Subrogation and co-insurance considered again

In The Rugby Football Union v Clark Smith Partnership Limited and FM Conway Limited [2022] EWHC 956 (TCC) the High Court considered the scope of cover provided to a contractor under an all-risks insurance policy and whether the contractor was able to rely on a co-insurance defence to prevent the Insurer from bringing a subrogated claim against it.  The court found that while the contractor was insured to some extent under the policy, it was not covered for the damage for which the Insurer had indemnified the principal insured (the RFU).  As such it could not rely on a co-insurance defence and the Insurer was able to pursue a subrogated action against the contractor.

BACKGROUND

The dispute arose in relation to substantial upgrade works that took place at the Twickenham stadium in advance of the 2015 Rugby World Cup.  In 2012 the Rugby Football Union (RFU) engaged a number of contractors to perform improvement works in advance of the tournament, which included a work package for the installation of high voltage power cables in buried ductwork.  The RFU engaged Clark Smith Partnership Ltd (Clark Smith) to design the ductwork and FM Conway Ltd (Conway) to install it.

Issues arose during the installation leading to damage to the cables and ductwork as the cables were pulled through - as a result the RFU suffered loss in the sum of £4,440,909.45.  The RFU claimed on its all-risks insurance policy (the Policy) and was indemnified by RSA (the Insurer) under the terms of the policy to the sum of £3,334,405.26.  RFU claimed against Clark Smith and Conway with respect to its losses by reason of defective design and deficiencies in workmanship respectively and the Insurer brought a subrogated claim.

Following issuance of the RFU and the Insurer's claim against Conway and Clark Smith, Conway commenced Part 8 Proceedings seeking clarification as to the effect of the Policy.  Conway contended that it was a co-insured with the RFU under the Policy and, as a consequence, the RFU and the Insurer could not bring a claim/subrogated claim against is for the losses covered under the policy.

This preliminary issue was the subject of the recent judgment.

In outline, Conway argued that either (1) it was an identified party under the Policy or (2) that the RFU had effected the Policy on its behalf and with its authority intending Conway to have the full benefit of the Policy.  The former argument derived from the wording of the Policy since the definition of "Insured" under the policy included "the contractor for each Project" and "all other contractors and/or sub-contractors of any tier and others engaged to provide goods or services in connection with the Project insured hereunder".  The second argument was put forward through factual and witness evidence which, in Conway's view, demonstrated that intention and authority had been clear at the time leading up to and surrounding the commencement of the relevant works.

The RFU and Insurer disputed these arguments saying that Conway was not an identified party under the Policy but a party capable of being ascertained.  The RFU admitted that it had entered into the Policy as an agent of Conway but said that the authority and agency was limited such that it was only procuring insurance cover for Conway to the extent set out under the JCT contract and no further.  As required by the JCT contract, the Policy covered Conway in respect of physical loss or damage to the work executed or to Site Materials. However, it did not on the face of it cover them for the cost of rectifying damage caused by Conway's own defective works.  If the RFU and the Insurer were right that Conway's cover was limited in this way, the operation and effect of the co-insurance and waiver of subrogation would also be limited to claims falling within Conway's cover. Conway would not be co-insured against – and would not therefore have the benefit of the waiver of subrogation in respect of – the insured losses for which the Insurer had indemnified the RFU.

DECISION

In considering whether Conway was a co-insured under the Policy, Mr Justice Eyre noted the clear principle set out in National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyds Rep 582 that insurers are prevented from bringing subrogated claims against co-insureds where the co-insured also has benefit of cover for the loss which forms the basis of the subrogated claim. This was characterised as an implied term, but Eyre J noted that in subsequent cases the courts have observed that the implied term cannot withstand express terms to the contrary (Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd [2008] EWCA Civ 286). Hence to determine whether the principle applies in a particular case the court must consider the terms of the contract between the parties (Gard Marine & Energy Ltd v China National Chartering Co Ltd [2017] UKSC 35)

Since the principle only applied to subrogated claims between parties insured under the same policy against the same loss it was necessary to consider whether Conway was an insured and if so was it insured with respect to the claimed losses.

Eyre J explained that there were different legal mechanisms by which a contractor might become insured under the employer's policy: (1) agency, whereby the employer acts as agent of the contractor in putting the insurance in place; and (2) the insurance policy is a standing offer by the insurer which the contractor accepts by entering the contract with the employer. Which mechanism applied depended on the circumstances but both required an analysis of the contract between employer and contractor, since that provided the key to the existence and extent of the insurance cover (following Haberdashers’ Aske's Federation Trust Ltd v Lakehouse Contracts Ltd [2018] EWHC 558 (TCC)). That contract was also relevant in considering the terms of the waiver of subrogation provisions.

Conway was not a named or identified party to the Policy: it fell within a generic category of contractors and subcontractors covered by the Policy. It benefited from cover as a result of the agreement with and actions of the RFU. The contract between in the RFU and Conway was therefore the starting point for the coverage analysis.

Eyre J agreed with the RFU on the scope of Conway's cover. On a proper construction of the Policy, it provided insurance to Conway consistent with Option C of the JCT contract and the Letter of Intent which had been agreed between RFU and Conway. While RFU and Conway were both covered under the Policy they were not insured to the same extent or in respect of the same risk. Specifically Conway was not co-insured for RFUs losses due to damage to cables caused by defects in the ductwork.

Conway had adduced evidence which (in its view) demonstrated that the parties intended that the policy would be the RFUs sole avenue of recourse in the event of contractor default. Eyre J disagreed: Conway's evidence was insufficient to counter the natural reading of the contractual documents.

The waiver of subrogation clause in the Policy had to be construed against this background. The Insurer's agreement “to waive all rights of subrogation which they may have or acquire against any insured party…" only extended to matters which Conway was insured against. The Insurer was therefore able to proceed with its subrogated claim against Conway.

COMMENT

The judgment is the latest in a series of cases which explore the nature of co-insurance in multi-party construction project context and whether subrogated claims can be brought in the name of one co-insured against another. Once again, the contractual risk allocation between the project parties was a central factor influencing the outcome in the case.

The case is currently being appealed but the judgment provides a useful reminder to contractors, sub-contractors and other project parties that when relying on project wide insurance policies parties are well advised to consider carefully the scope of cover obtained on their behalf. Even if an entity is within a class of potential insured parties, it should ensure that the risk allocation and insurance provisions are fully consistent to minimise the prospect of subrogated claims and adding to the already extensive case law in this area.