In this UK Court of Appeal judgment the dispute concerned a time-limited occurrence-based construction all risk policy.
Among the issues in dispute was whether in a time-limited occurrence policy, cover extends beyond the period of insurance for “deterioration and development damage” flowing from damage first occurring within the period of insurance.
The court held that the insured could recover for damage that deteriorates or develops after the period of insurance provided it can be shown that the post period of insurance damage flowed from indemnified damage sustained during the period of insurance.
The policy provided:
“The Insurers shall, subject to the Terms of this Contract of Insurance, indemnify the Insured against physical loss or damage to the Property Insured, occurring during the Period of Insurance, from any cause whatsoever…
In settlement of claims under the Section of the Contract of Insurance the Insurers shall, subject to the terms and conditions of the contract of insurance, indemnify the Insured on the basis of the full cost of repairing, reinstating or replacing property lost or damaged (including the costs of any additional operational testing, commissioning as a result of the physical loss or damage which is indemnifiable hereunder) even though such costs may vary from the original construction costs…”
The court held that “damage” in the context of the claim was any change to the physical nature of tangible property which impaired its value or usefulness to the owner or operators. The appeal court found that damage had occurred prior to the expiry of the period of insurance, and before practical completion in the form of water ingress. That was despite that it would take some time for that damage to develop or deteriorate further.
The court held that if the damage which first occurred during the period of insurance on ordinary causation principles resulted in further damage, for example, deterioration and development damage on the facts of the case, then the insurer was liable for that further damage subject to the normal principles of mitigation and remoteness.
The insurers had not pursued any defence based on remoteness of damage or a failure by the insured to mitigate their losses.
The principle is that an insured can recover for damage which develops after a period of insurance if damage developed from damage sustained during the period of insurance. The principle may be modified by the express terms of a policy, including modification of the measure of damages by way of, for example, policy limits, deductibles, and exclusions as certain type of losses.
The court said that forcing an insured to bear the costs of dealing with deterioration and development damage flowing from insured damage within the policy period would be “the antithesis of what property insurance is for”. It would also make deterioration and development damage occurring after the expiry of the period of insurance uninsurable under any separate and subsequent property insurance cover.