Application of the 'Damage to Existing Property' exclusion in a WELCAR policy

The dispute in Technip Saudi Arabia Limited v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (Medgulf) [2023] EWHC 1859 (Comm) concerned the interpretation of the Damage to Existing Property (DTEP) Exclusion in the standard WELCAR form wording for offshore construction all risks cover.

The insured succeeded in overcoming all hurdles save for the application of the DTEP Exclusion resulting in its claim failing entirely.

BACKGROUND

Technip was a contractor that agreed to perform certain offshore installation work for Al-Khafji Joint Operation (KJO), a joint venture which undertook the development of the Khafji Crude Related Offshore Projects in the Khafji Field, Saudi Arabia. In performance of the contracted works under the installation contract (the Installation Contract), Technip chartered a vessel, which collided with an unmanned wellhead platform (the Platform) causing damage for which Technip was liable to KJO. (The judgment and parties referred throughout to an "allision", being the term for a collision between a moving vessel and a stationary object, here an offshore platform.)

Technip claimed an indemnity under the liability Section II coverage of an insurance Policy (the Policy) underwritten by Medgulf on the amended WELCAR 2001 Offshore Construction Project Policy wording.

On being presented with the claim, Medgulf declined cover on the basis of certain Policy exclusions but received confirmation that Technip would act as a prudent uninsured. After a period of three years, Technip reached a settlement with KJO in respect of which it did not seek or obtain Medgulf's consent.

Pursuant to the terms of the settlement, Technip would pay KJO US$33 million which comprised of US$25 million in respect of repair costs arising from the allision and US$8 for KJO's other losses. KJO would in turn pay Technip an equivalent amount (ie US$33 million) in respect of other claims by Technip against KJO. The sums owing by both parties cancelled each other out resulting in a net zero settlement.

Following further refusal for coverage of the claim, Technip issued proceedings against Medgulf in the Commercial Court in London.

Issues in dispute 

The key issues in dispute in the proceedings were:

1. Whether Technip had a legal liability to KJO for damage to the Platform;
2. What was the consequence of Medgulf not consenting to the settlement; and
3. What was the effect of the DTEP Exclusion (being Medgulf's key defence to the claim).

DECISION

Existence of legal liability 

The Policy, being a liability policy, required proof on part of the insured of (i) a legal liability owed to KJO for damage to the Platform (ii) for a sum that was at least as much as the amount paid under the settlement. In the event that any such liability was of a lesser value, then a claim could only be presented for that lesser amount – in other words, the insured could recover no more than its actual legal liability from insurers.

The reasonableness of the settled amount was, the Judge noted, wholly irrelevant to the issue. The Judge clarified that while "other common law jurisdictions take the view that a failure by the insurer to pay is a repudiation of that obligation (albeit not of the contract as a whole) and that the policyholder's settlement with the third party is binding on the insurer if reasonable… English law … takes a different approach".

On the facts in the case, the question regarding the existence of a legal liability turned on the construction of two specific clauses in Technip's contract with KJO. Pursuant to clause 5.2.3 of the Installation Contract, Technip, as contractor, was required to:

"… protect from damage all existing structures, improvements or utilities at or near the WORK Site and … repair and restore any damage thereto resulting from [its] failure to exercise reasonable care in protecting the same during [its] performance of the WORK" [emphasis added]

Pursuant to clause 12.6, Technip was:

“fully responsible … for the acts, negligence, alteration, additions and omissions of all its Subcontractors at whatever tier, and their personnel, as if they were the CONTRACTOR’s own personnel…".

In contending that Technip did not have a legal liability to KJO, the insurer, Medgulf argued that: (a) the Platform was neither at nor near the work site, (b) the allision did not occur during performance of the Work, and (c) the vessel responsible for damage to the Platform was not a subcontractor within the meaning of the contract by virtue of not being a party to the Subcontracting Plan and providing only an ancillary service to the contract works.

In rejecting all these objections, Mr Justice Jacobs found that:

1. any reasonable person would consider that the Platform (being at a distance of 1 km from the Work Site) was near that Work Site;
2. the allision occurred during the performance of the Work under the contract as the alliding vessel was proceeding to a designated anchorage before resuming duties the following day; and
3. the vessel was a subcontractor for the purposes of the contract and Technip was therefore responsible for the negligence of the vessel in damaging the Platform.

Technip therefore succeeded in establishing a legal liability on its part to KJO for the allision and resulting damage to the Platform.

The quantum of Technip's legal liability was, however, limited to reasonable repair costs and certain other losses which the Court quantified in the sum of US$7.4 million (in addition to Technip's first party loss totalling US$10.4 million). Accordingly, had Technip's claim not fallen under the DTEP Exclusion (discussed below), it would have only been able to recover a sum of US$7.4 in respect of its actual legal liability as opposed to the entirety of the settlement sum (or even the US$25 million classified in the settlement agreement as repair costs).

Failure to obtain consent to settlement 

As is common with liability coverages, the Policy required the insurer’s consent before entering into a settlement agreement. The definition of Damages in the Policy comprised of four distinct categories of the kinds of damages, with only compromise settlements requiring insurer consent:

"DAMAGES" shall mean compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters' consent, but shall not include fines or penalties, punitive damages, exemplary damages, equitable relief, injunctive relief or any additional damages resulting from the multiplication of compensatory damages." [emphasis added]

Medgulf contended that there were no "Damages" as defined under the Policy that Technip could claim as part of its loss because of the insured's failure to obtain Medgulf's consent to the compromise settlement it had concluded with KJO. While Medgulf accepted that consent was not a condition precedent to Medgulf's liability, it persisted in its argument that it was an element of the definition of damages and one that had not been met.

In acknowledging the overlap between the various terms used, Mr Justice Jacobs held that the four categories, while distinguishable, could not be regarded as "separate watertight compartments". Accordingly, he was content that Technip's settlement with KJO involved a payment of "compensatory damages" which did not require insurers' prior consent and the absence of such consent did not preclude a claim under the Policy.

Separately, Mr Justice Jacobs accepted Technip's submission that, even if the settlement sum was only covered as a "compromise settlement", it would still not require Medgulf's consent due to the fact that Medgulf had previously denied cover. Mr Justice Jacobs commented, obiter, on the absurd result that would arise from a situation in which an insurer could defend a claim on the basis of an absence of its own consent in circumstances where it had denied cover but obtained confirmation that the insured act as a prudent uninsured. The Judge emphasised that "an uninsured person would, by definition, have no reason to consult or seek the consent of an insurer". The conduct of Medgulf effectively meant that Technip was uninsured and at liberty to take such steps as reasonably required to protect its position including, as had been done in this case, negotiating a settlement without Medgulf's prior consent.

The DTEP Exclusion

Medgulf's key defence against Technip's claim centred around the exclusions contained in the Existing Property Endorsement to the Policy. There were essentially two limbs, Limb 1 and Limb 3, that were the subject of consideration in the dispute:

"ENDORSEMENT 2

EXISTING PROPERTY Endorsement

Cover for damage to existing property is subject to the following Existing Property Contractual Exclusion and Buyback:

Existing Property Contractual Exclusion

The coverage provided under Section II of this policy shall not apply to any claim for damage to or loss of use of any property for which the Principal Assured:

1) owns that is not otherwise provided for in this policy;  [Limb 1]

2) ...

3) is liable or claimed to be liable by operation of any indemnification, hold harmless or similar provision contained within any contract or agreement. [Limb 3]

All other insuring agreements, terms, conditions, definitions, exclusions, notice requirements, schedules and endorsements of the policy remain unchanged.

Existing Property Contractual Exclusion Buy-Back

Notwithstanding the Existing Property Contractual Exclusion above, it shall not apply to any claim for:

Physical loss of and/or physical damage to existing property as per Schedule of Existing Property below and extends to anything reasonably ancillary thereto.

All other insuring agreements, terms, conditions, definitions, exclusions, notice requirements, schedules and endorsements of the policy remain unchanged."

[emphasis added]

Exclusion under Limb 1

Medgulf's primary defence was that, under Limb 1, coverage in respect of the Platform was excluded on the basis that the Platform was a property which the Principal Assured (ie KJO) owned and that was not otherwise provided for in the Schedule of Existing Property. Medgulf submitted that "the clear commercial rationale for the Existing Property Exclusion [was] to identify specific categories of property that are excluded, save to the extent that cover [was] specifically bought back". Accordingly, Medgulf explained that the purpose of the exclusion and Buy-Back mechanism was to enable the insurer to price the cover accordingly and therefore represented a clear marker to understand what was covered under the Policy and what was not.

Technip, on the other hand, submitted that, on a reading of the Policy language and its composite nature (the Policy was a separate insurance in respect of each Principal Assured), Limb 1 did not apply in circumstances where the property owned by one Principal Assured (ie KJO) was damaged by another (ie Technip). The Exclusion referred, at the very beginning, to "the Principal Assured" (being the Principal Assured that was bringing the claim) as opposed to "any Principal Assured". When considering the separate (composite) insurance contract between Technip and Medgulf, there could only be one entity that qualified as the "the Principal Assured", which was Technip. As Technip did not own the Platform, Limb 1 was not engaged.

Mr Justice Jacob decided in favour of Medgulf:

"The core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean …

In … applying this approach, the Court must adopt an approach to the interpretation of insurance exclusions which is sensitive to their purpose and place in the insurance contract. The Court should not adopt principles of construction which are appropriate to exemption clauses - i.e. provisions which are designed to relieve a party otherwise liable for breach of contract or in tort of that liability - to the interpretation of insurance exclusions, because insurance exclusions are designed to define the scope of cover which the insurance policy is intended to afford. To this end, the Court should not automatically apply a contra proferentem approach to construction. … If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense ..."

The Judge held that the Platform was clearly existing property owned by KJO which had not been specifically identified in the Schedule of Existing Property subject to the Buy-Back. Accordingly, a reasonable person with the requisite background knowledge would have understood the Policy to cover liability for only damage in respect of existing property owned by any Principal Assured if it was identified in the Schedule of Existing Property. Disregarding the listing of specific property in the Schedule made no commercial sense. Limb 1 was concerned with the identity and nature of the property in question and not with which insured party suffered a liability in relation to damage to it.

As a further point, Mr Justice Jacobs agreed with Medgulf's submission that, at the time of placing the Policy, the parties would have principally had in mind the existing property owned by KJO (as the operator of the field) and not any property owned by Technip who would, in its position as contractor, not have brought any property to the field for the purposes of the Project at that stage.

Exclusion under Limb 3

In light of the conclusion above, Mr Justice Jacobs did not need to consider Medgulf's alternative argument based on Limb 3 in any detail, save for noting that he did not consider the exclusion in this limb to apply in circumstances where Technip's liability arose under clauses 5.2.3 and 12.6 of the Installation Contract, neither of which terms could be considered to be an "indemnification, hold harmless or similar provision".

The Watercraft exclusion

Similarly, Mr Justice Jacobs did not consider it necessary to deal substantively with Medgulf's further alternative argument under the Watercraft exclusion under the Policy. It was not in dispute that the alliding vessel was covered under a P&I policy and Mr Justice Jacobs accepted that, pursuant to the relevant exclusion, this was sufficient regardless of whether Technip themselves were covered under that policy. On that basis, Medgulf failed to establish that the Watercraft Exclusion applied.

COMMENT

This judgment is notable for grappling with the proper construction of the DTEP Exclusion in a WELCAR offshore construction policy. This is an issue which has long been under debate and this is understood to be the first judgment addressing the Exclusion.

The consequence of the judgment is that insureds and their brokers may need to consider how to address the risk of liability for accidental damage to existing property which is close to or in the near vicinity of an offshore construction or installation site but which is not specifically scheduled in the Endorsement. The practical difficulty that could arise when construction work is carried out offshore in areas of existing development is that there may be a number of structures within a near radius of the site not all of which will be uppermost in the mind of the parties at placement of the WELCAR policy.

In terms of Mr Justice Jacobs' comments on obtaining insurers' consent to settlement, it is important to note that these were made obiter. Policyholders entering into settlements with third parties should always pay close attention to policy provisions concerning insurers' consent to settlement. It may be prudent and appropriate to seek insurers' consent and give insurers an opportunity to comment, even if insurers have declined the claim (and insureds are generally well advised to continue to comply with policy conditions even in the face of a declinature).

Finally, the judgment is understood to be under appeal.