Court of Appeal confirms insurer’s right of subrogation depends on underlying contract between the parties

The first instance decision in this case was reported in Weekly Update 32/13. 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). That third party argued that the demise charterers had had no liability to the owners and so had no claim to pass on to it (and  hence there was no claim for the insurers to be assigned to either). At first instance that  argument was rejected by the judge and the third party appealed. The Court of Appeal has now held  as follows:

  1. There had been no breach of the safe port warranty. The appeal therefore succeeded on that  point.
  2. Although not required to do so, the Court of Appeal nevertheless went on to consider the  subrogation argument because it raised “an important issue of principle”. 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. The question then arose  whether: “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, can the insurer use the name of the “innocent” party to sue the “guilty” party once the insurer has paid for the loss?”  The Court of Appeal answered this as follows: “Since insurance is usually intended to cover an  insured for any breach of contract or duty on his part, it is generally thought that the answer to  this question must be “No”; otherwise the party paying the premium has not secured the insurance cover he was entitled to expect”. The Court  of Appeal said that clear words to exclude that result were not required, so long as it was evident  that the insurance was intended to be for the joint benefit of the parties.

The Court of Appeal also confirmed that it is vital to construe terms of the underlying contract  between the parties (the terms of the insurance policy had not even been disclosed here), and that  clear words were not required to exempt liability for negligence. If a contract requires a party to that contract to insure the  parties, the prima facie position will be that the parties intended to look to insurers to  indemnify them, rather than to each other.

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. However, the Court of Appeal held that that did not mean that the fact that there was no  such express waiver of the right of subrogation in Clause 12 meant that it must be possible for  insurers to subrogate against the demise charterers.

COMMENT: This (obiter) Court of Appeal decision on subrogation in a co-insurance context once again  focuses the inquiry on the underlying contract between the co- insureds and who they intended  should indemnify any loss. In Tyco Fire v Rolls Royce (see Weekly Update 14/08) Rix LJ (again,  obiter) did envisage that a co-insured might still be liable to another for negligence, despite the  existence of joint names insurance (in the absence of express wording to the contrary). However, in this  decision, the Court of Appeal held that “the prima facie position where a contract requires a party  to that contract to insure should be that the parties have agreed to look to the insurers for  indemnification  rather than to each other”. Further support for that prima facie position will  arise if the insurance is in joint names for the parties’ joint interest or where, as in the case  of another recent Court of Appeal decision, Rathbone Brothers v Novae Corporate (see Weekly Update  43/14), the underlying contract consisted of an employer’s indemnity to an employee. One further  issue appears to influence the courts too: did the co- insured against whom subrogation is sought  cause the loss in question, or was it in some way “blameworthy? If so, the courts appear to be more  likely to allow a subrogated claim to proceed. Here, for example, the claim had not been for  negligence but was “concerned only with the (contractual) safe port obligation in the demise  charter” and it had not been the demise charterers’ actions which had allegedly caused the breach of that obligation.