This recent High Court decision on subrogation has left a number of unanswered questions, which could concern the energy construction insurance market.
This case has been explored from a general insurance context in our recent Insurance Hub article, however, we explore the specific implications of this case for the energy market below.
Construction All Risks (“CAR”) policies generally cover as insureds all parties concerned with the project, including the employer, EPC contractor and the various sub-contractors. The purpose of this is to streamline the cover purchased on behalf of the project stakeholders.
It is well established that, as a matter of English law, claims cannot be brought between co-insureds for insured losses and, therefore, an insurer cannot subrogate against a co-insured1. Consequently, in the construction sector, where all sub-contractors usually fall under the umbrella definition of “other insureds”, subrogation is rare.
However, the judge in Haberdashers’ found that, although on the face of it, the CAR policy purported to cover sub-contractors, the sub-contractor was deprived of insured status by reference to the terms of the sub-contract between the contractor and sub-contractor. That sub-contract provided that the sub-contractor must take out its own insurance cover, thereby suggesting there was never any expectation on the part of the sub-contractor to have access to the CAR policy. As the sub-contractor was held not to have insured status, CAR insurers were entitled to subrogate against the sub-contractor in the name of the main contractor.
Does the Haberdashers’ ruling open up new subrogation prospects for CAR insurers? As with most new rulings, the answer, in our view, is that it depends. It depends on the terms of the policy and the terms of the underlying contractual arrangement.
For many CAR policies, this ruling could have a significant impact but in the offshore energy sector, we expect the impact to be limited. This is because offshore energy construction insurance policies are usually written on the WELCAR 2001 form. WELCAR expressly states that underwriters waive rights of subrogation against all Other Assureds (which re-states the default English law position). However, what WELCAR also says is: “Where the benefits of this insurance have been passed to an Assured through contract [which will be the case for sub-contractors], the benefits passed to that Assured shall be no greater than such contract allows…” This clause therefore goes some way towards dealing with the Haberdashers’ principle in that, if there was no term in the contract conferring benefits of the WELCAR policy on a sub-contractor then it follows that the sub-contractor should not have the benefits under the WELCAR cover.
This depends on insurers seeing the sub-contract, which does not always happen, the presumption usually being that the sub-contract would have conferred benefits.
The sub-contract in Haberdashers’ contained a requirement for the sub-contractor to take out its own insurance. The judge focussed on the sub-contracting party’s subjective intentions (but strangely did not appear to consider the insurers’ intentions) and found that the sub-contractor did not ever have an expectation to benefit from the CAR policy and indeed did take out its own insurance policy, albeit with a much lower limit that the CAR cover. The loss exceeded the limit of the sub-contractor’s separate cover and the CAR Insurers in Haberdashers’ only sought to subrogate up to the limit of the sub-contractor’s liability insurance and not the full value of the loss.
What would have happened if they had sought to recover the full loss? The judge’s comments on this are obiter (and consequently not binding) but he suggested that they would not have been able to, due to the fact that it was surely not anticipated that the sub-contractor would bear any additional loss as an uninsured loss where there was CAR cover in place with a higher limit. This point was not fully explained in the judgment and leads to the obvious question of whether there can be some hybrid situation whereby a sub-contractor is not insured under the CAR cover up to the limit of its own separate cover and, excess of that cover, can become an insured under the CAR cover. This would be a rather uncertain and surprising result.
Further, it is impossible for CAR insurers to rate their exposure without knowing, at the time they write the CAR policy, what limits of cover a future (as yet unidentified) sub-contractor may or may not take out; in Haberdashers’ the sub-contract required the sub-contractor to take out cover for not less than £2m but it actually took out cover for £5m and the CAR insurers recovered the full £5m.
Another unknown is what happens if there is a mismatch in the terms of cover between the CAR policy and the sub-contractor’s liability policy? If CAR Insurers pay a claim as the first port of call, in the expectation they can subrogate against the sub-contractor, what is the outcome if the sub-contractor’s separate insurance is not engaged due to it being narrower cover? Ordinarily, one would expect the sub-contractor’s liability to the main contractor not to be dictated by the extent of insurance cover it has in the background to meet such liability. A company’s insurance protection, or lack thereof, should not as a matter of principle determine apportionment of liability for loss. That is, however, what the ruling in Haberdashers’ suggests and we expect some uncertainty to follow this particular judgment. What is clear now more than ever is that insurers should look at the terms of the underlying contractual arrangement in order to be as well informed as possible about the contractors’ respective intentions.