Co-insurances defences in construction claims: what are they and how do they arise?
Co-insurance on a construction project
It has become common practice in the construction industry for the parties involved in a project to provide for specified loss or damage to be covered by insurance (i.e. a construction all risk (CAR) policy) for their mutual benefit, whether caused by one party’s fault or not. The standard form construction contracts include various insurance options that allow the parties to adopt such a scheme.
Where such a scheme exists, the insurance can be the sole avenue for making good the relevant loss or damage, and the parties cannot make claims against each other in respect of a loss against which they are both co-insured. This avoids litigation between the parties to a project (or their insurers exercising rights of subrogation).
The existence of an insurance fund in itself does not necessarily preclude an insurer from exercising rights of subrogation against another party to the project for breach of contract which has caused that loss or damage. The extent to which an insurer can exercise subrogation rights against another party to the project will be dependent on the terms of the relationship between the parties.
The rule precluding claims between co-insureds
The rule that an insurer cannot sue one co-insured in the name of the other is based on a term to be implied into the contract between the parties. This was confirmed by the Supreme Court in Gard Marine & Energy Ltd v China National Chartering Co Ltd & another . This means that, to determine whether the rule applies in a particular case, the court must consider the terms of the contract between the parties. The critical question is whether the parties have intended to create an insurance fund which is the sole avenue for making good the relevant loss or damage.
Alternatively, whether the existence of the insurance fund co-exists with an independent right of action for breach of contract against the party that has caused the loss.
How a co-insurance fund is created
For one party (e.g. an employer) to obtain cover for another party (e.g. a contractor), they can do so as agent for the other party. Alternatively, the insurance policy is a standing offer made by the insurer to a class of unidentified insured that is accepted by executing the contract with the employer or the contractor (Haberdashers’ Aske’s Federation Trust Ltd & another v Lakehouse Contracts Ltd & another , which doubted the application of agency in this scenario).
Where parties are co-insured under the same policy, in either an agency or standing offer scenario, it is necessary to focus on the contractual scheme between the parties to identify the extent to which another party is co-insured.
The rule revisited in The Rugby Football Union (RFU) case
The recent case of The Rugby Football Union v Clark Smith Partnership Limited and FM Conway Limited [29.04.22] in the Technology and Construction Court (TCC) concerned a co-insurance defence. The RFU (the employer) engaged Clark Smith to design ductwork and FM Conway to install it, which the RFU claimed was defective in its design and workmanship, which caused damage to cables when they were pulled through.
The RFU took out a CAR policy which included, as the insured:
all other contractors and/or sub-contractors of any tier … each for their respective rights and interests.
The claim included a subrogated claim by CAR insurers. FM Conway sought a declaration that it was co-insured under the policy and alleged that it had the same benefit of cover under the CAR policy as the RFU, and so CAR insurers could not bring a claim against it.
The TCC rejected FM Conway’s arguments. They determined that it was necessary to ascertain the parties’ intentions and what authority the RFU had to effect insurance on behalf of FM Conway. On the facts, principles of agency rather than standing offer were applied. Agency was a better fit where the relevant contract had been entered into, and therefore the relevant sub-contractor ascertained, before the insurance was taken out. The policy and the contract between the parties had to be read together. The contract between the RFU and FM Conway was a JCT contract under which Insurance Option C was adopted. It required the RFU to take out and maintain a ‘joint names policy’ in respect of loss or damage to the work executed or site materials, but not against damage caused by FM Conway’s own defective works.
Whilst it was co-insured, because the RFU was authorised by the contract documents to take out insurance for FM Conway as agent and it intended to do so, the extent of that co-insurance was limited by the insurance requirements in the contract. The contract did not require the RFU to take out insurance that co-insured FM Conway against deficiencies in its works, and FM Conway was not insured against that risk. A subrogated claim could therefore be made by the RFU against FM Conway.
If the parties’ intention is to ensure that there is a sole insurance fund rather than making claims against each other, it is important to ensure that they not only have a CAR policy in place that covers the relevant risks, but that they also agree on the extent to which a party should be insured under that policy. The starting point for establishing the parties’ intentions will be the contractual scheme. The parties must therefore also ensure that the contract terms between them reflect that intention. There are different insurance options available under the standard form construction contracts and the parties can modify or expand such standard terms as necessary to reflect the extent to which they should be co-insured and prevented from making claims against each other.
In the earlier TCC decision in Haberdashers, Fraser J cast doubt on whether agency was a workable legal theory for the procurement of project insurance. Eyre J in The RFU agreed that there are difficulties where the contractor or subcontractor was not ascertainable when the policy was taken out. However, where their identity is ascertainable at the time the policy is taken out, those difficulties are not present and Eyre J determined principles of agency can apply.
What is clear from both cases is that the contractual terms between the parties are the key to ascertaining the parties’ intention and what authority, if any, was given to take out co-insurance and avoid claims between those parties.