Constructive Notes ®
Inferring aggregation from context and the search for one "event" as the source of insured damage
Introduction
A peril in first-party insurance destroys or diminishes the insured’s person, property or interest or deprives the insured of its use1.
That an insured contractor should bear a specified part of each loss by way of a self-insured retention, deductible or excess provision is a familiar feature of insurance policies which provide cover of this nature.
The purpose of an aggregation provision is to avoid serious disadvantage to the insured party where several incidents of damage all flow from one underlying cause.
The choice of language used to express the necessary unifying factor is of critical importance2.
But what of the situation where there is no explicit language of aggregation (eg: “continuous or repeated exposure to substantially the same conditions” or “occurrences of a series arising out of one original source or cause” etc), but rather wording which merely affords scope for aggregation by implying a unifying factor from general context?
Such wording can be found in policies which have as the deductible trigger an “Occurrence” defined as an “event which results in property damage”.
UK case authorities including a 2023 decision of the High Court provide guidance as to when the installation of defective components of a structure or the taking of defective measures can be regarded as an “event” for these purposes.
In doing so they make clear that the giving of an erroneous instruction, or a defect in manufacture or design (or the design decision itself), could potentially satisfy this undefined term (‘event’) so as to afford scope for aggregation of policy deductibles.
UK Case Authorities
In the decision of Seele Austria GMBH Co v Tokio Marine Europe Insurance Limited3 (a case relevantly concerned with contract works cover) the England and Wales High Court of Justice Queens Bench Division (Technology and Construction Court) noted that the Court of Appeal (from which the case had been remitted) had held that workmanship deficiencies to each window represented a separate occurrence/event, and thus permitted the defendant to apply the retained liability (or deductible as it was called) of £10,000 to each repaired window. It noted that if, on the other hand, the defects to the repaired windows were due to design errors, it had long been accepted by the defendant that such defects, repeated throughout the glazing works would constitute only one event or occurrence under the policy, and therefore give rise to one deductible of £10,000 in respect of all the windows.
The operative clause to the policy stated:
“… the Insurer hereby agrees to indemnify the Insured … in respect of any occurrence of loss or damage … during the period of insurance.”
Moore – Bick LJ said:
“One must start by identifying the occurrences of damage in respect of which an insured is entitled to be indemnified, since it is to these that the aggregation provisions apply.”4
While noting that the damages had certain identifying characteristics, Moore-Bick LJ observed that the relevant aggregation provision required that the separate instances of damage should arise out of (in the sense of being caused by) one event.5 If there was to be aggregation it was necessary therefore to find one event which could properly be regarded as the source of all the damage.
In the judgment of the Court of Appeal majority (Moore-Bick LJ with whom Richards LJ agreed), the issue was answered:
‘The workmanship deficiencies to each window represent a separate occurrence; there was a series of occurrences, but they did not arise out of one event.’
Moore-Bick LJ, having considered various possible candidates for the “event” stated:
‘… I do not think that the installation of defective windows can be regarded as an event for these purposes either, however, if they had all suffered from a common defect in design and manufacture which lay at the root of the problem, it might have been possible to argue, despite the number of separate units involved, that the installation of windows with a common defect was an event for these purposes, but as I understand the Judge’s findings, that is not really the case . . . Rather the impression one obtains from the findings in paragraph 5 of the judgment . . . is that poor workmanship was really to blame. It seems fairly clear that similar short comings in workmanship affected all the windows and I am prepared to assume for present purposes that in each case the same mistakes were made. However, there is no evidence that those mistakes were attributable to a single event, such as giving the workmen wrong instructions which they then conscientiously followed so as to produce a series of similar defects. Again, had that been the case, it may have been possible to argue that giving faulty instructions was the unifying event, but the Judge’s findings point to the conclusion that the defects were simply the result of poor workmanship repeated over and over again6 ’
Prior to making those findings, the Court of Appeal had considered the ‘best test’ of the existence of a single event, being to ask whether there is a unity of cause, intention, location and time.7 The court also noted that it was not altogether easy to say precisely what constitutes an ‘event’, but noted that in AXA Reinsurance (UK) PLC v Field,8 Lord Mustill (with whom the other members of the appellant committee agreed) suggested that in ordinary speak, an event is something that happens at a particular time, at a particular place, in a particular way.9
In Sky UK Limited v Riverstone Managing Agency Limited [2023] EWHC 1207 (Sky UK) Judge Pelling KC was called on to consider the scope and effect of a policy of insurance in respect of loss and damage allegedly suffered as a result of the widespread failure of the roof of Sky UK’s global headquartered building, known as “Sky Central” in Hounslow in West London.
The roof consisted of a series of glue laminated timber beams on which had been placed a total of 472 cassettes each of which weighed about 3.5 metric tons and measured 10.5 metres in length, 3 metres in breadth and 45 cm in depth.
The underside of the cassettes comprised acoustic insulation and a perforated metal liner. Following installation the cassettes were left waiting for permanent water proofing, and were exposed to the weather. This could have been avoided by use of a temporary roof structure until after installation of the permanent weather proofing, but no such structure was installed during the construction process, nor specified as part of the design of the roof.
It became apparent from an early stage that rainwater was entering the cassettes after they were installed on the roof leading to loss and damage.
The insured contended that none of this would have occurred but for a fundamental flaw in what it maintained was the design of the roof by failing to so design the roofing works as to require the erection of a temporary roof to protect the partially installed cassettes until the gutters could be completed and a final Derbigum layer was laid across the roof. It was this single failure that the insured claimed was the single event or occurrence by which their retained liability under the policy was to be ascertained.
Under the Contract Works policy a special deductible applied to claims to which the DE5 Design Exclusion applied (as here). The Insured’s Retained Liability was [relevantly] defined to be: “GBP 150,000 any one event”.
The Judge noted [at 96] that the claimants submitted that the Retained Liability of “GBP 150,000 any one event..” is an aggregation provision. The defendants submitted that this was “wrong” as the provision did not anywhere contain any “… language of aggregation …”.
Judge Pelling KC then went on to say that he found the “debate” as to whether the clause is an aggregation provision or one that can have aggregating effects depending on the facts, to be an “ultimately arid and unhelpful one”, going on to opine “The only real question that matters is what as a matter of construction does the phrase “…any one event …” mean …”.
Judge Pelling KC then said [at 98]:
“In my judgement loss and event may – not must – amount to the same thing or for that matter different things. This is so because an “event” is something out of which a loss or series of losses arises – see Candle v Sharp [1995] Lloyds Rep IR 433 per Nouse LJ at 443 LHC. In the context in which the word “event” is used in the Retained Liability section of the Policy that I am now considering, that interpretation is plainly appropriate as a matter of principle”.
And then [at 100]:
“I agree …that in the context in which the word “event” is used in the provision of the Policy…and acknowledging that the word “event” has a usual meaning in an insurance context, being that set out by Lord Mustill in AXA, it means something that happens at a particular time, at a particular place and in a particular way. To that extent I agree that the use of the word has a potentially aggregating effect in relation to the deductible…”.
Judge Pelling KC then set out [at 102] the arguments raised by the claimant (insured) and defendants (insurers). The claimants maintained that the single proximate cause of the damage occurring during the Period of Insurance was the failure by the designers and contractor to specify the need for or to provide temporary roofing or other effective waterproofing arrangements:
“For present purposes it is necessary to note only that the claimants’ case is that on a proper construction of the Policy, the event for the purposes of the claim was “…. the decision to build to the defective design or, alternatively, the instruction to install the roof in accordance with the defective design, which caused the damage to the roof”.
The Judge then observed that the defendants maintained that in law, a decision cannot constitute an event or occurrence and in consequence they submitted that there was no single event which caused the damage for which indemnity was sought, and that the damage each cassette suffered must be treated as a separate event and that the DE5 Retained Liability of GBP 150,000 applied to the cost of remediating each cassette which was proved had been damaged during the Period of Insurance.
The defendants maintained that the design decisions relied on by the claimants were not material because the Policy insures against damage to property not the “…issuance by contractors of instructions to implement a design which was defective insofar as its imperfect execution might lead to the property being vulnerable to damage by water ingress”. They maintained that the design did not cause the damage, which was caused by the ingress of water into the cassettes.
Judge Pelling KC said [at 105]:
“The claimants submit that the defendants submission that a decision or a plan cannot in law constitute an event or occurrence is wrong. I agree…”.
Then [at 108]:
“…I accept 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 but before final waterproofing works were carried out then that will sufficiently satisfy the unities of time place and cause that must be satisfied ….”
And [at 109]:
“On that basis, the damage for which the defendants would otherwise be responsible would attract a single Retained Liability of GBP 150,000 rather than GBP 150,000 for each cassette that suffered damage during the Period of Insurance”.
In concluding [at 180] Judge Pelling KC said:
“…. I have concluded on the balance of probability the entry of the water all occurred …. as a result of the failure to utilise a temporary roof to protect the cassettes until the permanent waterproofing works could be carried out …”
And then [at 181]:
“Returning to the Policy, the issue to be resolved is whether in the events that have happened there is “…one event …” that can be said to have resulted in the damage to the roof cassettes occurring during the Period of Insurance. Applying the conclusions on construction reached earlier in this judgment, I have no difficulty whatsoever in concluding that the decision to design the Sky Central roof without incorporating the use of a temporary roof until permanent waterproofing had taken place was an event in the sense of it being an occurrence at a particular time and place and that was arrived at in a particular way which caused the damage suffered and thus the losses caused by such damage suffered during the Period of Insurance. I conclude therefore that the sums otherwise recoverable by Sky under the Policy are subject to a single deductible of GBP 150,000”.
Conclusion
In Sky UK, Judge Pelling KC rejected as “mistaken”10 the defendants’ argument that the design did not cause the damage but rather the damage was caused by the ingress of water into the cassettes, which was said to find support from the conclusions of the majority of the Court of Appeal in Seele.
While noting11 it was true to say that Moore-Bick LJ in that case rejected the suggestion that the decision to carry out a programme of remedial works was an aggregating event, Judge Pelling KC said that was not a conclusion reached on the basis that a decision to embark on a single programme of remedial work could never be such an event. Rather the remedial work provided the context in which the damage was caused, but was not of itself the underlying cause of it, which lay in the defects which gave rise to the need for it.
While Seele left open the possibility that the installation of windows with a common defect (in design or manufacture) could be an “event”, along with the giving of workmen the wrong instructions, in Sky UK, the High Court actually found for aggregation based on no more than the undefined term “event” in respect of a design decision which was found to be [relevantly] causally related to the damage sustained12.
It did so absent express language of aggregation. As such it reinforced that if an “event” can be identified which can properly be regarded as the source of all the damage, the absence of the express words “originating cause or source” (which have been said to open up “the widest possible search for a unifying factor in the history of losses which it is sought to aggregate”13, will not be fatal to an ability to aggregate deductibles.
1 Hronopoulos v Building Appeals Board [2022] VSC 376 at [52], Mukhtar ASJ adopting the explanation contained in Sutton on Insurance Law (Lawbook, 4th Ed. 2015).
2 AIG Europe v OC320301 LLP [2015] EWAC 2398 at [25].
3 [2008] EWCA Civ 441.
4 Ibid, [54].
5 Ibid, [55].
6 Ibid, [56]. The decision in this case can be contrasted with an earlier decision of the Court of Appeal in Mitsubishi Electric UK Ltd v Royal London Insurance Ltd and Others (UK) [1994] 2 Lloyd’s Rep 249, in which Bingham MR reduced to trial Judge’s finding of 94 deductibles down to a single deductible on the basis that cementitious board was the defective component in a singular sense which became part of each module: “… has the defective board given rise to multiple claims or to a single composite claim … I think … the plaintiffs are alleging a single, albeit composite head of loss and I see no basis for apply the deductible more than once.”
7 Kuwait Airways Corporation v Kuwait Insurance Co SAK [1996] 1 Lloyd’s Rep 664, 686 per Rix J. This has become known as the ‘unities test’ which was developed in the 1972 Dawsons Field arbitration award.
8[1996] 1 WLR 1026.
9Ibid 1035. See also Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 and Pacific Dunlop Ltd v Swinbank (1999) 10 ANZ Ins Cas 61-439 (affirmed on other grounds in (2001) ANZ Ins Cas 61-496).
10 At [104].
11At [104].
12 In Metricon Homes Pty Ltd v Great Lakes Insurance SE [2017] VSC 749 … at [60] it was said to be ‘clear’ (and not contested by the insurer) that defective design materials and workmanship which caused damage to a house constructed by the insured constituted an ‘occurrence’ under a policy definition referring to ‘an event, or continuous or repeated exposure to conditions … which results in … damage to … property and/or loss of use thereof.’ It was not entirely clear however which part of this composite expression led the Court to that conclusion.
13 See Standard Life Assurance Ltd v CE European Group [2012] EWAC 104 at [259].
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