Seele Austria GmbH & Co KG v Tokio Marine Europe Insurance Ltd

A contractors all risks policy generally insures against fortuitous physical damage to the works, but its wording may provide a separate indemnity for intentional access damage needed to rectify a defect. A clause granting that additional cover can operate independently of provisions dealing with accidental consequential damage, even where no accidental damage has yet occurred. The insured property may comprise the whole works, subject to the insured’s insurable interest. A subcontractor’s cover is not confined to its own work unless the policy clearly says so. A defect alone is not damage, and the cost of rectifying defective work remains outside the access-damage indemnity. Aggregation requires a single event, identifiable as the underlying cause of all damage; testing or a remedial programme is insufficient.

The appellant subcontractor installed punched windows in a redevelopment project. Defects in the windows required remedial work, including the removal and reinstatement of external cladding and internal finishes. The subcontractor sought indemnity under Section 1 of a combined contractors all risks and third-party liability policy.

Field J decided preliminary construction questions substantially in favour of the insurers, holding that Memorandum 18(3) was subject to Memorandum 18(2) and did not provide cover without accidental damage to other work. The appeal concerned whether clause 18(3) was a free-standing indemnity, the scope of the insured property, and whether the relevant damage arose from one event for excess purposes. The central question was whether intentional access damage required to rectify defects was recoverable where no accidental physical damage had occurred.

Majority decision

1. Construction of the policy. Moore-Bick LJ, with Richards LJ agreeing, held that Section 1 generally provided cover against fortuitous physical damage to the works as a whole. That general character did not prevent the policy from granting additional cover of a different kind. Memorandum 15 restricted the indemnity in the circumstances it described; it did not confine the insured property to the subcontractor’s own work. Each subcontractor was insured in respect of the whole works to the extent of its insurable interest (paras [35]-[38], [63]).
2. Memorandum 18(3). Clause 18(3) was a free-standing indemnity. It was not conditional on clause 18(2) or on prior accidental damage. It covered intentional damage necessarily caused to other insured property to enable defective work to be rectified. The defect itself was not damage, and the cost of repairing the defective windows was not recoverable under clause 18(3). Necessary removal and reinstatement of external cladding and internal plasterboard ceilings constituted recoverable access damage because the remedial work was required to preserve the building’s physical integrity (paras [41]-[45], [50]-[51], [62]-[66]).
3. Separate property and aggregation. Parts of the works which were commercially separate and distinct could be other insured property free from the defective condition. However, there was no evidence that water ingress had caused physical damage to the ceilings. For aggregation, the separate instances of damage had to arise from one event in the ordinary sense: something occurring at a particular time, place and in a particular way. The water testing, the remedial programme and repeated poor workmanship did not constitute one underlying event. The workmanship deficiencies therefore represented separate occurrences and did not arise out of one event (paras [49]-[57]).

The appeal was allowed to the extent indicated, and the preliminary issues were answered as set out at paragraph [58]. Other issues relevant primarily to damages were left for the damages trial and any later appeal.

Dissent

Waller LJ agreed that Memorandum 15 did not confine cover to the subcontractor’s own works, but considered that the policy responded only to accidental damage. He would therefore have dismissed the appeal on the central issue.

1. Court of Appeal (Civil Division) — The appeal was allowed to the extent indicated. The court answered the preliminary issues in favour of indemnity for necessary intentional access damage under Memorandum 18(3), and held that the separate occurrences did not arise out of one event. [2008] EWCA Civ 441
2. Queen’s Bench Division, Commercial Court — Field J answered preliminary construction questions in favour of the insurers, holding that Memorandum 18(3) was subject to Memorandum 18(2) and required accidental damage to other work. [2007] EWHC 1411 (Comm)