the design was not fit for purpose. On the basis of the evidence, the judge found that the design of the building’s ground water drainage was inadequate and therefore that Exclusion (1) relating to faulty or defective design would have applied.
  • 'Subsequent damage' - Exclusion (1) contained a write back proviso which stated that it “shall not exclude subsequent Damage which itself results from a cause not otherwise excluded”. The University sought to argue that the long standing damage to the blockwork and the subsequent cracks to the wall that occurred within the policy period were distinct incidents of damage. The judge held that the University could not rely on the proviso as it had not pleaded such reliance and that expert evidence would be required to properly deal with what may or may not be regarded as "subsequent Damage". Notwithstanding that, the judge went on to state that "subsequent Damage" must be damage that is different and distinguishable from the original damage and must result from a new or intervening cause. He rejected the Australian case of Prime Infrastructure (DBCT) Management P/L v Vero Insurance Ltd [2005] which suggested that subsequent damage is mere damage occurring after the 'initial damage' but does not need to be distinct, independent or separate from that initial damage.

Comment

The issue of what amounts to 'damage' or what is a 'defect' or 'faulty or defective design' often arises under both All Risks and CAR policies. Increasingly, insurers are also asked to consider whether, if there has been 'damage', such damage was 'accidental' or whether it lacked 'fortuity'. Less frequently insurers might also have to consider exclusions relating to 'gradual deterioration' or 'inherent vice' or 'latent defect' or 'wear and tear'.

In this respect Mr Justice Coulson’s judgment provides useful guidance on these policy terms. In particular, Mr Justice Coulson set out eight guiding principles in assessing what constitutes 'accidental' or 'fortuitous' damage under an All Risks policy:

(i) the claimant must prove that the loss was caused by some event covered by the general policy wording but does not have to prove the exact nature of the accident or casualty
(ii) accidental damage means damage that was not wilful or deliberate
(iii) accidental damage means damage that was caused by a chance event, against the risk of which the insurance was taken out
(iv) accidental damage does not mean damage that was inevitable
(v) inevitability will be assessed prospectively, from the time that the cover was taken out
(vi) accidental damage does not mean damage to property due to the inherent characteristics of that property
(vii) there is a critical distinction between those cases where the damage was caused by an inherent weakness and those where it was caused by an external fortuitous event
(viii) the policy should be construed in accordance with the ordinary rules of construction.

However, it should be remembered that each case will be fact specific and depends greatly upon the factual and expert evidence available as to precise cause of the 'damage' sustained.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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