Will someone think of the Lenders? Co-insurance issues for funders
Recent Court decisions such as Sky UK Ltd & Mace Ltd v Riverstone Managing Agency Ltd (which we wrote about previously in more detail here) have discussed “Project Insurance” policies taken out by employers in relation to construction projects, confirming the principles by which contractors, sub-contractors and other consultants may become insured under these policies. However, such policies normally also name lenders as insured parties (either specifically by name, or by general description) and in this article we discuss how these principles apply to lenders and what lenders need to do to ensure they are entitled to claim under the policies.
By way of recap, a Project Policy or OCIP normally covers insured parties in respect of physical damage to the “works”, as well as providing third party liability cover (both in respect of negligence and “non-negligence” under JCT 6.5.1). The employer, and/or any lenders, will frequently also want the policy to provide Delay in Start Up cover, which covers financial loss in the event that practical completion is delayed by damage[1] to the works.
A policy will normally define the “Principal Insured” as the employer, being the party who contracts with insurers when the policy is taken out. As I say, contractors, sub-contractors and lenders may also be named under the policy although, as was stated by Eyre J in RFU v Clark Smith Partnership [2022]:
“Being named as an insured does not without more make a person a party to the insurance contract. A person who is named as an insured but who is not otherwise a party to the insurance contract does not become a party to the contract simply by reason of having been named in it. That person remains a third party unless and until it becomes a party in a way recognised as constituting it in law a party to the insurance contract or obtains the benefit of the policy in question in some other way. … Similarly, the editors of Colinvaux rightly say at 15-018 “the mere fact that a policy states that it covers the interests of named or identifiable third parties does not of itself give those third parties the right to enforce the contract or to rely upon its terms (e.g. the benefit of a waiver of subrogation clause)”.
Where a third party insured, such as a contractor or lender, becomes an insured by agreement between an insurer and a Principal or contractual insured, the existence and scope of the cover the third party insured enjoys under the policy depends on the intention of the parties to be gathered from the terms of the Policy and the terms of any contract between the contractual assured and the relevant third party insured.
In a construction context, the Courts have stated that a third party insured contractor can become a party to the policy:
- If the employer taking out the policy is authorised to insure on the third party’s behalf (the “agency” route); or
- On the basis there is a standing offer from the project insurers to insure persons described in the policy such as “Main Contractor” or “Sub-Contractor”, which offer is capable of being accepted by those persons upon execution of a building contract, provided it is not inconsistent with the standing offer (this was the approach which the Court said was relevant in Haberdashers’ Aske Federation Trust Ltd v Lakehouse Contracts Ltd).
Whether a (sub) contractor becomes insured because of agency principles or accepting a standing offer, as well as looking at the policy, it will therefore be necessary to look at the (sub) contract to determine the extent to which the (sub) contractor is entitled to claim, and also to determine the extent to which the (sub) contractor will benefit from a waiver of subrogation.
For similar reasons, a lender will not be insured under a project policy where that policy has been arranged by a principal insured, unless the lender has provided authority to the principal insured to arrange insurance on its behalf and, even then, the lender will only be insured to the extent of the authority provided (even if the cover provided under the policy is wider than the authority provided).
In many cases, this will not cause any issues for a lender to a development finance project since the loan agreement with the borrower will authorise the borrower to arrange insurance in respect of the works, naming the lender as co-insured and first loss payee. Where the borrower is the principal or contracting insured in these circumstances, it will have the requisite authority to insure and the lender will be insured to the extent that the policy reflects the authority.
However, if for some reason the borrower is not the contracting insured, the lender may need to grant authority to the contracting insured via means other than the loan agreement. Further, if the lender wants to benefit from certain bespoke coverage not normally catered for in standard LMA facility agreement drafting (such as DSU cover), it will need to ensure that the principal insured is specifically authorised to obtain such cover on its behalf, and to the extent required.
A final point to note is that these principles will also apply where lenders are looking to be insured under other types of insurance policy in addition to project policies, which the lender has not taken out directly with insurers, such as latent defects or rights of light policies.
Christopher Ives is a Partner at Fenchurch Law
[1] Policies normally contain certain non-damage triggers as well, such as murder, suicide and disease.
