Co-Insurance, it’s a bit of a scrum

The Rugby Football Union v Clark Smith Partnership Limited & FM Conway Limited [2022] EWHC 956 (TCC)

This recent High Court decision once again shines a light on the tricky issue of co-insurance under project CAR policies, in particular the difficulties faced by contractors of all levels when trying to demonstrate the extent of cover in the face of a subrogated claim from project insurers.

It’s the most noteworthy judgment on the issues since Haberdashers’ Aske’s Federation Trust in 2018 (which, as we’ve stated previously, is a bad decision for policyholders), and is a helpful refresh of the issues, if only to remind parties to construction projects to ensure that the contractual arrangements for any project accurately reflect the intention and authority of the party obtaining insurance cover for others.

Background

The Rugby Football Union (“RFU”) was undertaking significant works at Twickenham in 2012 in order to prepare for the 2015 Rugby World Cup. It engaged Clark Smith Partnership Limited (“Clark Smith”) to design buried ductwork which was to contain power cables, and FM Conway Limited (“Conway”) to install it. RFU and Conway contracted on the basis of a JCT Standard Building Contract without Quantities 2011 (“the JCT”), some of which (but importantly not all) was the subject of agreed amendments.

RFU asserted that the ductwork was defective which caused damage to the cables as they were pulled through (by a third party), which resulted in replacement costs of £3,334,405.26, for which it was indemnified by the project insurers, Royal & Sun Alliance Plc (“RSA”).

The project policy contained a DE3 standard form defects exclusion, which meant that the cost of addressing the defective ductwork was excluded, but the remedial cost of the consequential damage to the cables was covered.

RSA sought to recover those sums from Conway (and Clark Smith) in a subrogated recovery action on the basis that the damage had been caused by its defective workmanship. In response, Conway issued Part 8 proceedings seeking a declaration that it was a co-insured under the project policy and that it had the benefit of cover to the same extent as RFU (as principal insured), which prevented RSA from bringing the subrogated claim against it.

Issues

In relation to the claim brought by RSA (in relation to which it stood in RFU’s shoes), Mr Justice Eyre was asked to consider whether the sums paid by RSA to RFU were irrecoverable because RSA could not exercise subrogation rights and/ or on a proper analysis of the project policy and/ or the contract documents that RFU and/ or RSA were not entitled to claim the insured losses.

The judgment contains a very useful summary of the law regarding co-insurance to date, including the basis on which subrogated claims between parties to an insurance policy can be barred by reason of circuity of action (Co-operative Retail Services Ltd [2002] UKHL 17) and the basis on which one insured may obtain cover for another (Gard Marine & Energy Ltd [2017] UKSC 35).  However, the key aspect here was not the existence of cover in the first place, but the extent of that cover for a co-insured.

The specific consideration here was whether Conway had the benefit of the full cover under the project policy, which provided cover for damage to other property insured caused by Conway’s defective works, or whether its cover was restricted to damage caused by Specified Perils as provided for by the unamended part of the JCT.

Mr Justice Eyre was at pains to stress (guided by the above authorities, but also National Oilwell (UK) Ltd [1993] 2 Lloyd’s Rep 582) that the contract is key when determining the intention and authority of the principal insured when securing cover, stating:

“74. What is important is that the authorities are clear that in order to determine whether the insurance cover which a policy effected by, in my example, the employer or contractor applies to the contractor or sub-contractor and if to what extent (with the latter point determining the extent to which they are co-insured) it is necessary to look to the terms of the contract between those parties. It is those terms which provide the key to the existence and extent of the insurance cover.”

“88. …  when a person becomes a party as a consequence of the actions of another person then the terms of the contract between the insured party and that other govern the extent of the insurance”

In relation to the intention and authority of RFU, Mr Justice Eyre found (despite witness evidence to the contrary relied on by Conway, that the insurance obtained by RFU was intended to be more extensive than envisaged by the JCT), that the contract documents read together (including the JCT) did not demonstrate an intention for the project policy to create a fund which would be the sole remedy for loss suffered by RFU as a consequence of a breach by Conway.

Whilst Conway was an insured under the project policy, the extent of that cover was that as envisaged in the JCT and no wider, such that it was not a co-insured in relation to the damage for which RSA had indemnified RFU. He went on to find (again consistent with National Oilwell) that the waiver of subrogation clause in the policy only related to the matters for which Conway had cover under the policy, and so didn’t prevent a claim by RSA.

Comment

This judgment doesn’t alter the previous state of the law in this area, but is a salutary reminder to make sure that the contractual documents are in line with the expectations of the parties.

Mr Justice Eyre indicated that “compelling evidence to counter the inferences from the natural reading” of the JCT may have altered the result (which is in line with the “other admissible material” referred to in National Oilwell), but that evidence was not present here. Rather, the judge found it “surprising” that the JCT was subject to amendment elsewhere, but not in relation to the insurance for the works. If the parties had intended the extent of cover to be different from that envisaged by the unamended JCT, then presumably it would have been simple enough to reflect that in an amended version of the JCT. The absence of those amendments seems to have been an important consideration in relation to the parties’ intentions.

If there’s an intention for members of the project team to have a benefit under any project policy, it is vital that the underlying contractual documents accurately reflect the full extent of the principal insured’s intention and authority in that regard.

Rob Goodship is a Senior Associate at Fenchurch Law