Not in our names
4 August 2008
7 August 2014
30 April 2014
M&A Weekly Update: when is there a duty of good faith between contracting parties; prospectuses: acceptable languages; and more
9 April 2014
19 December 2013
26 February 2014
Litigation arising out of construction projects is not, of course, unusual. What is regrettable is the number of disputes that have arisen out of unsuccessful attempts by the parties to allocate risk by means of joint-names insurance (usually, in fact, composite insurance).
The principle of such insurance is – or was – that if damage occurs to the insured property then, regardless of the party at fault, insurance funds are available to allow for reinstatement without recourse to litigation between the joint- or co-insureds.
Difficulties arise, however, where other contractual provisions dealing with risk allocation or liability are potentially inconsistent with such a scheme. These issues were considered by the Court of Appeal in Tyco Fire & Integrated Solutions (UK) v Rolls-Royce Motor Cars (2008).
In Tyco the employer was required under the construction contract to obtain joint-names insurance in relation to the existing property and the contract works. The contractor was obliged to indemnify the employer against damage arising from the contractor’s negligence, however. Following a flood (assumed for these purposes to be the contractor’s fault) the employer claimed against the contractor for damage to the existing structures.
Tyco asserted that Co-operative Retail Services v Taylor Young Partnership (2002) (CRS) established a rule that precluded such a claim. In CRS, an issue arose as to whether the contractor was liable to an employer under a detailed contractual code that included a requirement that the employer obtain joint insurance. It was held that it did not. That disposed of the matter, but Lord Hope also considered the effect of the joint-names policy. It was accepted that an action could not be brought between two persons insured under the same policy against the same risk. While circuity of action had previously been advanced as an explanation as to why an insurer cannot exercise a right of subrogation against a co-insured, Lord Hope preferred the explanation of an implied term in the contract between the parties, noting the view expressed in Hopewell Project Management v Ewbank Preece (1998) that it would be nonsensical if parties jointly insured under a policy could make claims against one another in respect of damage to contract works.
This was the ‘rule’ that Tyco sought to rely on. The short answer in Tyco was that the contractor was not required to be covered by the insurance in respect of the existing structures, and so there was no question of the claim being precluded. That disposed of the appeal, but the following points were also said to support the conclusion reached:
• There was no ‘special regime’ for risk and responsibility as there had been in CRS.
• The obligation to obtain joint-names insurance did not extend to loss caused by negligence of the contractor in the absence of plain language, and the fact that the insurance in fact obtained would have covered negligence did not affect this analysis.
As to the asserted rule, Lord Justice Rix considered that it was necessary to construe the contracts on a case by case basis. In particular:
• While the existence of joint insurance may have an impact on the construction of the contract, the implied term may be displaced by express wording to the contrary.
• If the underlying contract envisages that one co-assured may be liable to another for negligence within the cover provided by the policy, there is nothing in the doctrine of subrogation to prevent the insurer from suing in the name of the employer in the absence of an express waiver of subrogation.
Rix LJ expressed caution in commenting on this area, given the complex case law (which was not considered in detail). His comments will undoubtedly be cited in future cases, however.
While the preservation of claims not covered by the insurance appears unobjectionable, a subrogated claim against a co-insured would be, as Rix LJ indicated, unusual (and contrary to the position stated in CRS).
This is a difficult area of law and the impact of the Court of Appeal’s comments will no doubt become clearer as the issues articulated are further tested. For present purposes, the key points are to ensure: that the contractual provisions regarding risk allocation, liability and indemnities (in particular in relation to negligence) are clear and consistent with the provisions as to joint-names/composite insurance; that consideration is given to the need for contractual provisions dealing with waiver of subrogation; and that the cover required is in fact obtained – as many of the cases in this area arise because it was not.
Sarah McNally is a barrister and Alexander Oddy a partner at Herbert Smith