Sometimes construction developments see parties taking out ‘project-wide’ insurance for their mutual benefit as the sole avenue of recovery. This becomes clouded when parties also take out their own policy which provides an independent right of action for recovery.
The case of Haberdashers’ Aske’s Federation Trust Ltd v Lakehouse Contracts Ltd and others sets out a valuable reminder regarding the importance of contractual terms.
Facts of the case
A local education partnership, Lewisham Schools for the Future LEP Ltd (LEP), instructed Lakehouse Contractors Ltd (the Contractor) to carry out works at a school. Cambridge Polymer Roofing Ltd (the Sub-Contractor) was engaged by the Contractor to carry out roofing repairs.
LEP (the Employer) was required to take out project insurance which expressly included the Contractor and future sub-contractors under the scope of cover.
The Sub-Contractor was also required to take out their own insurance policy for a cover of not less than £5m.
When a fire broke out and led to extensive damage to the school, a claim was sought against the Contractor and Sub-contractor.
After admitting liability and settling the claim at £8.75m (paid by the insurers of the project insurance), the Contractor sought to recover the losses from the Sub-Contractor (technically a subrogated claim by the project insurers).
It was argued by the Sub-Contractor that as they were a co-insured party under the project insurance, it was not the intention that a subrogation claim could be brought against them for damages covered by such insurance.
Thus the question for the court was: can a sub-contractor be awarded protection under a co-insurance policy notwithstanding their obligation to obtain their own policy?
Decision
Fraser J disagreed with the Sub-Contractor. It was held that insurers (bringing a subrogated claim on behalf of the Contractor) were entitled to recover the full amount of the Sub-Contractor’s own insurance policy (£5m), on the basis that it had been expressly agreed under the sub-contract that the Sub-Contractor had an obligation to maintain their own policy.
The court accepted that the project insurance was clearly intended to provide cover for the Sub-Contractor; however this could not be viewed in isolation. It was important to take into account the agreed terms under the sub-contract itself.
As the project policy insured “subcontractors of any tier” this was considered to be a standing offer to insure unnamed sub-contractors who could, on their appointment under the sub-contract, accept the offer by joining the defined group of insureds. However, by accepting the terms of their contract, the Sub-Contractor inadvertently excluded the possibility of protection under the project insurance, opening up the avenue for claims against their own policy.
Emphasis on express terms
In summary, as the party in question couldn’t establish that they were included in the definition of co-insureds, their protection under the project insurance unravelled. Fraser J pointed out that “in order to avail itself of what is effectively immunity from suit by a co-insured, [the sub-contractor] has to demonstrate that it is co-insured in the first place”.
Alarm bells may be ringing for any sub-contractors and rightly so. This case opens up the doors for any subrogation claims where the two clauses (project insurance and individual insurance) concurrently exist.
Implications for the future
These types of policies are useful in the construction industry. They offer protection when liability cannot easily be distinguished between parties and they ring fence risk on unusual projects (so that each parties’ claims record under their own policy is protected). Case law in relation to co-insurance often addresses the same question: is the insurance policy intended to be the sole avenue of making good the loss or damage? If the answer is no, then it is likely that you can be independently liable.
The answer is always down to the contractual relationship between the parties, which is what Fraser J emphasises in this case.
Sub-contractors should take considerable care to review insurance provisions contained within sub-contracts through a magnifying glass in the future to ensure their intentions are reflected.