Leeds Beckett -v- Travelers
When coverage disputes arise on ‘all risks’ insurance, four interlinked issues frequently dominate:
- The defective design exclusion
- The gradual deterioration/wear and tear exclusion, and
- The inherent vice exclusion
Compared to the US, English law is thin on these issues. Leeds Beckett University (formerly Leeds Metropolitan University) -v- Travelers Insurance Co Ltd  EWHC 558 goes some way to remedy this.
In the early 1990s, Leeds Beckett University (the university) constructed accommodation blocks adjacent to the Leeds-Liverpool Canal, on the site of the old Kirkstall Brewery.
The accommodation block was built on a watercourse. A hydrological survey in 1994 identified seven natural springs in the vicinity. Drainage recommendations to deal with the flowing water were not considered and/or were never implemented. Water caused repeated difficulties throughout the progress of the construction works and was dealt with in an ‘ad hoc’ way. In addition, the surface water drainage was not built as originally designed. It was found that water flowed against the concrete block work supporting the building, causing leakage and sulphate attack.
In 2011, one of the accommodation blocks developed large cracks on the internal walls and ceilings. Investigations revealed that some concrete blockwork below ground level had, shockingly, ‘turned to mush’, and had no structural strength at all. The block was demolished in 2012.
The university sought a declaration that Travelers, which provided ‘all risks’ property insurance, was liable under the policy (quantum was to be dealt with by arbitration, under a clause Mr Justice Coulson rightly described as ‘odd’ although, as insurers will know, it is not uncommon). Travelers denied cover.
Both parties accepted the flowing water caused the damage. The court had to decide whether or not the loss was fortuitous and/or accidental and, so, if any exclusion clauses applied.
The requirement under ‘all risks’ insurance for a loss to be ‘fortuitous’ can be controversial. Lack of fortuity has been characterised by policyholders and brokers as an overly technical basis for insurers to deny cover. Mr Justice Coulson confirmed that this remains a live issue under English law.
The policy expressly defined ‘damage’ as ‘accidental loss…’. The judge therefore had to look at fortuity in tandem with this clause.
In doing so, he considered the following:
a. The claimant must prove 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 (British and Foreign Marine Insurance Company Ltd -v- Gaunt  2 AC 41)
b. Accidental damage means damage that was not wilful or deliberate (The Xantho  12 App. Cas. 503 & Patrick- v- Royal London Mutual Insurance Society Ltd  EWCA Civ 421)
c. Accidental damage means damage that was caused by a chance event, against the risk of which the insurance was taken out (Xantho & Gaunt)
d. Accidental damage does not mean damage that was inevitable (C A Blackwell (Contractors) Ltd -v- Gerling Allegemeine Verischerungs-AG  EWHC 84 (Comm))
e. Inevitability will be assessed prospectively, from the time the cover was taken out (Soya GmbH Mainz KG -v- White  1 Lloyd’s Rep 136). Foreseeability is irrelevant (The Miss Jay Jay  1 Lloyd’s LR 264)
f. Accidental damage does not mean damage to the property due to the inherent characteristics of that property (Global Process Systems Inc and Another –v- Svarikat Takaful Malaysia Bhd (The Cendor Mopu)
g. 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 (The D C Merwestone  EWHC 1666 (Comm))
h. The policy should be construed in accordance with the ordinary rules of construction (Arnold -v- Britten  UKSC 36)
The university argued the fortuity or ‘accident’ in this case was a flood. Its expert hydrologist, however, defined flood as ‘a covering by water of land not normally covered by water’. The court found the land in question was often covered with water and held that ‘it is difficult to see what the fortuity might have been. So the next logical question is to ask whether what happened in December 2011 was inevitable’.
An argument that a loss was inevitable and not accidental or fortuitous, often founders upon the fact that, in order to lack fortuity, a loss must have been bound to occur in the policy period. In this case, however, the court found that the relevant period of cover started on 1 August 2011, only four and a half months before the collapse and, at that point, the collapse was inevitable during the policy period. That was enough for insurers to decline the claim: they did not need to show the damage was inevitably going to occur on the particular night it did.
The court concluded ‘this was not a fortuity that occurred during the period of the policy, but an inevitable consequence of [the building] as designed and the environment in which it found itself, namely its exposure to the groundwater that was always there’.
The insurance policy expressly excluded:
- ‘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.-‘
This was referred to as ‘the proviso’. The court held that loss caused by gradual deterioration, inherent vice and defective design could be accidental and fortuitous. We now turn to the gradual deterioration and defective design exclusions.
The court rejected the argument that the gradual deterioration exclusion applied only to deterioration caused by the thing itself i.e. the accommodation block. It was held instead that ‘gradual deterioration can be caused by the interaction between the property insured and the circumstances in which that property exists’ (in this case, the building and the water respectively).
The parties agreed that ‘deterioration’ meant ‘the process of becoming progressively worse’. The meaning of ‘gradual’, however, was disputed. Unusually, although understandably on the facts of the case, the policyholder argued that ‘gradual’ could denote a very speedy process (the argument is a familiar one in the US, where certain courts see the hallmark of a ‘gradual’ process as something that happens by degrees rather than over a particular timeframe).
Mr Justice Coulson disagreed, saying:
‘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’.
This clarifies English law on the point, at least for the moment. There was also some useful comment on the argument, often made by policyholders, that gradual deterioration (excluded) is separate from any actual damage (which must be sudden and is covered). The court held there was no distinction to be made on the facts of the case between deterioration not causing damage and damage itself. In any event, the university did not want to be indemnified for the cracks (which appeared suddenly) but the whole building.
The court found that the damage would, in any event, be excluded under the gradual deterioration exclusion clause as the damage to the blockwork occurred over a period of at least 10 years.
Mr Justice Coulson confirmed that negligent design was not necessary for a design to be defective. The ‘gap’ in cover between (a) property cover (which typically excludes loss caused by defective design) and (b) professional indemnity insurance offered to designers (which normally only responds when the designers have been negligent) was thus confirmed.
The court referred to the Australian case of Queensland Government Railways and Electric Power Transmission Pty Ltd -v- Manufacturers Mutual Insurance Ltd  1 Lloyd’s Rep. 214 and the English case of Hitchins (Hatfield) Ltd -v- Prudential Assurance Co Ltd  2 Lloyd’s LR 580, saying that counsel for insurers ‘said that these cases showed that all the defendant had to demonstrate was that the design was not fit for its purpose. I did not understand Mr Hickey to dissent from that proposition. That is therefore the test which I shall apply to the design in this case’.
The judge went on to find the design of the groundwater drainage was faulty and defective and unfit for its purpose.
It is regrettable that the proper test for defective design was not more closely examined. In particular, the longstanding controversy between the Queensland Railways defective design test (‘not fit for the purpose for which it was designed’) and the faulty design test in Canadian National Railway Company –v- Royal and Sun Alliance Insurance Company of Canada  3 SCR 453 (‘not designed in accordance with the state of the art at the time’) was not mentioned, which might be viewed as an opportunity lost although, on the facts, it is doubtful it would have aided the university’s case. Mr Justice Coulson found that the defective design exclusion was the insurer’s strongest argument.
Although not properly pleaded or addressed in the evidence, Mr Justice Coulson’s treatment of the proviso was illuminating. The effect of the words ‘shall not exclude subsequent damage which itself results in a cause not otherwise excluded’, is a hoary old chestnut in first party coverage disputes. Typically, the policyholder argues that the defective design or gradual deterioration caused only minor damage, but triggered subsequent damage that is covered. Insurers, on the other hand, normally seek to show the excluded peril was the cause of the entire loss.
The court held that:
‘First… ‘subsequent Damage’ must be a reference to different damage: damage that can be distinguished in some way from the damage originally caused. Second, because that different damage must be caused by something which is ‘not otherwise excluded’, that must mean a new or different cause to the gradual deterioration or the faulty/defective design. It must mean a new or different cause because it is a cause not otherwise excluded and, as we know, gradual deterioration and/or faulty/defective design are both causes which are excluded.
‘In my view, the sort of situation that the proviso is intended to cover is, let us say, the collapse of a factory wall because of a faulty/defective design. The falling masonry breaks opens a gas pipe, which causes a fire that destroys some adjacent houses. Whilst a claim for the cost of repairing the factory would be excluded (because of the faulty/defective design), the claim for repairing the buildings damaged by the fire would be a claim in respect of subsequent damage caused by something (a fire) not otherwise excluded, and would be recoverable under the policy.’
This analysis means that the application of the proviso (a common clause in property policies) is likely to be fact-sensitive and, potentially, quite narrow in the future.
The Leeds Beckett -v- Travelers decision is a welcome addition to the canon of English law on first party insurance cover. It confirms the framework of the existing law but, in not making any definitive ruling on the test for defective or faulty design, it may be seen as an opportunity missed. Neutrals may hope for an appeal and at least some obiter dicta on that issue.