Co-insurances defences in construction claims: Court of Appeal confirms that contract is still king

This case review was co-authored by Bethan Price, Trainee Solicitor, London.

We have previously reported on co-insurance defences as analysed in the Technology and Construction Court (TCC) first instance decision of The Rugby Football Union v Clark Smith Partnership Limited and FM Conway Limited.

The Court of Appeal recently upheld the first instance decision, and reinforced the view that the scope of joint insurance cover will be “assessed primarily by reference to the underlying contract”. This article provides summary of the appellate judgment, and sets out the key takeaways for insurers.

The background

The project concerned the upgrade works to the Twickenham Stadium, in preparation for the 2015 Rugby World Cup. The Rugby Football Union (RFU) engaged Clark Smith Partnership (CSP) to design ductwork, and FM Conway Limited (Conway) to install it. The RFU alleged that either the design or installation was defective, and brought claims against CSP and Conway for a total loss of c. £4.5 million. Insurers indemnified the RFU for the majority of its losses, c. £3.3 million, under a Construction All Risk (CAR) project insurance policy (the Policy), and subsequently pursued a subrogated claim.

The "Co-insurance Defence"

Conway argued that, due to the fact it was a co-insured under the Policy, it was also protected by its terms. Therefore, if the RFU claimed that the Policy was triggered to cover the loss, it would also have to accept that it covered Conway’s liability. As a consequence, it was Conway’s case that the RFU could not make a claim against it for losses covered by the Policy, and nor could insurers bring a subrogated claim.

Initial judgment

In the TCC, Eyre J, decided in favour of the RFU on the basis that, whilst both the RFU and Conway were insured under the Policy, the scope of their cover was different. Conway was insured against specified perils but Conway’s cover did not extend to damage caused by defects. The Policy covered the RFU’s loss but did not cover Conway for damage caused by its defective works. Consequently, co-insurance was no defence to the claim against Conway.

The appeal

Conway’s appeal was based on arguments that the first instance judge was wrong to focus on the underlying contract to determine whether the Policy precluded the subrogated claim.

Instead, Conway argued that certain pre-contractual discussions between individuals representing both parties, and their shared understanding, should determine what the parties had agreed the scope of the co-insurance cover should be.

The timeline of events was:

• 19 June 2012 - Letter of Intent - states that the contract between the RFU and Conway would be the JCT Standard Building Contract Without Quantities 2011 (which would require the employer to take out a ‘joint names’ policy for specified perils, but not damage caused by defects).
• Early July 2012 - Discussions take place between a project manager, who worked for the RFU’s chosen contract administrator, and Conway’s Director of Civil Engineering. They understand that the project policy would be comprehensive and would cover all contractors.
• 17 July 2012 - Policy incepts covering all contractors for their “respective rights and interests”.
• 19 October 2012 - The building contract is entered into on the JCT Standard Building Contract Without Quantities 2011, (the underlying contract).

The issue was, the shared understanding reached in early July 2012 was not reflected in the letter of intent, nor was it reflected in the Policy or the underlying contract.

The Court of Appeal dismissed Conway’s argument on the following grounds:

(a) Putting a primary emphasis on the underlying contract in determining the scope of cover under a co-insurance policy was the correct approach, and is clearly supported by the authorities.

(b) The court should and did consider broader dealings between the parties, however, in this case, the broader dealings in question were not determinative. The authority and intention for the RFU to take out insurance for Conway, and the scope of that cover, was determined by the underlying contract.

Regarding (b), the RFU’s project manager (who had understood the project policy would be the sole avenue of recourse for damage of the type which occurred) was not the only professional acting for the RFU. The contractual dealings were conducted through a number of professional including solicitors and insurance brokers. This was not a case where the contractually effective dealings were conducted between two people. On this basis, the Court of Appeal held that elevating the shared understanding of two individuals to override any express contractual intention was not reasonable.

In the words of Coulson LJ:

It would allow an entity involved in negotiations to identify an early stage of discussions between Smith and Jones, in which there was an agreement which in hindsight was favourable to that entity, and then to ignore any subsequent stages of the actual negotiations (which did not primarily involve Smith and Jones at all), in which different individuals, charged with negotiating the relevant terms, reached a different agreement.

The Policy also included a waiver of subrogation clause. Conway submitted that this meant that insurers could not bring a subrogated claim against it, even if Conway was not co-insured with the RFU in respect of the same loss. The argument failed. The waiver of subrogation applied only in respect of losses against which Conway was insured. The Court of Appeal found that it would be contrary to commercial common sense if insurers were precluded from claiming against Conway for a loss against which Conway was not insured. It would mean that Conway effected cover by the back door.

Key takeaways for insurers

• The Court of Appeal judgment is an important decision in relation to co-insurance defences. It provides a clear indication of the approach which the English Courts will adopt when determining the scope of co-insurance.
• When determining whether one insured party (usually the employer or the main contractor) had the authority and intention to take out insurance for another party (contractors, subcontractors, consultants etc.), the primary emphasis will be placed on the underlying contract, but other factors should be taken into consideration.
• Although standard form contracts (such at the JCT contracts) refer to “joint names” insurance, CAR insurance is better understood as composite insurance cover. The cover afforded to a particular co-insured can differ according to each insured’s “respective rights and interests”.
• Even though a party may be insured under a CAR policy, it is necessary to assess the extent (scope) to which they are insured under that policy. Insurers will be precluded from bringing a subrogated claim a party only to the extent that such party is insured under the policy.

Related item: Co-insurances defences in construction claims: what are they and how do they arise?

Read other items in Construction Brief - June 2023