Supreme Court decides by 3:2 majority that insurer had no rights of subrogation because of clause in the underlying contract between the co-insureds

The owners of a vessel had entered into a demise charter which provided that joint insurance would be taken out for the benefit of the owners and the demise charterers (with the premium being paid by the demise charterers). When the vessel became a total loss, the insurers paid and sought to bring an assigned claim against a third party to whom the vessel had been time-chartered by the demise charterers (based on the breach of a safe port warranty). Clause 12 of the charterparty between the owners and the demise charterers provided that the demise charterer would pay for the hull insurance, which would be taken out in their joint names. Clause 13 of the charterparty had provided that the owners would pay for the insurance and expressly provided that insurers would have no rights of subrogation against the demise charterer, but that clause had been deleted by the parties.

At first instance, it was held that insurers could bring a subrogation claim because Clause 12 did not provide a complete code for the treatment of insured losses. The Court of Appeal held that there had been no breach of the warranty but went on to find (obiter) that clear words would be needed to exclude the conclusion that if a loss occurs as a result of a breach of contract or negligent conduct on the part of the party who pays the premium, the insurer cannot use the name of the "innocent" party to sue the "guilty" party once the insurer has paid for the loss.

The Supreme Court has now held that there was no breach of the safe port warranty and, by a majority of 3:2, held (again, obiter) that there could be no subrogation against the time charterers.

The Supreme Court agreed that an insurer cannot bring a subrogated claim against a co-insured: "It is well established…that, where it is agreed that insurance shall inure to the benefit of both parties to a venture, the parties cannot claim against each other in respect of an insured loss". However, Lord Clarke and Lord Sumption believed that that is not because the policy itself excludes a liability to pay damages by a co-insured (and so a co-insured has nothing to recover from its third party agent that caused the damage). Instead, the insurer's payment satisfies any liability to pay damages as between only the co-insureds themselves, thus still leaving open the possibility of a subrogation claim against the third party (who was not a party to either the policy or the agreement between the co-insureds). Accordingly, they found that the insurer could still bring a subrogated claim against the time charterers (Lord Clarke further finding that the insurers could have brought against a subrogated claim against the demise charterers, because such a claim was not expressly excluded under Clause 12, and Clause 13, which did provide such as exclusion, had been deleted).

However, Lords Mance, Lord Hodge and Lord Toulson agreed that Clause 12 provided a comprehensive scheme. Lord Mance held that the inability to bring a subrogated claim against a co-insured "is now best viewed as resting on the natural interpretation or, or implication from, the contractual arrangements giving rise to such co-insurance". Lord Toulson held that the key question in each case is "whether the parties are to be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss or damage, or whether the existence of the fund co-exists with an independent right of action for breach of a term of the contract which has caused that loss. Like all questions of construction, it depends on the provisions of the particular contract". Here, it was clear that "The insurance arrangements under clause 12 provided not only a fund but the avoidance of commercially unnecessary and undesirable disputes between the co-insureds". He left open the possibility of the demise charterers being able to bring a claim against the time charterers.

COMMENT: For some time there has been uncertainty as to the basis for the general principle that a subrogated claim cannot be brought by insurers against a co-insured. This decision makes it clear that the parties must look to the underlying contract between the co-insureds and whether the co-insureds had (on the particular facts of the case) thereby agreed to look to insurers for indemnification in the case of a loss (even in the absence of express wording to the effect). One issue which did not arise for consideration, because no breach of warranty was established, is whether that principle still applies where the co-insured against whom subrogation is sought caused the loss in question or was in some way blameworthy.

A further point to note is that insurers may not necessarily know what the terms of a contract entered into by the co-insureds are, and so may be unaware that the co-insureds have thereby effectively excluded the insurers' rights of subrogation against them. Accordingly, insurers may wish to address this point either through express wording in the policy or by seeking disclosure of the co-insureds' agreement when underwriting the risk.