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Co-insurance and subrogation rights revisited (again!)

My colleague, Natalie Wardle, commented on the Supreme Court’s decision in Gard Marine and Energy Ltd v China National Chartering Company Ltd in her May 2017 blog. As she noted, the judgments (and the 3:2 majority verdict) left a number of questions unanswered. Two of these were:

  • What is the strength of the implied term that one co-insured party may not sue another, and when it may be rebutted.
  • The juridical basis for the implied term and its consequential impact on sub-contractors.

These issues have arisen in two recent cases, which I propose to examine briefly in this blog. They throw a little more light on the situation, but by no means provide all the answers.

Rebutting the implied term

SSE Generation Ltd v Hochtief Solutions AG and another was an appeal to the Inner House of the Scottish Court of Session. It concerned questions of liability for a catastrophic tunnel collapse that occurred shortly after the completion of a hydro-electric plant at Glendoe. The judgments cover a number of issues, but of key interest for present purposes is their interpretation of the joint insurance provisions in the main contract, which was based on the NEC2 ECC form.

The judge at first instance had held that the usual rule (whereby one co-insured party may not sue another, thus excluding insurers’ rights of subrogation against a negligent contractor) was in this case overridden by the indemnity clause in the NEC form. However, that decision pre-dated the Supreme Court ruling in Gard Marine, which persuaded the majority of the Inner House to come to the opposite view. They noted that the Gard Marine decision was underpinned by a strong presumption in favour of an implied term that precluded claims between co-insured parties. Having analysed the NEC indemnity and the surrounding circumstances, they concluded that the parties had not intended to exclude this implied term and that the presumption should be upheld.

On the face of it, this decision provides welcome clarification. However, like Gard Marine it is obiter, since the majority considered that the insurance did not in fact cover the employer’s losses in any event. It is also a majority decision of a Scottish court, which further weakens its persuasive authority.

Personally I have always been concerned that the NEC indemnity clause creates unnecessary uncertainty and could give rise to exactly the type of argument seen in this case. It seems to have survived this time, but there is no guarantee that it will do so if the issue arises squarely for decision in England. The NEC4 draftsmen have chosen not to clarify the position; we will have to wait and see whether, with hindsight, that call proves to be a wise one.

Claims against sub-contractors

The dispute in SSE v Hochtief was purely between owner and contractor, so the question of sub-contractor liabilities did not arise. However, in Haberdashers’ Aske’s Federation Trust Ltd v Lakehouse Contracts Ltd and others, the position of the sub-contractor was at the heart of the issue.

That case concerned a fire at a school under construction in Lewisham, for which the roofing sub-contractor (CPR) was assumed to be responsible. Because the works were being carried out under the little-lamented Building Schools for the Future programme, the contractual and insurance arrangements were complex. However, in essence, the employer (as required under the main contract) purchased a project policy covering itself, the local authority, the contractor (Lakehouse) and “sub-contractors … of any tier … for their respective rights and interests”.

Following the fire, insurers paid out the cost of reinstatement and sought to recover the proceeds from CPR, by way of a subrogated claim in the name of Lakehouse. Unsurprisingly, CPR sought to defend the claim on the ground that it was a co-insured under the policy, and that as a result there was an implied term excluding subrogation rights. However, it faced a difficulty; it had signed up to Lakehouse’s standard terms, which included an indemnity from CPR in relation to property damage, backed up by an obligation to maintain public liability insurance. Fraser J held that the presence of this clause was sufficient to exclude the implied term and that CPR should be liable for the loss suffered.

At an objective level, this all seems logical. The clause as drafted is perfectly clear, and it is true that an express term should generally exclude the implication of a conflicting provision. However, two observations strike me on reading the judgment:

  • Looked at subjectively through the eyes of the parties, I cannot believe this is what they actually intended. I’m sure that, if asked, they would have assumed that the project policy would protect CPR. I suspect that no-one even noticed the indemnity clause in the Lakehouse terms, and that if they had, they would not have appreciated its significance. This may not be how contracts are interpreted in the post-Arnold v Britton world, but I can’t help feeling that justice has been sacrificed on the altar of literalism here.
  • More interestingly (to me at least), the majority of the Supreme Court in Gard Marine had held (albeit obiter) that the underlying juridical basis for the rule against claims between co-insured parties was that liability was impliedly excluded between them, since the insurance arrangements provided a complete scheme of “no fault” compensation for the loss suffered. (The minority had come to a different view, namely that liability existed but was discharged by the payment from insurers.)

As Natalie’s blog noted, the implications of this decision are profound, since if liability is excluded, there is arguably no basis on which to found a subrogated claim against a defaulting sub-contractor. But, as far as I can see from Fraser J’s typically thorough and reasoned judgment, the point was not even raised on behalf of CPR. On the contrary, the case proceeded on the assumption that Lakehouse was liable and that accordingly CPR should pay, unless it could rely on the project insurance for protection.

I may be missing something, and of course each case turns on its own facts and the wording of the specific contract in question. But I can’t help wondering why this point wasn’t at least argued. Perhaps someone can explain?

Conclusion

What these cases show – if we didn’t know it already – is that co-insurance is a fiendishly complex subject. There are potentially conflicting legal principles at play and the case-law does not present a wholly consistent picture.

Most of all, Haberdashers offers yet another reminder to contracting parties of the need to read and fully understand the terms of their contract before signing it. Don’t assume that an insurance policy will protect you, even if you are (or think you are) a co-insured.

Bryan Cave Leighton Paisner LLP John Hughes-D’Aeth

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