In the recent decision of Gard Marine & Energy v China National Chartering, the Supreme Court decided that an insurer had no right to pursue a subrogated claim against a party (and co-insured) having regard to the terms of the underlying contract.
The case arose out of the grounding of the Ocean Victory after leaving the port at Kashima, Japan. The vessel had been chartered by the owner (OVM) to the "demise charterer" (OLH) under a charterparty which required insurance to be taken out for the benefit of both the owners and the charterers. OLH chartered the vessel to Sinochart who, in turn, chartered the vessel to the "time charterers", China National Chartering (CNC) on 13 September 2006.
When leaving port on 24 October 2006, the vessel ran aground and eventually broke in two. Insurers (Gard Marine) paid out under the policy and subsequently took an assignment of the rights of the OVM and OHL rights in respect of the grounding of the vessel. Gard Marine commenced proceedings against Sinochart, which Sinochart passed on the CNC, for the recovery monies paid out under the policy by reason of their default in causing the accident.
The High Court allowed Gard Marine's claim and awarded them damages in the sum of approximately $140 million for the losses suffered. The Court of Appeal overturned the decision on appeal on the basis that there had not been a breach of the underlying contractual provisions. However, the court of Appeal also held that, in the light of the insurance provisions in the demise charterparty, OVM abnd OLH (and Gard Marine as their assignee) were not entitled to pursue a claim. Gard Marine appealed to the Supreme Court.
The Court considered when a subrogated claim can be made by insurers of joint insureds.
In a construction context, if a policy of insurance covers both the Employer and the Main Contractor, no subrogated claim can be made in respect of the loss suffered by one against the other; clearly, it would be absurd for insurers to indemnity one party and then claim against the other to which they would then owe an indemnity. The question is less clear where the fault lies further down the contractual chain.
Consider the position where a sub-contractor causes a loss to the Employer which has joint insurance with the Main Contractor. If the Employer is entitled to an indemnity from the Main Contractor, the Main Contractor could in turn pass the claim down the contractual chain to a negligent sub-contractor. However, if the Employer has been indemnified by the insurers, then there is no loss to pass on to the Main Contractor and thereafter onto the sub-contractor. Insurers cannot bring a subrogated action as the Main Contractor has not suffered a loss which would allow it to pursue a claim, and the Employer does not have the same contractual rights.
The issue is not straight forward.
All five of the Supreme Court Judges agreed that the issue depended on the construction of the underlying contract, and were then divided 3:2 as to what that construction was. The majority held that the parties had extinguished all claims between them by agreeing to the insurance for the benefit of the vessel owner and the charterer. The time charterer and sub-charterer (equivalent to sub-contractors) could not be pursued as there was no relevant claim for the charterer to pursue. The fact that the parties arranged insurance in this way determines the issue - the claim need not have been paid. The determining factor is whether the policy was obtained for the benefit of both parties, not whether they are jointly named in the policy.
The intention of the parties is paramount, as determined through consideration of the contract as a whole. The more comprehensively insurance and liabilities are addressed in the contract (which parties are to be covered, in respect of which property/time period/perils) the easier to determine the issue and avoid disputes.
This decision highlights the risk to insureds in the event that they are underinsured. They will now be unable to recover any additional losses down the contractual chain. It should also be appreciated that this decision will not prevent a main contractor from pursuing claims against a sub-contractor where the main contractor's obligation is to carry out remedial works.