WELCAR 'Damage to Existing Property’ exclusion considered by Court of Appeal

The Court of Appeal in Technip Saudi Arabia Limited v The Mediterranean & Gulf Insurance and Reinsurance Co. [2024] EWCA Civ 481 considered the Damage to Existing Property (DTEP) exclusion in the standard WELCAR form wording for offshore construction all risks cover. The Court of Appeal affirmed the High Court's decision that the DTEP exclusion excludes cover for damage to property owned by any insured under the policy and not simply the insured bringing the claim. In this case the claim brought by the contractor was excluded as the damaged property in question was owned by the project developer.

BACKGROUND

Technip was a contractor performing 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, Technip chartered a vessel, which collided with an unmanned wellhead platform (the Platform) causing damage for which Technip was liable to KJO.

Technip claimed an indemnity under the liability Section II coverage of a composite insurance Policy (the Policy) underwritten by MedGulf on the amended WELCAR 2001 Offshore Construction Project Policy wording. However, MedGulf declined cover and Technip issued proceedings against MedGulf in the Commercial Court in London.

The claim was heard by Jacobs J in the High Court with judgment handed down in July 2023. Our analysis of the High Court judgment can be found here on our Insurance Blog. In short Jacobs J found cover under the Policy was excluded entirely by the DTEP exclusion since the damaged property was owned by an insured (namely KJO).

The text of the DTEP exclusion was as follows:

"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;
2. has use of, custody, physical control, access, right of way or an easement to by operation of a contract or agreement, or
3. is liable or claimed to be liable by operation of any indemnification, hold harmless or similar provision contained within any contract or agreement.

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."

(emphasis added)

The Schedule of Existing Property did not list the Platform.

COURT OF APPEAL DECISION

Technip appealed the High Court's judgment on three grounds:

1. The judge had failed to pay proper regard to the language of the DTEP exclusion.
2. Reading the composite Policy as a separate insurance for Technip, the 'Principal Assured' whose property was referred to in the first limb of the DTEP exclusion was Technip (not KJO or any other Principal Assured).
3. The judge had paid excessive regard to the commercial rationale of DTEP exclusion.

Technip submitted that the words “any property which the Principal Assured … owns”, read in context, only excluded cover for any property owned by the particular Principal Assured making the claim under the Policy. In other words, the exclusion should only apply to property owned by Technip as they were the party making the claim.

MedGulf argued that the words excluded coverage for any property owned by any of the many Principal Assureds. 'Principal Insureds' (not 'Principal Assured') was a defined term under the Policy and it included Technip, the joint venturers in KJO and their affiliated companies (amongst others). Since the Platform was owned by KJO, MedGulf argued that the DTEP exclusion meant that Technip had no claim (as the High Court found).

1. The proper meaning of the DTEP exclusion

Sir Geoffrey Vos MR (with whom Lewison and Arnold LJJ agreed) acknowledged that the Policy "is not a model of clear drafting" (e.g. the inconsistent use of the terminologies Principal Assureds, Principal Insureds and the singular and plural of these terms). However, the Court of Appeal rejected Technip's interpretation of the DTEP exclusion, in particular on the following grounds:

• Technip's interpretation "does far more violence to the natural meaning of the words used in [the DTEP exclusion]". It would require adding the words in bold so that the DTEP exclusion would read as follows: "any claim for damage to … any property [for] which the Principal Assured [which is making the particular claim concerned]: 1) owns that is not otherwise provided for in this policy".
• Technip's interpretation of the wording does not make sense if a liability claim is brought by one of the 'Other Insureds', being the various parties specified in the Policy who have direct written contracts in connection with the project (e.g. project managers). These Other Insureds are not Principal Insureds such that if the DTEP had the meaning contended by Technip then this exclusion could never bite in respect of a claim brought by an Other Insured.

2. The relevance of the Policy being a composite policy

Technip argued that as the Policy was a composite policy (expressly "deemed to be a separate insurance in respect of each Principal Insured") the 'Principal Assured' in the DTEP exclusion was Technip (being the only insured under its nominal separate insurance contract with MedGulf). Technip referred to number of English and Commonwealth judgments in support of this position.

This argument was rejected by the Court. Having found that these earlier judgments did not assist, the Court acknowledged that while each insured under the Policy was deemed to have separate insurance, 'Principal Assured' had the same meaning in each of the nominal separate contracts. Therefore, if the words 'the Principal Assured' meant 'Technip and/or KJO and/or associated companies', then they must have that same meaning in each of the separate insurances including Technip’s separate insurance contract.

3. The commercial rationale of the Policy

Technip contended that the first instance judge had paid excessive regard to the supposed commercial rationale of the DTEP exclusion as an exclusion for claims for damage to property (e.g.) owned by the Principal Insured unless that coverage is specifically bought back by being identified in a separate schedule.

The Court of Appeal held that the High Court did not give excessive regard to the supposed commercial rationale of this clause since the judgement was primarily based on the language of the Policy (as outlined above).

COMMENT

This judgment has provided clarity on an important liability coverage exclusion under WELCAR, the standard form wording for offshore construction all risks cover.

Those taking out cover under these policies will need to ensure that all property falling within the scope of the DTEP exclusion is identified and a decision is made as to whether cover should be brought back with appropriate attention given to the language used when scheduling the relevant existing property. This will be particularly important where offshore construction works take place in locations with significant existing infrastructure.

In this case there was a clear list of offshore existing property in the buy back but the wellhead platform with which the vessel collided was omitted. As a result, policyholders and brokers might need to consider adding to the scheduled property some generic language addressing all other property (if any) of the Principal Insureds within a certain radius of the development site.