Contract is king in co-insurance disputes
Haberdasher’s Aske Federation Trust and others v Lakehouse Contracts Limited and other 
On Monday 19 March judgment was handed down in the above action in which Kennedys was instructed.
Lewisham Schools for the Future LEP Ltd (LEP) was the employer. LEP was contractually required to take out project insurance pursuant to their contract with the local authority. The project policy insured ‘subcontractors of any tier’. Lakehouse Contracts Limited (Lakehouse) was the main contractor on a Building Schools for the Future project at Hatcham Temple Grove School in Lewisham. Lakehouse subcontracted the roofing works to Cambridge Polymer Roofing (CPR).
On 6 April 2010, a fire broke out at the site, causing extensive damage to the existing building, its contents, and to the works. Lakehouse and CPR were blamed for the fire, and a claim was initiated against both parties by the local authority and academy trust. Lakehouse admitted liability, and the claim was subsequently settled.
Lakehouse sought a contribution and/or indemnity from CPR in respect of its liability to the claimants. In reality, the claim was a subrogated claim brought by the project CAR insurers. Consequently, CPR sought a declaration that it was co-insured under the project insurance which provided it with a defence to the claim by Lakehouse. CPR’s subcontract provided that CPR would obtain its own liability insurance. The issue for the court was whether CPR was co-insured under the project insurance notwithstanding the requirement to obtain its own insurance.
Fraser J considered a number of ways in which the project policy might come to provide insurance to a subcontractor.
The first was by way of agency. In order to effect insurance for a subcontractor there must be authority to obtain or effect insurance on behalf of the subcontractor, which must be the intention of the parties to the insurance contract. The intention of the parties was found in the express terms of the subcontract. This showed an objective intention that CPR needed to have its own public liability insurance. There was no intention for Lakehouse to act as agent on CPR’s behalf by ensuring CPR was covered under the project policy.
The second was by way of offer and acceptance. The project policy insured, amongst other groups, “subcontractors of any tier”. This was a “standing offer” to insure an unnamed subcontractor, which could be accepted by the subcontractor joining the defined grouping upon execution of the subcontract. However, CPR’s subcontract contained an express term that it would obtain its own public liability insurance. Rather than leading CPR to join the groups insured under the project policy, the execution of the subcontract therefore had the opposite effect. The contractual requirement for CPR to obtain its own insurance excluded the possibility of it being co-insured under the project policy.
The third route was acceptance by conduct, and whether it was the intention of Lakehouse and the project insurers for CPR to be insured under the project policy. Even if there were such an intention, this could not be elevated above the express intention of Lakehouse and CPR, which was that CPR would procure its own insurance to “replace” the project insurance.
The last route was by way of the Contracts (Rights of Third Parties) Act 1999. In order to rely upon the Act, CPR would need to be able to bring itself within the definition of the insureds under the project policy. The express term of the subcontract prevented CPR from falling within a group defined as being insured under the project policy.
Whilst the project policy agreed to waive insurers’ rights of subrogation against any party insured under that policy, an express term of the subcontract prevented CPR from falling within the groups insured under the policy. Consequently, CPR could not rely on the waiver of subrogation clause in the policy.
Fraser J concluded that Lakehouse was entitled to bring a claim against CPR as CPR was not insured under the project insurance.
It is common in the construction industry for the parties to provide for specified loss or damage to be covered by project insurance for their mutual benefit, whether caused by one party’s fault or not, avoiding litigation between the parties. The question which often arises is whether the parties intended to create an insurance fund which would be the sole avenue for making good such loss or damage, or whether there is an independent right of action against a party that caused the loss or damage.
A subcontractor facing a subrogated claim might seek to defend it on the basis that it is in fact insured under the project policy. If the subcontractor succeeds in that argument, then it is likely to be able to prevent a subrogated claim from being made against it. The decision of Fraser J reinforces the position that the answer as to whether a subcontractor has the benefit of a project policy depends on the contractual arrangements between the parties. If the subcontract expressly provides that a subcontractor will procure its own insurance, the subcontractor will struggle to defend a claim on the basis that it is co-insured and is therefore protected from a subrogated claim.
This decision may come as unwelcome news for the subcontractors and their insurers, and a windfall for project insurers who will receive premium for providing cover for ‘subcontractors of any tier’ but may not be covered depending on the express terms of their subcontract. It highlights the importance of ensuring that the insuring obligations in the contract documents reflect the true intention of the parties. Where a subcontractor believes it has the benefit of a joint insurance scheme, it is critical that the subcontract terms are consistent with such arrangement.