Maintenance, is it WELCARed for? Maintenance cover on offshore projects - CAR policies and the 2001 WELCAR terms November 2019

In a rare court decision on matters relating to construction all risk insurance policies, in the case of Munich Re Capital Limited v Ascot Corporate Name Limited [2019] the Commercial Court considered the application of maintenance cover under the provisions of an Offshore Construction All Risks (“CAR”) policy on WELCAR 2001 Offshore Construction Project Policy (“WELCAR”) terms.

Construction All Risks (“CAR”) policies/WELCAR

Offshore construction projects carry considerable risk during construction; this is taken into account in Construction All Risks (CAR) policies, to ensure that those with an interest in offshore work (including contractors and subcontractors) are sufficiently protected. The WELCAR terms are frequently used in offshore CAR policy wordings. These terms provide a high level of cover and, of significance in the Munich Re case, include limited “maintenance” cover for a short period (typically 12 to 18 months) following project completion (Clause 21). This cover is intended to bridge the gap between completion of the construction phase and operation, at which stage cover will be provided by an Operating Policy, and provides cover for losses which relate back to a cause occurring during the construction phase. 

Facts

Munich Re (“the insurers”) were reinsured under an excess of loss reinsurance policy issued by the Defendant reinsurers, Ascot (“the reinsurers”). The insurers had indemnified their insured, Chevron (“the insured”), under a CAR insurance policy incorporating the 2001 WELCAR terms with some amendments (“the insurance policy”).

The insurance policy provided cover for the insured’s Bigfoot project in the Gulf of Mexico. The project period ran from March 2011 until completion of the project, which was estimated to be no later than September 2014. Due to delays, the project period was extended three times, to 31 December 2018. The insurance policy also included a maintenance period during which some limited cover would be provided post completion. This was an amended version of clause 21 of the WELCAR terms and provided cover for any loss or damages arising in the 12 months post project completion that could be attributed to a cause arising before the expiry of the policy period.

It was common ground that the reinsurance policy was intended to run back to back with the insurance policy. However, due to what appears to have been an oversight, when the project period was extended in the insurance policy no corresponding extension was requested or agreed in respect of the reinsurance policy. Accordingly, the reinsurance policy project period expired on 30 September 2014, at which stage the Bigfoot project was far from complete.

The insurers paid out $26 million under the insurance policy in respect of claims in 2015 and sought to recover a proportion of this from the reinsurers. Insurers argued that, because the project period had expired on 30 September 2014, the 12 month maintenance period would ‘kick-in’ immediately after. As such, the reinsurance policy would provide limited maintenance period cover over the whole project for a period of 12 months from September 2014, which would cover the claim paid out by the insurers in respect of the claims in 2015.

Reinsurers contended that as at 30 September 2014, given the stage the work was then at, there was no completed project that fell to be covered during the maintenance period. Alternatively, if maintenance cover was available, it would only begin when the project in fact completed (which was some years later, on 1 January 2019).

Decision

The Court held that the insurers were not entitled to recover from reinsurers the sums paid to the insured under the insurance policy. It agreed with the reinsurers’ argument that, as the project period expired prior to completion of the project, the project was not capable of being covered during the maintenance period.

The Court confirmed that, when considering the construction of a contract, it would look at the true intention of the parties, by reference to an objective test of what a reasonable person, having all the relevant background knowledge, would have understood the language in the contract to mean. The Court will not consider any subjective evidence of what the parties’ intended at the time.

The Court considered that any reasonable person assessing the parties’ intention at the time the reinsurance policy was agreed, would expect the project period to cover the work through to the completion of the construction. There was nothing to suggest that insurers in the market were generally moving or had moved to datedefined cover for the construction phase that ignored actual progress in construction.

The insurers’ case was correct on a literal basis – the project period did indeed expire on 30 September 2014 and as such the maintenance period would begin on 1 October 2014 for 12 months. However, the Court did not accept that this was how the parties had envisaged the scope of cover at the time they entered into the reinsurance contract. Rather, it was obviously intended that the two policies would mirror each other throughout – that was the “commercial rationale”. It would have been open for insurers to refuse to extend the project period had they been able to agree terms with the reinsurers. As such, they were “always in a position to prevent being in the position they ultimately found themselves in”.

It was also noted that, from a practical perspective, if the insurers were correct, that would leave the insured with only very limited cover whilst construction works were still ongoing. An endorsement to the insurance policy demonstrated clearly that neither the insurers not the insured intended the limited cover under the maintenance period to begin until the project had moved from construction to the operational phase.

Summary

This is the first time in which the English courts have given consideration to the WELCAR terms and, in particular, maintenance cover under clause 21. The decision is interesting in that it clearly confirms that maintenance cover will only be triggered after completion of a project, not before. It is also evident from the Court’s decision that insurers and their brokers should take care to ensure that insurance and reinsurance policies are indeed back to back so as to avoid a potential lack of reinsurance cover in the event that a claim is made.