Case Alert -  EWHC 558 (TCC)
Judge holds that insurers can pursue subrogation claim against sub-contractor on a project
A main contractor entered into a project insurance policy, which included cover for sub-contractors. The main contractor sub-contracted roofing works to a sub-contractor, which was undertaking "hot work" at the project site when a fire broke out, causing extensive damage to buildings. The project insurers indemnified the main contractor and then sought to recover some of that payment from the sub-contractor. The sub-contractor argued that the subrogation claim couldn't be pursued because it was a co-insured under the project insurance policy. However, there had been an express term in the roofing sub-contract entered into between the main contractor and the sub-contractor that the sub-contractor would obtain its own third party liability insurance cover (which it had done). The project insurers argued that, as a result, the sub-contractor was not entitled to be covered under their policy.
The insurers accepted that sub-contractors who had already contracted with the main contractor when the project insurance policy was taken out would ordinarily be covered under the policy. They also accepted that sub-contractors who were appointed after the policy was in place were also covered by the policy because of an implied term in the sub-contract ("This implication of a term would occur by means of a standing offer to a sub-contractor to be included in the Project Insurance, that offer being accepted by the sub-contractor by execution of the sub-contract". The Contracts (Rights of Third Parties) Act 1999 was excluded under the policy). However, the project insurers argued that there was an exception to this position where there was an express term in the sub-contract that the sub-contractor would take out its own insurance.
That argument was accepted by Fraser J. Reference was made to the recent Supreme Court decision in Gard Marine v China National Chartering where, although it was held that subrogated claims cannot generally be brought against co-insureds, it was also emphasised that regard had to be made to the particular terms of the particular contract between the co-insureds. Fraser J also pointed out that "in order to avail itself of what is effectively immunity from suit by a co-insured, [the sub-contractor] has to demonstrate that it is a co-insured in the first place". He held that it could not do that given the express term in the sub-contract, and he rejected arguments raised by the sub-contractor based on agency or a standing offer from insurers: "Indeed, on any approach – standing offer or the application of agency principles – it is necessary to consider the intention of the parties" (those parties here being at least the main contractor and sub-contractor, and possibly other parties such as the insurers as well). Put another way, the judge asked "How, it could be posed rhetorically, could the parties be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss or damage, when those parties had expressly agreed that [the sub-contractor] would obtain its own separate insurance?".
The judge went on to find that, since the sub-contractor was not a co-insured under the project insurance policy, it would not take the benefit of an express waiver of subrogation clause in that policy: "If my analysis above is correct, and clause 6 of the roofing sub-contract prevents [the sub-contractor] from being an insured party (because the term that would have to be implied for [the sub-contractor] to have that status would be contrary to the express term agreed by [the main contractor] and [the sub-contractor])then [the sub-contractor] is not entitled to rely upon the waiver of subrogation term within the Policy Insurance...The only way in which [the sub-contractor] could take advantage of this is if [the sub-contractor] were to be entitled to the benefit of the Project Insurance. I do not consider that CPR is so entitled, and therefore this is the end of this argument too".
The judge also tested the commercial sense of his decision by considering whether (if the project insurers had rejected cover for the fire) the third party liability insurers of the sub-contractor would have been able to avoid liability under that policy because of the existence of the project insurance policy: "I doubt that it could. Under this hypothetical procedural scenario, the concept of double insurance would arise".
Finally, although not required to decide the point, the judge also considered the issue of "uninsured losses". The project insurers had paid out over £8 million, but the insurance policy taken out by the sub-contractor only had a limit of £5 million. The judge considered that "I doubt in the commercial context that [the intention of the main contractor and the sub-contractor], objectively ascertained, would be that [the sub-contractor] would be exposed to the whole amount of the losses incurred on the occurrence of an insured event, regardless of any limit on the cover of the [sub-contractor's own insurance policy]".
COMMENT: The legal principles governing subrogation claims can be overridden by express contractual terms. This decision again confirms that for a potential subrogation claim against a co-insured, the focus will be on the underlying contract between the "co-insureds", rather than the policy (although the judge in this case suggested that the intention of the insurers could also be relevant). An express term in that underlying contract requiring the "co-insured" to take out its own insurance will result in that party being required to look to that policy first in the event of a loss. However, this decision goes further, in that the judge held that, insofar as there was alternative insurance in place covering the sub-contractor, the sub-contractor was not a co-insured at all under the project policy, despite otherwise potentially falling within the definition of a sub-contractor and despite no express term in that policy excluding it.
Past caselaw, though, has accepted that it is possible to have a double insurance policy situation (and hence cover under both policies) even where one policy was specifically intended to cover the loss in question. For example, in Rathbone Bros v Novae, where a party was insured under both a professional indemnity and a D&O policy, a clause in the D&O policy expressly provided that the policy applied "excess over more specific management liability insurance and indemnification". It was not held in that case that there was no cover at all under the D&O policy given the overlap in cover (although that point may not have been argued and it might be said that the express term in the D&O policy impliedly negated that argument. It might also be relevant that in this case, the sub-contractor was to be added to the policy only after the policy had commenced).