Insurance is a good idea. It offers a safety net for all parties, protecting potential claimants from the risk of an insolvent or untraceable defendant, and potential defendants from the risk of insolvency due to a claim that is simply too large for it to cover.

However, the intricacies of insurance law have some traps for the unwary, as recently highlighted by the Court in the case of SSE Generation Ltd v Hochtief [2015] CSOH 92 which, whilst a Scottish decision, will be persuasive in the English courts and also considers English case law.  

The facts

SSE employed Hochtief to design and construct a hydro-electric scheme at Glendoe, Fort Augustus. The contract was based on the NEC2 standard form contract with various option and Z clauses. The contract sum was £125.9 million.

As required under the contract, Hochtief took out an insurance policy in the joint names of itself and SSE in respect of contractor's risk events (often referred to as a Contractor's All Risks or "CAR" policy). 
The scheme began operating in January 2009. In August 2009, a major tunnel collapsed and the scheme ceased to operate. SSE and Hochtief could not agree who bore the risk of the collapse and SSE subsequently employed another contractor to carry out remedial works. The scheme reopened on 21 August 2012. 

SSE's problem

SSE commenced proceedings against Hochtief to recover the losses it claimed to have sustained as a result of the tunnel collapse. SSE's claim came to over £130 million.
 
Hochtief, however, argued that, irrespective of any liability it has for the collapse (which it contested "every branch of"), SSE was barred from raising proceedings against it at all. SSE should instead have made a claim on the joint names CAR policy. Hochtief argued the contract intended the CAR policy to take the place of the parties' liabilities under the contract in respect of a loss covered by the CAR policy.  

Hochtief's submissions

Hochtief relied on two main arguments. First, it relied on the principle that an insurer cannot use its rights of subrogation against a joint insured. As the CAR policy expressly waived subrogation rights, Hochtief argued this meant the parties intended that they could not claim against each other in respect of the risks it covered. 

Second, Hochtief relied on case law which suggests that, where there is a joint names policy, a term is implied into the contract that the parties have excluded claims against one another for a loss covered by that policy. In particular, Hochtief relied on the case of Co-operative Retail Services Limited v Taylor Young Partnership Ltd [2002] 1 WLR 1419, in which Lord Hope concluded that, where two parties entered into a contract which required one party to obtain an insurance policy in the joint names for both, there was an implied term preventing one party from suing the other where the loss was covered by insurance.  

The Court's view

The Court disagreed. Having reviewed the case law, it held there was no irrebuttable presumption of an implied term that the parties have no liability to each other simply because a joint names policy is in place. Whether or not there is such an implied term depends on the terms of the contract.  

In this case there was no express term addressing the issue. However, a number of terms implied that the insurance policy did not replace the contractual liabilities of the parties. For example, clause 83.1 provided that each party indemnified the other against claims which were at his risk and clause Z11 limited the liability of each party to the other to the total tender price. The inference of Clause Z11 is that liability was limited because the parties recognised that each was obliged to the other in respect of loss, and they had not intended the CAR policy to replace that liability.   

Comment

The advice to those entering into contracts which require joint names insurance is to decide upfront what the impact of that insurance is. Is the insurance policy to stand in place of the parties' contractual liabilities, or are the insurance policy and contractual liabilities to co-exist, and not override, each other?  

There are advantages and disadvantages for both approaches, which will depend on the facts in each case. But the advice either way is unequivocal: whatever you decide, make sure the contract clearly spells it out.