To what extent does a subcontractor become a party to a Contractors’ All Risks insurance policy which is in place before the subcontractor is engaged and what right do Insurers have to pursue subrogation claims against sub-contractors on a project?
The Claimants owned and operated a School. The First Defendant (Lakehouse) was appointed as the main contractor for an extension project and the Second Defendant (Cambridge Polymer Roofing) was their appointed roofing sub-contractor. A fire occurred at the project site which caused extensive damage to the buildings. The Claimants brought proceedings for damages against the First Defendant and the claim was settled for £8.75m, paid by a project-wide insurance policy which covered a list of insureds, including the First Defendant contractor and its sub-contractors.
The Second Defendant had also expressly agreed in its sub-contract with the First Defendant that it would obtain its own insurance cover in respect of its construction works in the sum of £5m (which it had done). The project insurers sought a contribution/indemnity from the Second Defendant’s insurers. The Second Defendant argued that, notwithstanding the express term in the sub-contract that it obtain its own insurance, the project insurance had been intended to, and did, include it as an insured party and sought a declaration to that effect.
Issues to be determined
To what extent did the Second Defendant sub-contractor have the benefit of the project-wide insurance policy and could the project insurers pursue a subrogated recovery from the Second Defendant’s insurers?
The Court held that the Second Defendant was not entitled to the benefit of the project wide policy, to the extent that it had its own insurance. Recovery from the Second Defendant’s insurance policy was therefore allowed. In deciding the issues, Mr Justice Fraser helpfully discussed the question of how subcontractors in the construction industry come to participate in project insurance policies and provided useful guidance. Three ways were discussed – Agency and ratification, Standing offer, Implied conduct.
- Agency – The theory that the contractor was an agent of the sub-contractor when procuring project insurance was deemed to be stretching the principles of agency and posed a problem for subsequent subcontractors as they would not have been identifiable at the time the insurance was procured and therefore could not ratify the procurement of the insurance under the principles of agency. The Court did not favour this theory.
- Standing offer – The favoured method was by acceptance of what could be deemed a standing offer of insurance to all those persons who are subsequently identified as members of a defined grouping, namely the First Defendant’s sub-contractors. The offer is accepted by the execution of the sub-contract. However, in this instance the express term in the Second Defendant’s sub-contract for them to obtain their own insurance meant that they never joined the “defined grouping” to which the offer was being extended (at least not to the extent that it had its own insurance cover), and therefore the act that would have included the Second Defendant in the project insurance, namely entering into the subcontract, did not constitute acceptance, where the agreement expressly stated that the sub-contractor should have its own insurance.
- Implied conduct – It was considered that a sub-contractor could be deemed included in the project insurance from their conduct, negating the need for offer and acceptance as required for a standing offer. The Judge did not comment on whether this was a correct method but excluded it as a possibility on these facts as it was determined that the parties’ intention on the face of it was for the Second Defendant to obtain their own insurance. This express term in the contract prevented the possibility of implying a term to the contrary and to say that the sub-contractors insurance would never be called on in such circumstances would be to go against the express intention of the contract.
To the extent that the Second Defendant had expressly agreed to have insurance in place, the Second Defendant was not entitled to the protection of the project insurance. The express agreement in the sub-contract negated any standing offer, over-rode any implied conduct and prevented any implied contractual terms to the contrary. Therefore, the project insurers were entitled to bring a subrogated recovery claim and could recover the full amount of the insurance cover that the Second Defendant had agreed to obtain, as a contribution/indemnity.
This case does not provide definitive guidance. The Court did not go so far as to say the agency theory is completely wrong, or that the only correct approach is the standing offer theory. However, this seems the most plausible scenario from the useful guidance that is given. Contractual parties should be mindful of the primacy of any express agreements in subcontracts which will over-ride any informal intention or implied conduct in relation to project wide insurance cover and the right of subrogated recovery from a sub-contractor’s insurer.