In May of this year the Supreme Court handed down their judgement in the case of Gard Marine & Energy Limited v China National Chartering Co Ltd  UKSC 35. Whilst the case is not a construction case it has widespread implications for any parties that are named as co-insured on an insurance policy, and is therefore of particular importance to any parties who may be joint insured on a Contractor’s All Risks insurance policy, which not only includes the employer and main contractor, but also potentially subcontractors and funders.
Facts of the Case
The case relates to a vessel that was chartered by the owner to OLH, who in turn sub-chartered the vessel to Sinochart, who further sub-chartered to a company named Daiichi. The vessel sank whilst in port and whilst under the control of Daiichi. There was a successful insurance claim further up the contractual chain under a joint names insurance policy between the owner and OHL. The vessel was underinsured – the insurance cover was £70m whilst the vessel’s value at the time it sank was £88m.
The case revolved around two issues; first, whether there had been a breach of a contractual warranty (being a warranty only to dock in ‘safe ports’) and second whether the insurer could make a claim against Sinochart (as an assignee of OHL’s rights to make that claim) given the existence of the joint names insurance policy. In the event, the matter was decided on the fact that there had not been a breach of the safe port warranty, but the Court went on to examine whether the contractual claim would have been excluded due to the existence of the policy. The majority held that it would have been.
It was agreed that:
- There is a general rule that where insurance is taken out for two parties’ benefit they cannot sue each other, but this would always be subject to the express terms of the contract to establish whether recovery under the insurance is intended to be the only avenue for recovering loss or whether it co-exists with other rights;
- The rule applies even where the loss is caused by one or other of the insured parties;
- The above only applies to insured losses (and not other losses);
- A claim could be made if the party relying on this rule has prevented recovery under the policy.
The point at issue was the basis on which the general rule above was based. The first rationale put forward was that the insurer’s payment makes good any loss suffered by either party and therefore there were no grounds for one party to sue the other as there would be no loss to recover. The second rationale was that the insurance contract being in joint names constituted an implicit exclusion of liability, and that by entering into a joint names policy the parties were effectively agreeing not to pursue each other for the insured risk.
The distinction is particularly important in cases where the insurance money is not recovered or is not sufficient, as in the Gard Marine case, or, as was also the case here, one of the insured parties wanted to sue a third party (and whether that third party could rely on the implied exclusion of liability to run a ‘no loss’ argument). Under the first rationale, the party suffering the loss could still bring a claim against the culpable party for any shortfall in the insurance proceeds. However, under the second rationale, any uninsured loss or unrecovered loss would lie where it fell, regardless as to the culpability of the party suffering that loss.
The minority took the view that the rule was based on the first rationale above, namely that where the insurance has not paid out for any reason, or where the recovery was insufficient, there is still a right to make a contractual claim. The grounds for adopting the first rationale were predominantly based on the principle that clear language is required to exclude liability, and that a party to a contract should not be able to implicitly exclude their liability by taking out insurance.
However, the majority took the view that the rule was based on the second rationale. Their judgement was based on the fact that it was common practice to replace a right to bring a claim by procuring insurance. Therefore in this case OHL would not be able to make a claim against Sinochart as OHL had no liability to the owner and there was no right to bring a claim for any unrecovered losses, such as the uninsured amount.
Lord Toulson, one of the majority judges, when speaking at a seminar on the case hosted by 4 New Square chambers, explained that he thought the differences of opinion between the judges that decided the case came about because of their different backgrounds. As a former construction barrister Lord Toulson’s view was that the purpose of joint names insurance was to avoid the costly and complex multi-party disputes and cross-claims that often arose on construction projects, and joint names insurance was not only intended to be a pot of money to be applied to meet a risk but it was also intended to cut through potential litigation (as stated in Co-operative Retail v Taylor Young).
The case is significant to any parties entering into construction contracts which provide for joint names insurance because joint names insurance has fundamental implications with regard to the risk profile which the parties may not intend; by agreeing to enter into a joint names policy, a party to a contract could be unwittingly taking on the risk of that insurance being insufficient or the insurance monies being unrecoverable. The case also further reinforces the importance of all parties to a construction project understanding their position with regard to insurance. Clear drafting is required as to where liabilities for uninsured losses lie, or else the parties should be wary of the risks that they are accepting.