Joint names insurance is common place in the construction industry. Construction All Risks policies typically provide cover for the employer, contractor and key sub-contractors and/or consultants. The effect of a joint names policy on parties’ underlying liability to each other in respect of matters covered by the insurance can be complex. Do parties remain liable to each other notwithstanding the existence of the joint names policy or is there a general rule of law that joint-insureds cannot sue one another? A decision last week from the Scottish Court of Session is the first case to consider these issues under the NEC form of contract.

SSE Generation v Hochtief Solutions

In 2005 SSE engaged Hochtief to design and build a new hydro-electric scheme at Glendoe, Fort Augustus in Scotland. The scheme involved the construction of a 6km long power (or headrace) tunnel using a Tunnel Boring Machine. The form of contract was NEC2 Option A. The contract required Hochtief to take out insurance in the joint names of SSE and Hochtief to cover contractor risk events.

After around only 9 months of operation, it was discovered that there had been a major collapse in the tunnel.

Discussions between the parties ensued regarding rectification of the collapsed tunnel but no agreement was reached.

SSE has raised proceedings against Hochtief seeking to recover losses (c£130million) arising from the tunnel collapse. Hochtief has counterclaimed for just under £10million. SSE argues that the collapse was a contractor’s risk; Hochtief says it was an employer’s risk.

The Issue

The judge (Lord Woolman) had to decide a preliminary point: did the existence of the joint names policy which covers contractor’s risk events prevent SSE from pursuing Hochtief for its losses? Hochtief said it did; SSE disagreed.

The Parties’ Submissions

Hochtief’s position was that the  parties intended that, by placing the insurance policy in joint names, they would exclude liability to each other in respect of matters covered by the policy. In particular Hochtief said that claims by the Employer under Part 8 of the contract (for damage caused by Defects) were barred. It accepted that the insurance could not affect claims made under Part 4 of the contract (the costs of rectifying defects, as distinct from damage). Hochtief contended that there was a general rule of law or an implied term that one party will not sue the other for losses covered by the joint names insurance.

SSE’s position was that there no such general rule of law or automatic implied term; everything turned on the terms of the underlying contract in question. SSE founded its case on clause 83.1 of the contract which provides that "Each party indemnifies the other against claims, proceedings, compensation and costs due to an event which is at his risk" and clause 85.4 which provides "Any amount not recovered from the insurer is borne by the Employer for events which are at his risk and by the Contractor for events which are at his risk." SSE’s position was that nothing in the contract - in particular the insurance provisions – overrode these provisions. SSE did not accept the policy in lieu of Hochtief’s underlying liability.

The Decision

Lord Woolman reviewed existing authorities on the matter and concluded that the NEC provision for joint names insurance did not displace parties’ underlying contractual liability. He accepted that "the thrust of the authorities is in favour of joint names insurance displacing contractual liability" referring to the English Court of Appeal’s decision earlier this year in the Gard Marine case (reported on in our earlier Law-Now here).  However he went on to state that "care must be taken not to merge the law of insurance with the law of contractual interpretation…the primary focus in each case is on the words used by the parties set in their context." The starting point was clause 83.1 whereby "each party undertakes liability to the other...I see no warrant to override clause 83.1 and give primacy to clause 84." There was no implied term nor any irrebuttable presumption that liability was excluded simply because of the existence of a joint names policy.

Lessons learned

The decision provides welcome clarity on the position under NEC contracts – liability remains regardless of the existence of the joint names policy. That is what clause 83.1 of the contract provides. This can be contrasted with the position under JCT contracts where there is an express exclusion of liability from the indemnity provisions in respect matters covered by the joint names all risks policy.

What can be taken from this? Well, in short - the contract "is king". Parties who agree to place joint names insurance policies would therefore be well advised to consider up front what they want the effect of the insurance to be - is it intended as a guarantee pot for underlying contractual liability or is it intended to supplant that liability? Whatever the answer is – set that out clearly in your contract; don’t leave it up to chance.