First English Law Decision on WELCAR Offshore Construction Form

In what is understood to be the first English law decision on a policy underwritten on the WELCAR form, Mrs Justice Carr in the Commercial Court in Munich Re Capital Limited v Ascot Corporate Name Limited [2019] EWHC 2768 (Comm) held that there was no maintenance cover under a facultative excess of loss reinsurance contract which had not been extended to reflect the underlying policy and the ongoing project work.  The decision reflects the unusual circumstances of the insurance and reinsurance placement for the project which should have been "back to back" (but were not) and includes some interesting observations on the operation of the period clause in offshore construction (re)insurance contracts.

Background

The Claimant in this action, Munich Re, underwrote a line on an offshore CAR policy insuring Chevron in respect of its Bigfoot project in the Gulf of Mexico.  The original insurance was underwritten on the now standard WELCAR 2001 offshore construction form with certain amendments.  In addition to insurance for the construction phase of a project, WELCAR 2001 provides limited cover for an additional period post-completion for maintenance work and making good defects (the Maintenance Period).  Munich Re in turn reinsured part of its exposure on the original insurance under a facultative excess of loss reinsurance policy underwritten by the Defendant, Ascot.  It was common ground that the reinsurance was intended to be "back to back" with the original insurance policy although there were differences as to premium, limits and other terms where stated.  The original insurance was subject to Texas law whereas the reinsurance contract was governed by English law.

Munich Re paid Chevron US$26 million in respect of its share of liability for claims in 2015, after expiry of the main Project Period, and sought to recover a portion of those losses under the Maintenance Period provision in the reinsurance policy.  Ascot declined on the basis that Munich Re had failed to extend the period of the reinsurance contract in line with extensions to the Project Period of the underlying insurance.

Project Period(s)

The Project Period in the underlying insurance originally ran from April 2011 until final completion of the project predicted to be at the latest around September 2014.  As is frequently the case with offshore construction projects, construction delays led to three extensions of the Project Period by original insurers including Munich Re until 31 December 2018 at which point the project transferred to the Operational Insurances effective 1 January 2019.

The reinsurance policy initially adopted the same Project Period as the original insurance.  However, there was no attempt or agreement to extend the reinsurance policy, apparently due to an error.

Initially, Munich Re argued that the reinsurance policy was automatically extended when the original policy was extended. However, it then changed position, and instead argued that it was entitled to recover under the Maintenance Period of the reinsurance policy which, by the terms of both the original insurance and reinsurance, followed the Project Period.  The issue here, was that in 2015 when the losses occurred, the Policy Period for the reinsurance had already ended but the Bigfoot project was still under construction and it was years away from conclusion of main construction works, which is typically when Maintenance Coverage would be expected to attach.

Munich Re argued that on expiry of the Project Period in the reinsurance, namely 30 September 2014, the Maintenance Period coverage would continue over the whole project (albeit on a limited basis as to cover) for the twelve month maintenance period.  Alternatively Munich Re said that the limited Maintenance Period cover would continue in respect of each item, portion or part of the insured construction project which had at the expiry of the main Project Period been completed.

Conversely, Ascot maintained that as at 30 September 2014 there was no completed project capable of falling for coverage during the Maintenance Period.  Alternatively Ascot said that if Maintenance Period coverage was provided for the completed project, then such cover commenced when the project in fact completed on 1 January 2019, leaving a gap of more than four years between the main coverage which ended with the (unextended) Project Period in September 2014 and the Maintenance Period coverage.

Munich Re argued that the language of the Maintenance Period was clear on its face – the Policy Period expired on 30 September 2014 and the Maintenance Period commenced immediately thereafter.  This was a literal reading of the words of the contract.  This defined end point to the Project Period was said by Munich Re to reflect a wider trend in offshore construction insurance partly explained by the disinclination of insurers to expose themselves to a project period of open-ended length and arguments as to the meaning of "completion" of the overall project.  As a result it was wrong to consider construction and maintenance as two binary, mutually exclusive concepts or stages and that in the "real world" it was unrealistic to say that maintenance only begins after construction of the entire project.  Munich Re accepted that their approach was opportunistic but that this was irrelevant to the strict construction of the policy language.

Ascot in summary argued that the parties, at inception, intended that cover provided during the Maintenance Period would apply to the completed project after an acceptance certificate had been issued on completion of the Bigfoot platform.  The essential nature of that cover did not change simply because Munich Re omitted to ask for the Project Period in the reinsurance contract to be extended.

Decision

Carr J set out the well-known principles of contractual construction found in three recent Supreme Court cases: Rainy Sky SA v Kookmin Bank, Arnold v Britton & Ors and Wood v Capita Insurance Services Limited.

Essentially, the court is concerned to identify the intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. It requires a focus on the meaning of the relevant words in their documentary, factual and commercial context.  That meaning must be assessed in light of the natural and ordinary meaning of the clause, any other relevant provisions of the contract, the overall purpose of the clause and the contract, the facts and circumstances known or assumed by the parties at the time the document was executed and commercial common sense.  The subjective evidence of the parties' intentions is disregarded.

The judge held that on a purely literal reading of the reinsurance policy, Munich Re's construction was correct.  However, Carr J was not persuaded it was the true and correct answer.  The overall structure of the reinsurance policy was to mirror the original insurance policy; that was its commercial rationale.  The judge observed (obiter) that if Munich Re had asked Ascot to extend the reinsurance and Ascot had refused, then Munich Re could itself have refused to extend the Project Period in the insurance policy.

The exercise of construction for the reinsurance policy was to be undertaken in circumstances where, contrary to the original (objective) expectation of the parties, there had been an extension of the insurance Policy Period but not (for whatever reason) an extension of the reinsurance Policy Period.  The judge held that the commercial context was important and that it was (or should be) common ground that an experienced participant in the offshore construction all risks market would ordinarily expect the project period in such a policy to cover all operations up to the completion of construction.  The judge cited David Sharp's well known text Upstream and Offshore Energy Insurance (2009) in support of this conclusion.  The judge also noted, based on Paul Reed QC's book Construction All Risks Insurance 2nd Edn (2016) that there is nothing to support any suggestion that insurers in the market are generally moving or have moved to date-defined cover for the construction phase that ignores actual project progress and construction.  The judge held that a reasonable person would expect an extension with a Project Period beyond the date originally agreed on terms and at a premium to be agreed in the event of delays.

Against this commercial context the judge held that the choice of a date range in the Period clause is important.  It was an "estimated" Project Period providing for continuous cover during all operations until 30 March but not beyond September 2014.  It was inconsistent with Munich Re's submission that the parties were to be taken to have chosen a date-defined cover irrespective of the stage of construction reached.  The definition of the Project Period in the reinsurance policy was consistent with the original insurance.

There were further factors which militated in favour of Ascot's construction by reference to the wording of the Maintenance clause itself.  The heading "Maintenance" suggested a completed project, not one under construction and the fact that maintenance work might be required earlier during the construction phase did not alter this.  This was reinforced by the wording of the clause which addressed a post-handover situation by reference to the "acceptance certificate" and obligations in respect of maintenance and making good defects.

Further, as a matter of commercial common sense, Munich Re's construction would if correct leave Chevron as the insured on the underlying policy with only very limited cover in a period when full construction works could be ongoing.  An endorsement to the original insurance made clear Chevron and Munich Re's expectation that maintenance cover would attach when the project transferred from construction to operation.

Applying all of this to the changed factual circumstances, Carr J held that the Project Period of the reinsurance did not expire on 30 September 2014 and the Maintenance Period did not commence thereafter.  Cover under the Maintenance Period clause would provide cover for a completed platform after handover.  There was simply no completed project capable of being insured under the Maintenance Period of the reinsurance contract.  That was the interpretation which applied to the changed circumstances and was most consistent with the parties' original intentions and expectations.  Accordingly Munich Re's request for a declaration failed and Ascot was not obliged to pay for the losses.

Comment

The extension of offshore construction insurance policies is an occasional source of friction between policyholders and insurers and in turn between insurers and reinsurers.  Ultimately the policyholder embarking on a hazardous venture offshore requires a flexible product that recognises the many factors that can cause delays to a construction project during its onshore and offshore phases.  For that reason insurers generally appreciate the need to extend the policy period on terms and conditions to be agreed.  As the judge found here, facultative reinsurances of such projects are expected to operate on the same basis.

This judgment arises in unusual circumstances where the underlying policy was extended but the reinsurance was not.  As a result the reinsured attempted to argue that the Policy Period was to be construed as time limited, in order to try to take advantage of the maintenance cover and mitigate the consequences of the failure to extend the main Policy Period.  The judgment will therefore be reassuring to policyholders in terms of the operation of the Period clause.  It offers a clear warning about the risks of failing to ensure the facultative reinsurance is back to back with the original insurance.  The precise language used will be critical as to its effect on cover and requires close attention.

Understandably, given the way Munich Re advanced its case, Carr J principally focused on the date at which the Maintenance Period commenced.  There remains however a question as to the precise status of the reinsurance after the initial estimated date for completion had expired up to completion of the construction phase.  If, as this judgment suggests, the parties to the original policy intended to provide cover for the construction phase rather than providing date-defined cover, and if (as was accepted by the parties) the reinsurance is back-to-back with the original policy, then there is potential scope to argue that the reinsurance extended automatically at the same time as the original policy.  Indeed this was the case originally advanced by Munich Re, and it is unclear from the judgment why – ultimately – it decided not to pursue this line of argument.