A recent High Court judgment provides useful guidance on the meaning of ‘accidental damage’ in the context of an all risks insurance policy
In the case of Leeds Beckett University vs Travelers Insurance Company Ltd  the High Court provided useful guidance to property and construction professionals on the meaning of “accidental damage” in the context of an all risks policy and the interpretation of exclusion clauses dealing with gradual deterioration and faulty/defective design.
The university owned a student accommodation block adjacent to the Leeds/Liverpool canal. Construction of the building commenced in 1993 and was completed in 1996. In August 2011, the university took out an all risks insurance policy with Travelers which covered the building. While it was unknown at the time the policy incepted, contemporaneous construction records revealed the site where the building stood had a long history of springs and watercourses, and that significant water problems were encountered during construction.
In December 2011, large cracks appeared in the internal walls of the building and it was evacuated. Investigations revealed that an area of below ground concrete blockwork, which supported the building’s superstructure, had deteriorated and turned to “mush”. It was found that the cause of the damage to the blockwork was sulphate attack and leaching brought about by flowing ground water. Evidence suggested that the blockwork had been subject to sulphate attack for a period of at least 10 years. The building was deemed structurally unsafe and was demolished.
The university made a claim under its policy for the costs of reinstating the building and loss of income, estimated to be in the region of £10m.
Travelers declined indemnity, relying on a policy exclusion clause which excluded damage caused by or consisting of “inherent vice latent defect gradual deterioration wear and tear frost change in water table level its own faulty or defective design or materials “. The university subsequently issued a claim against Travelers, contending that failure to pay out constituted breach of contract.
Mr Justice Coulson dismissed the university’s claim on the following basis:
- Accidental damage The building had not suffered from “accidental damage”. He held that “accidental” means an event that occurs by chance, which is non-deliberate. The evidence demonstrated the blockwork had been subject to mobile ground water since completion of the building in 1996, causing it to weaken over time. Consequently, when the policy was taken out in August 2011 the damage was already inevitable and therefore not “accidental”. The only thing that was unknown was precisely when the failure would occur. As the judge found the cause of the damage was not accidental, it followed that the policy did not respond. Nevertheless, he went on to consider the application of the exclusion clauses.
- Gradual deterioration The university argued that the gradual deterioration exclusion should be restricted to instances where property deteriorates of itself. The judge rejected this interpretation stating: “As a matter of construction and of common sense, I conclude that gradual deterioration can be caused by the interaction between the property insured and the circumstances in which that property exists.” He further clarified 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”. The judge therefore held that the exclusion clause did apply.
- Faulty/defective design The court approved the well-established principle from Hitchens (Hatfield) Ltd vs Prudential Assurance Co Ltd  that an insurer is not required to prove negligence in order to rely on an exclusion for faulty/defective design. All that needs to be shown is that the design was not fit for purpose.
On the basis of the evidence, the judge found that the design of the building’s groundwater drainage was inadequate, observing that “The over-arching problem with the design of the groundwater drainage system here was that, in my view, there was simply no design at all”.
This is a reminder that insurers’ first consideration will be whether a claim falls within the scope of the cover
This case is a reminder that insurers’ first consideration will be whether a claim falls within the scope of the cover; is the damage truly accidental, as envisaged by the policy? Even if the policy is written on an “all risks” basis, the loss must be caused by a chance event and must not be an inevitability at the time the policy was purchased.
So, when is something considered to be inevitable? The judgment makes it clear that where the cause of damage commences prior to policy inception and, when judged at the time of inception, the damage is certain to occur or manifest during the policy period (as opposed to there simply being a risk of damage occurring), the damage is not accidental; it is inevitable. Invariably expert evidence will be required to prove if damage is certain to occur during the policy period.
Nick Young is a partner, Olu Dansu, a senior associate and Eleanor Whittaker, an associate, at DAC Beachcroft. The firm successfully acted for the defendant insurer in this case