In the case of Leeds Beckett University v Travelers Insurance Company Ltd the High Court has today provided useful guidance to property and construction insurers on three key policy provisions:
1. "Accidental damage" in the context of an all risks policy;
2. Exclusion clauses dealing with gradual deterioration and faulty/defective design; and
3. "Subsequent damage" provisos contained within an exclusion clause.
Mr Justice Coulson also confirmed that commercial common sense rules of construction should be applied when construing an insurance policy, as most recently summarised in Arnold v Britten [2015].
The Facts
The University owned a student accommodation block ("the Building"), whose eastern wall ran adjacent to the Leeds/Liverpool canal. Construction of the Building commenced in 1993 and was completed in 1996.
In August 2011, the University took out an all risks insurance policy with Travelers which covered various properties including the Building.
On 13 December 2011, large cracks appeared in the internal walls and ceilings on the eastern part of the Building. The Building was evacuated and investigations revealed that an area of below ground concrete blockwork, which supported the Building's superstructure, had deteriorated and turned to "mush", offering no structural support. A large volume of water was also found to be impounded within the Building's undercroft.
Further investigations confirmed that the cause of the damage to the blockwork was sulphate attack and leaching brought about by the effect of flowing ground water. Evidence suggested that the blockwork had been subject to sulphate attack for a period of at least ten years.
The Building was deemed to be structurally unsafe and was demolished.
Whilst it was unknown at the time the policy incepted, contemporaneous construction records revealed that the site where the Building stood had a long history of springs and watercourses and that significant water problems were encountered during construction.
The Claim
The University made a claim under its policy for the costs of reinstating the Building and loss of income, estimated to be in the region of £10m.
Travelers declined indemnity, relying on the following exclusion clause:
"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 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".
The Judgment
Mr Justice Coulson, Head of the Technology & Construction Court, dismissed the University's claim on the following basis:
Accidental damage
The Building had not suffered from "accidental damage". He held that "accidental" means an event that occurs by chance, which is non-deliberate. He also provided 8 guiding principles to assist in assessing what constitutes accidental damage.
The evidence demonstrated that the blockwork had been subject to mobile ground water since completion of the Building in 1996, causing it to weaken over time. Consequently, when the policy was taken out in August 2011, the damage was already inevitable and therefore not "accidental". The only thing that was unknown was precisely when the failure would occur.
As the Judge found the cause of the damage was not accidental, it followed that the policy did not respond. Nevertheless, he went on to consider the application of the exclusion clauses.
Gradual deterioration
The University argued that gradual deterioration cannot occur from an interaction between the property insured and its environment (i.e. the ground water) and that it should be restricted to where the property deteriorates of itself. The Judge rejected this interpretation stating: "Thus, as a matter of construction and of common sense, I conclude that gradual deterioration can be caused by the interaction between the property insured and the circumstances in which that property exists".
Further, the Judge clarified that "It seems to me that the word ‘gradual’ is intended to convey something which developed over time. If deterioration is itself progressive (i.e. it takes place over time), then gradual deterioration must mean a process that may go even more slowly."
Faulty/defective design
The Court approved the well-established principle from Hitchins (Hatfield) Ltd v Prudential Assurance Co Ltd [1991] that an Insurer is not required to prove negligence in order to rely on an exclusion for faulty/defective design. All that needs to be shown 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 groundwater drainage was inadequate. The Judge found that "The over-arching problem with the design of the groundwater drainage system here was that, in my view, there was simply no design at all".
The proviso to the exclusion
The exclusion clause contained a proviso, which states that it "shall not exclude subsequent Damage which itself results from a cause not otherwise excluded".
Although not pleaded by the University, it sought to argue that the long standing damage to the blockwork and the subsequent cracks to the walls that occurred within the policy period were distinct incidents of damage. The Judge held the University could not rely upon the proviso as it was unpleaded and that expert evidence would be required to properly deal with what may or may not be "subsequent Damage."
However 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 different cause. He gave an example of where a factory wall collapses due to faulty/defective design, and falling masonry cracks a gas pipe which causes a fire that destroys neighbouring houses. Whilst a claim for the costs of repairing the factory would be excluded (due to the faulty/defective design exclusion) the claim for repairing the damaged houses would be covered, as it is subsequent (i.e. different) damage resulting from a cause not otherwise excluded (i.e. the fire).
He rejected the Australian case of Prime Infrastructure (DBCT) Management P/L v Vero Insurance Ltd [2005] which suggests "subsequent damage" is mere damage occurring after the "initial damage" but does not need to be distinct, independent or separate from the initial damage
The University also said that since the proviso was part of the exclusion clause, the burden of proving that it did not apply fell on Travelers.
The Judge also rejected this argument. If it was the University's case that some of the damage was not caught by the exclusion clause because of the proviso, then it was for the University to establish. It is not for the Insurer to plead and prove a negative.
The University's claim was dismissed and Travelers' declinature of the claim upheld.
DAC Beachcroft successfully acted for Travelers in this matter. A more comprehensive article dealing with some of the key issues arising from the case will be published shortly. These issues will also be discussed in more detail at our Property and Construction Insurance spring seminar on 17 May, click here to book your place.
