Posted on December 17, 2018
Sandy Mooneeapen looks at a case that demonstrates key issues to be aware of with so-called All Risks Insurance, in an article recently published in
All Risks Insurance is a failsafe for most businesses. The cover, which protects against most risks, is a common choice. However, All Risks Insurance can be counterintuitive as it isn’t an all-inclusive policy, and there are often gaps in this type of cover.
Construction issues are particularly fraught, and this was something that a university found out first-hand, when it was taken to court in Leeds Beckett University (formerly Leeds Metropolitan University) v Travelers Insurance Company Ltd  EWHC 558 (TCC). The university restored two historic buildings near a canal between 1993 and 1996 and, to accommodate the slope of the landscape, the restoration of the buildings included a subterranean concrete undercroft.
In December 2011, just 15 years after the buildings had been refurbished, considerable cracks began forming on the walls and ceilings of the eastern side of the building. There were no correlating cracks in the exterior, so engineers went in and quickly determined that there was a problem with the inner leaf of the building. Due to the severity of the cracks, the building was immediately evacuated.
Further investigations uncovered that part of the concrete undercroft had “turned into mush”, offering no structural strength to the building. In 2012, the building was demolished, and it is commonly believed that the structure failed due to the flowing water of the canal. However, the exact cause of the damage remains in dispute.
The university made a claim, under the terms of its insurance policy, to be reimbursed for the value of the renovation. The claim was denied.
Why was the university’s claim denied?
There was an exclusion in its insurance policy, which did not cover damage caused by changes in the water table, faulty design, or faulty materials, and also did not cover damages incurred by water (shrinkage, dampness, dryness, humidity, or contamination).
The university made a second claim and stated that the failure of the undercroft was caused by sulphates that were brought in by water, which destroyed the concrete, and that the water had come from an eternal spring that flooded the undercroft. Most importantly, the university alleged that the undercroft would have flooded intermittently from 2008, when the university had an insurance policy that would have protected it against these damages. After its claim was denied again, the university chose to take its insurance company to court.
Following an investigation, a report was compiled, and several themes began to emerge. One being that the university had been advised of the risks that water damage posed to the site, but that it had decided to proceed with construction anyway, without honouring any plans to create additional drainage. The site was clearly in a flood plain, and the land that surrounded it had been heavily mined. Two mine shafts were determined to be the cause of the leak.
The report again brought attention to the amount of sulphates present in the water. Two of the five water samples tested exceeded safety threshold levels. An excess of sulphates in water do not represent a health hazard, but rather, they can erode ground-level concrete. This erosion was identified as the reason for the damage.
What made this case interesting was that both the university and the insurer admitted that flowing water caused the damage. However, the court was tasked with deciding whether the loss was fortuitous or accidental, which is where the particulars of All Risks Insurance became prominent.
In the case of coverage issues with All Risks Insurance, problems that arise usually fall into four categories: fortuity, the defective design exclusion, the gradual deterioration exclusion, and the inherent vice exclusion. This case dealt primarily with fortuity, gradual deterioration, and design.
Fortuity, or the assumption that the damage caused by the claim was the result of an accident, can be controversial, and to deny a claim for “lack of fortuity” requires substantial evidence. The university sought repayment by arguing that the fortuity in the case was the flood. However, the court quickly determined that, as the building was built in a flood plain, it was unlikely that the accident was fortuitous. This led the court to take another look at the case, to determine whether the flooding could be termed inevitable, rather than accidental. As the court found that the insurance policy began in August 2011, just four months before the collapse, the collapse was considered inevitable rather than accidental, and it concluded that the insurance company was within its rights to deny the claim.
Gradual deterioration, or the idea that something wears away beyond safe or practical use over a period of time, is often cited in All Risks Insurance policies. In this case, the court deemed that “gradual deterioration” can be caused by the interaction between the property insured and the circumstances in which that property exists. However, it was the very idea of “gradual deterioration” itself that came into question. The university argued that gradual could in fact refer to a very quick process. The judge disagreed, saying that gradual was certainly meant to convey something that had occurred slowly over a length of time. The court ruled that the damage occurred over 10 years, and was certainly gradual deterioration, and did not honour the claim.
On examination, the judge found that the design for groundwater drainage was defective, and considered unfit for purpose, falling cleanly into exclusions provided by the policy. Furthermore, there was a gap in cover between the property cover and the professional indemnity cover offered when designers have made a mistake, which would not fall into practice here as the original designs were not honoured.
Not all policies offer a proviso, though these additions are becoming more common. In this case, the proviso stated that it “shall not exclude subsequent damage which itself results in a cause not otherwise excluded”. In these cases, the policy holder (the university) would seek to prove that defective design and gradual deterioration only caused a bit of damage, but was the catalyst for the major damage that would be covered by the policy. The insurer would then attempt to show that the excluded issues were the cause of the loss as a whole. In this case, the court dismissed any claims under the proviso because of the way that the problems built on one another. The damage was caused by the original error, rather than subsequent damage. This case has shown future companies that using a proviso isn’t a failsafe, and that they are likely to be extremely subjective depending on the facts available.
Breaking new ground
This case broke new ground in the world of All Risks Insurance, highlighting the measures that businesses need to take in construction, as well as the limitations of an All Risks Insurance policy. For the university to have been covered in the case, it would have needed a latent defects policy, as well as an environmental policy to cover any damages incurred to the environment.