Seele Austria GmbH & Co v Tokio Marine Europe Insurance Ltd

Under a Contractors All Risks policy, a defect in contract works does not itself constitute loss or physical damage. Cover for defective workmanship requires qualifying physical damage, ordinarily of a fortuitous kind. Intentional dismantling or opening-up undertaken solely to gain access for rectification does not satisfy that requirement. Where policy wording makes cover for intentional access damage part of a wider carve-out, the applicable conditions must be read together, including any requirement for unintentional damage to non-defective works. Consequential delay losses remain excluded where the policy excludes consequential loss, although direct costs of access works and certain measures needed to carry them out may be recoverable if cover otherwise exists and the insured proves the amount claimed.

Seele, a trade contractor, sought indemnity under a Contractors All Risks policy for costs arising from defective punched windows installed on a building project. The claimed losses included rectification, dismantling and reinstatement of cladding and internal finishes, project-management costs, delay charges and settlement-related deductions.

The policy covered Seele only under section 1 and subject to Memorandum 15. Seele relied principally on Memorandum 18(3), concerning intentional damage necessary to enable repair or rectification of defective insured property. The central issues were whether qualifying damage had occurred, whether the conditions in Memoranda 15 and 18(2) applied, and which categories of loss would be recoverable if cover existed.

1. Coverage failed. The claimant was not entitled to indemnity under Memorandum 18(3). The policy required loss or damage within the insuring clause, Memorandum 15 and the opening words of Memorandum 18. A defect in the punched windows was not itself physical damage. The relevant concept was an adverse physical effect on the state of the insured works.
2. Memorandum 18(3) was to be read as part of the carve-out in Memorandum 18(2), and was therefore subject to the condition that non-defective insured works had been unintentionally damaged in consequence of the defect. That construction avoided inconsistency between the memoranda and was consistent with the commercial structure of the policy.
3. The intentional removal of cladding and opening-up of internal finishes to reach the defective windows did not constitute the qualifying damage required by the policy. There was no evidence that water entering during testing had physically damaged the ceilings. In any event, the ceilings were vulnerable to the defective façade and were not works free from the defective condition.
4. Memorandum 18(3) was also subject to Memorandum 15. For a trade contractor, the relevant works had to be carried out by it and be works for which it was responsible. Much of the intentionally damaged cladding and internal finishing had been carried out by subcontractors engaged by the employer.
5. By way of alternative guidance, if cover had existed, intentional dismantling of an integral cladding system could constitute damage even where individual stones were preserved. Accidental damage to stones would not be intentional damage. Recoverable losses would be confined to direct access and reinstatement costs, and to measures required solely to permit access works to proceed in parallel. Delay costs were consequential loss and were excluded by Exception 4. The insured also bore the burden of proving and, where necessary, apportioning its loss.
6. The claim was dismissed. No indemnity was available for the loss and expense claimed.

Not stated in the judgment.