Fraser J finds that express contractual terms can override the law which governs subrogation claims

This case concerns the proper construction of insurance provisions arising out of project-wide cover for a development consisting of works to a school. The school is situated in the London Borough of Lewisham (Lewisham) and operated by Haberdasher's Aske's Federation Trust (Haberdasher's).

In 2009 and 2010, major works were performed to extend the school. The main contractor was Lakehouse Contracts Ltd (Lakehouse). Lakehouse took out £50m of Contractors' All Risks insurance in respect of the project (the Project Insurance) with Zurich Insurance plc, QBE Casualty Syndicate 386 and CNA Insurance Co (the Project Insurers). The Project Insurance contained an express waiver of subrogation clause.

Lakehouse subcontracted certain roofing tasks to Cambridge Polymer Roofing Ltd (CPR). Clause 6 of the roofing sub-contract required CPR to obtain not less than £2m of all risks insurance for the sub-contracted works. It did so, placing £5m of cover with Faraday.

In April 2010, CPR was carrying out "hot work" on the school roof, using a blowtorch to stick down roofing membrane. In the course of these works a fire occurred, causing extensive damage to the school buildings.

Lewisham and Haberdasher's issued proceedings in the Technology and Construction Court. The proceedings were settled for a total sum of £8.75m, which was funded by the Project Insurers. The Project Insurers then sought to recover £5m of that payment from CPR by way of a subrogated claim.

CPR argued that the Project Insurers should not be permitted to bring a subrogated claim, because it was a co-insured under the Project Insurance.

The Project Insurers accepted that as a sub-contractor, CPR fell within the definition of Insured in the Project Insurance. However, the Project Insurers argued that, as a result of the express term in the roofing sub-contract that CPR would obtain its own insurance, CPR was not entitled to rely on the Project Insurance.

Fraser J agreed with the Project Insurers: CPR was not a co-insured under the Project Insurance.

In reaching his decision, Fraser J referred to the recent Supreme Court decision in the case of Gard Marine and Energy Ltd v China National Chartering Co Ltd[1], which held that while subrogated claims cannot be brought against co-insureds, "like all questions of construction, it depends on the provisions of the particular contract" (per Lord Toulson, para 139).

Fraser J held that in cases such as this one, concepts of agency were not relevant. Instead the Court should prioritise the intention of two contracting co-insureds, and any contract between them, rather than the terms of the relevant insurance policy. In this regard he noted that in this case "The terms agreed by Lakehouse and CPR are of central relevance when considering the intention of the parties, which here must mean, primarily, the intention of Lakehouse and CPR" (para 38). He went on to comment that the intention of "other parties" (para 38), which would presumably include the insurers, could also be relevant – but in this case would lead to the same result.

On the facts, Fraser J considered that the contract between Lakehouse and CPR clearly demonstrated that (objectively assessed) the parties intended for CPR to have and rely on its own insurance, not on the Project Insurance.

Fraser J therefore rejected CPR's assertion that it should be immune to a subrogated claim from the Project Insurers on the basis that it was a co-insured under the Project Insurance. Further, Fraser J held that as CPR was not considered a co-insured under the Project Insurance, "then CPR is not entitled to rely upon the waiver of subrogation term within the [Project Insurance]" (para 77).

Similarly, in this case, the Contracts (Rights of Third Parties) Act 1999 did not assist CPR in obtaining the benefit of the Project Insurance, because if (for the reasons set out above) CPR could not claim the benefit of the Project Insurance, it could also not claim the benefit of an Endorsement to the same which might have incorporated the Act.

Comment

This case demonstrates that express contractual terms can override the usual principles of subrogation. In particular, in circumstances where you have a possible subrogation claim between two co-insureds, the Court will take into account the terms of any contract between those two co-insureds. Even absent a direct exclusion in the relevant insurance policy, the terms of such a contract could affect who is insured under that policy.

Although the loss incurred by the Project Insurers exceeded the limit of CPR's cover, the subrogated claim was limited to £5m (matching the limit of coverage in CPR's separate all risks insurance). Therefore the issue of uninsured losses did not arise. Fraser J did make some obiter comments in this regard, which suggested that Lakehouse would not have been entitled to recover the sums which fell outside CPR's separate cover, because the parties would not have intended for CPR to be exposed to liabilities exceeding that which it had insurance for. However, we will need to wait to see how this issue is dealt with in any future cases for further guidance.

Practical tips

When entering into all risks policies, contractors and sub-contractors should give careful consideration to the terms of the proposed policy (including definitions of the insured, 'other insurance' clause and any subrogation clauses). Equally, they may want to review the terms of existing insurance policies.

In addition, contractors and sub-contractors should be conscious of the terms of direct contracts they enter into (especially when contracting outside or on amended versions of industry-standard forms) - in particular in relation to the allocation of risk, because the terms of such contracts could have a serious impact on their insurance arrangements and ability to recover under the same.

Haberdashers' Aske's Federation Trust Ltd and another v Lakehouse Contracts Ltd and another [2018] EWHC 558 (TCC)