The scope of cover for co-insureds may not always be as it seems

The Court of Appeal in its judgment in the appeal of FM Conway Ltd v Rugby Football Union & Ors [2023] EWCA Civ 418 has endorsed the principle that insured parties under a joint names insurance policy are not necessarily all insured to the same extent, even where the policy itself appears to be silent on the issue.

BACKGROUND

The Rugby Football Union (RFU) engaged a contractor (Conway), to install ductwork designed by another contractor, Clark Smith Partnership Ltd, in order to accommodate high voltage power cables being installed as part of a major refurbishment of Twickenham Stadium before the 2015 Rugby World Cup.

The RFU alleged that defects in the design and installation of the ductwork caused damage to the cables and made a successful claim against their project insurance policy (the Policy) for the cost of replacing the damaged cables.

The Policy insured the RFU expressly as well as a number of classes of unnamed but identifiable insureds including contractors and subcontractors engaged on the project, although it was specified that these were insured "each for their respective rights and interests". It was agreed that Conway was insured under the Policy as part of one of the classes of unnamed but identifiable insureds.

Having indemnified the RFU, their insurers, RSA, brought a subrogated action in the RFU's name against Conway in respect of the sums paid to RFU for the cost of replacing the damaged cables. Conway argued that, as a co-insured under the Policy, RSA (through the RFU) could not claim against it in respect of losses covered by the Policy by reason of a multiple insureds clause under the Policy, and sought declarations by way of separate Part 8 proceedings to that effect.

FIRST INSTANCE DECISION

In April 2022, Eyre J handed down judgment in the first instance on two preliminary issues including whether the RSA was able to exercise subrogation rights or to claim insured losses from Conway. For a full analysis of Eyre J's decision, read our article on the first instance decision on our Insurance Blog.

Eyre J analysed the authorities relating to co-insurance by reference to the principles of principal and agent, concluding that:

• It is necessary to consider whether and to what extent the party effecting the insurance (in this case the RFU) had both authority to obtain cover for the other party (in this case Conway) and had an intention to do so.
• This means considering both the existence of those elements (to determine whether the party is insured at all) as well as looking at the extent of cover that in this case RFU was authorised and was intending to obtain.
• In order to determine the existence and extent of the two elements of authority and intention, Eyre J said that you need to look to the contractual relationship between RFU and Conway to identify the basis on which the RFU effected the Policy on behalf of Conway. This included considering the wording of any contractual documentation as well as evidence of the dealings leading up the contractual arrangements.
• On the facts, the wording of the contract between the RFU and Conway required Conway to take out and maintain its own insurance in respect of its liability for 'any loss, injury or damage whatsoever to any property real or personal insofar as any such loss, injury or damage arises out of or in the course of or by reason of the carrying out of the Works or of any obligation…and to the extent the same is due to any negligence, breach of statutory duty, or omission or default'. That requirement was additional to the joint names policy that the RFU was required to take out and maintain in respect of certain specified perils.
• Given the wording of the contract, Eyre J was satisfied that the agreement between RFU and Conway had not been for the Policy to create the sole recourse for making good the relevant loss as a consequence of default by Conway. Applying the above approach to the exercise, the RFU did not intend that Conway would be insured under the Policy in respect of damage resulting from its own negligence or default. Conway was therefore not co-insured for RFU's losses due to damage to cables caused by defects in the ductwork and the insurer was able to proceed with its subrogated claim against Conway.

As part of his consideration of the contractual relationship between the parties, Eyre J did consider that the two principals may have intended a wider scope, that could not prevail over the terms of agreement between them, which he described as "key to ascertaining the effect of the insurance which was obtained". Further, on the facts, the negotiation of the terms was not conducted solely between these individuals, they were agreed between teams of a number of professionals on each side.

Eyre J also identified an alternative way in which to analyse the relationship between co-insureds, by treating the Policy as constituting a standing offer by the insurer to insure any party who subsequently becomes a member of a defined class. A standing offer is accepted by (for example) a subcontractor when it becomes a member of the class, i.e. when it enters into the relevant sub-contract. Which mechanism applied depends on the circumstances but in any event Eyre J considered that this approach requires analysis of the contractual relationship, since that provides the key to the existence and extent of the insurance cover.

Conway appealed the decision, submitting that Eyre J had applied the wrong test, and that he should have ascertained the necessary authority and intention from the shared understanding of the two individuals who were involved in negotiations, and that investigations should not have been limited to the underlying contract. It is notable that Conway did not contest that it was necessary to ascertain the necessary authority and intention in order to ascertain the scope of cover available to it.

COURT OF APPEAL DECISION

Coulson LJ (endorsed by Baker LJ and Davies LJ) gave judgment in favour of the insurer and the RFU, upholding the decision at first instance.

In his judgment Coulson LJ addressed the relevant authorities on co-insurance, including the key judgments on this topic in National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd's Rep 582, Gard Marine Energy Limited v China National Chartering Co Limited & Anr [2017] UKSC 35 and Haberdashers’ Aske’s Federation Trust & Anr v Lakehouse Contracts Limited & Anr [2018] EWHC 558 (TCC). A running theme throughout his analysis of these authorities was his acknowledgement that at least the focus of the analysis when considering the existence and extent of authority and intention should be the underlying contractual terms, and that the 'true basis' for the rule that co-insureds cannot sue one another in respect of damages for which they are co-insured is to be found in the underlying contract between the parties.

Coulson LJ summarised the applicable principles arising from the relevant authorities as follows:

• The mere fact that A and B are insured under the same policy does not, by itself, mean that A and B are covered for the same loss or cannot make claims against one another.
• In circumstances where it is alleged that A has procured insurance for B, it will usually be necessary to consider issues such as authority, intention (and the related issue of scope of cover). Such issues are conventionally considered by reference to the law relating to principal and agent. Although an alternative approach, referrable to the existence of a standing offer, was identified by Fraser J in Haberdashers’, that was dictated by the particular facts of that case.
• An underlying contract between A and B is not a necessary pre-requisite for a proper investigation into authority, intention and scope. However, a contract may well be implied in any event.
• On the other hand, where there is an underlying contract then, in most cases, it will be much the best place to find evidence of authority, intention and scope. The underlying contract has been called “the most obvious source of authority”.
• That is not to say that the underlying contract will always provide the complete answer. Circumstances may dictate that the court looks in other places for evidence of authority, intention and scope of cover.

When applying these principles to the facts of the case, Coulson LJ held that Eyre J had properly considered the underlying contractual terms and the Policy and was correct in his conclusions. This meant that Conway could not rely on a co-insurance defence.

Coulson LJ also held that Eyre J had not limited or confined his investigation to the underlying contract, and had properly considered the contractual relationship as a whole, including the understanding of the two key principals. His finding that such understanding was of no legal significance because it was overtaken by subsequent negotiations and that there was no authority/intention to create a sole-recourse fund – which Coulson LJ called 'in many essential respects a finding of fact' – was fatal to the appeal.

As above, Coulson LJ confirmed the key principle that the underlying contractual regime is 'at least the starting-point for the investigation'. The fact that the building contract had been entered into after the Policy was not relevant: he was having regard to the building contract in order to consider the twin issues of authority and intention, which were already in existence at the time the Policy was written.

The Court of Appeal also rejected an argument that because at the time the policy incepted Conway was "identifiable" (as opposed to being unknown and/or unidentifiable), the question of Conway's intention became irrelevant, and instead all that mattered was the question of the RFU's authority. This was rejected by Coulson LJ, who said that (i) the test for authority was not met; and (ii) even if it had been, there was no rational or policy justification for the scope of Conway's cover differing depending on whether it was either an identified or an identifiable insured.

COMMENT

This judgment follows a number of recent authorities which consider whether insurers are entitled to bring subrogated claims against co-insured parties, and which focuses on authority and intention as evidenced (in the objective sense) by contractual documents in determining if any such claim can be brought.

This judgment has been applied by the Commercial Court in the recent decision of Sky UK Limited v Riverstone Managing Agency Limited [2023] EWHC 2107 (Comm) in which it was held that a contractor named on the policy was not insured to the same extent as the principal under a joint names project CAR policy. Following RFU v Conway, HHJ Pelling KC in Sky made clear that it was necessary to look behind the policy to the underlying contract to determine the relevant (objective) authority and intention, and therefore the scope of cover, even in circumstances where the contractor was expressly named in the policy.

This issue continues to be an active one for the parties and courts. Care should be given to exactly what wording is included in CAR Policies and related construction contracts to predict what claims may or may not be possible in due course, even when the contractor is identifiable or identified.