Elizabeth Ann Fresca-Judd v Galina Golovina  EWHC 497
This case concerned the insurance recovery position of a tenant where damage had occurred to a rental property and insurance had been taken out by the landlord covering that risk.
Fresca-Judd leased a cottage to Golovina. The lease required Fresca-Judd to maintain insurance against certain risks, including damage caused by water. The lease also contained a clause requiring Golovina to compensate Fresca-Judd in the event of fire damage. During a period of absence by Golovina the water pipes froze and burst causing extensive damage to the property. The lease contained a clause requiring Golovina to leave the heating on when away to prevent this type of incident, but it was alleged by Fresca-Judd that she had not done so and had thereby caused the damage. The insurer indemnified Fresca-Judd, and then brought a subrogated claim against Golovina to recover its outlay.
A key question at trial was whether Fresca-Judd's insurers were entitled to bring a subrogated claim against Golovina. The Court found that the terms of the lease demonstrated a common intention that the insurance policy would benefit both Fresca-Judd and Golovina, even where the tenant was responsible for the damage. The fact that damage caused by fire was specifically provided for and liability carved out (despite the insurance position) showed the intention that the other risks, including water damage, should be compensated by insurance only and no subrogated claim could then be brought.
This is another case which shows the need to consider the terms of a contract, and not simply the provisions determining who is to obtain insurance, to ascertain liability for specific risks. It follows on from a construction case decided in the Scottish courts in 2015 (SSE Generation Limited v Hochtief Solutions AG) which highlights similar issues in the case of an NEC construction contract.
SSE Generation Limited v Hochtief Solutions AG, Hochtief (UK) Constructions Limited (2015) CSOH 92
In this case SSE engaged Hochtief to design and construct a hydroelectric scheme at Glendoe in Scotland. Once the scheme was put into operation it did not run as expected and investigations were undertaken. It was identified that one of the tunnels was blocked as a result of a partial collapse of that tunnel. A disagreement quickly arose between SSE and Hochtief as to whose risk the collapse was under the contract. SSE considered that the collapse was a defect (inadequate tunnel support) that existed at takeover and it was therefore a contractor's risk event pursuant to clause 81.1, and instructed Hochtief to remedy the collapse. Hochtief considered that the collapse was an employer's risk event and that it would be entitled to payment for carrying out the remedial works.
Following a period of negotiation the parties were unable to agree and SSE engaged another contractor to carry out the remedial works. These works took two years to complete during which time the scheme did not generate electricity. SSE commenced proceedings against Hochtief claiming £130m in respect of remedial works plus additional sums for a failure to meet the minimum guaranteed performance criteria and management time. Hochtief brought a counterclaim. The contract between the parties was in the form of the NEC Engineering and Construction Contract 2nd Edition (November 1995).
The contract contained a number of relevant provisions:
- Clause 83.1 that each party indemnifies the other against claims, proceedings, compensation and costs due to an event which is at his risk.
- Option Z11 provided that the total liability of each party pursuant to that clause is limited to the total tender price.
- Clause 84 required the contractor to take out a policy in joint names to provide cover for contractor's risk events.
- The provision stipulated that the policy should include a waiver by insurers of their subrogation rights against directors and other employees of the insured. There was no equivalent waiver in respect of the parties themselves.
- The CAR insurance policy itself did contain a waiver of rights of subrogation against those parties in whose interest the insurance was effected.
Hochtief submitted that the provisions of the contract were intended to limit the parties' liabilities and that the effect of clause 84 was that the CAR policy should take the place of Hochtief's liability for contractor's risks. Each party was therefore barred from bringing any proceedings against the other in respect of any loss covered by the CAR policy. SSE meanwhile contended that the CAR policy was not accepted in lieu of Hochtief's obligations and that clause 83.1 makes clear that each of the parties expressly agreed to indemnify the other in respect of their risks.
Lord Woolman in the Outer House of Session in Scotland considered the authorities and noted those which suggested that it is an implied term in such contracts that one party will not sue the other in respect of a loss or damage for which they are both co-insured. However, the authorities also showed that the position in each case will ultimately depend on the proper interpretation of the underlying contract and the terms of that contract rather than the terms of the insurance policy itself.
Clause 83.1 was key in this case. It expressly provided that each party undertakes to indemnify the other in respect of its risks. That clause clearly distinguished this case from others where a contrary provision had been incorporated into a contract or where there was no such provision at all, allowing the implication of an implied term. Hochtief's argument was that clause 84 requiring them to procure CAR insurance took precedence over clause 83.1. Lord Woolman could not accept that argument. Were he to do so it would render clause 83.1 redundant as there is no need for a liability provision if SSE has no right to sue in the first place. He also noted the option Z11 clause in which the parties sought to limit their liability to the total tender price. That would have been unnecessary if they had no such liability. Clause 85.2 waived subrogation rights against the directors and employees of the joint insured. There was no such waiver in respect of the parties themselves. Had the parties wanted to make such provision they would have done so in express terms. The case will now proceed to a full hearing.
This case makes clear that the position on a party's right to sue another, where CAR insurance is in place, will be determined on the basis of the terms of the contract itself. It is another example of the importance of parties ensuring that their contracts accurately and fully reflect the agreement between them, and their intentions.