Tackling co-insurance – kicked into touch

A recent case in the Technology and Construction Court (The Rugby Football Union v Clark Smith (1) and (2) FM Conway [2022] EWHC 956) has highlighted the importance of parties agreeing the full extent of their insurance coverage and ensuring that the agreed position is reflected in the contract.

The case will be of particular interest to parties that are relying on, or intending to rely on, insurance taken out by others.

Background

Prior to the Rugby World Cup in 2015, the Rugby Football Union ("RFU") had works carried out at Twickenham Stadium. Part of the works involved the upgrading of cables. The RFU appointed Clark Smith Partnership ("Clark Smith") to design the ducts through which the cables would be run and FM Conway Limited ("Conway") to construct the ducts. The RFU subsequently brought a claim against both Clark Smith and Conway claiming that the ducts were defective as they were damaging the cables. The claims, denied by both Clark Smith and Conway, were in the region of £4.5million.

Insurance

The RFU had insured the works pursuant to a Contractors All Risk Insurance policy (the "Policy") with Royal Sun Alliance ("RSA"). The Policy indemnified the RFU for a claim of around £3.5million in respect of the damaged cables. RSA then pursued Conway under the rules of subrogation, which allow an insurer to pursue a third party after the insurer has paid out a claim.The terms of the building contract entered into between the RFU and Conway, which was a JCT standard building contract without quantities provided for insurance option C to apply. As per the usual provisions under such a contract, the 'insured parties' under the building contract included contractors and subcontractors. Conway, therefore, contended that they were co-insured under the Policy taken out under the building contract.

Co-insurance

Conway sought to rely on the fact that they were co-insured with the RFU under the Policy to the same extent as RFU and therefore could not be liable either to RFU or RSA. It is settled law that there cannot be an action between two parties who are insured under the same policy against the same risk. This principle arises not from the insurance policy but as a result of an implied term in a contract between two parties. Therefore, the extent to which this binds the insurance company, and limits their rights of subrogation, required the court to look at the building contract between RFU and Conway, and the principles of agency to determine the extent of the insurance cover of Conway under the Policy. Did RFU insure Conway's liability as its agent?

To establish whether one party has the right as 'agent' to act on another's behalf, the following cumulative conditions must be met:

• The agent must have the authority to contract on the other party's behalf.
• The agent must have intended to contract on other party’s behalf.
• That the terms of the policy must not preclude the other party from being covered.

The view of the court was that the terms of the building contract set out the intention of RFU and under the terms of the building contract, there was an express exclusion for losses caused by a party's own defective works. Therefore, there was no intention by RFU to extend the insurance under the Policy on Conway's behalf to cover their defective works, and the parties were not insured to the same extent under the same policy for the same risk. RSA could therefore pursue a claim against Conway as they could exercise rights of subrogation.

The insurance provisions of the JCT contract included contractors and subcontractors as an insured party, but this only required the RFU to take out insurance to cover those contractors in respect of loss and damage to the works and did not extend to damage to cabling caused by Conway's failures in relation to the ductwork. Conway's cover was not fully co-extensive with RFU's and the Policy did not provide a common fund that was intended to be the RFU's sole redress for loss caused by Conway's breach of contract. Conway could not therefore rely on being a co-insured party to avoid the subrogation claim by RSA.

Takeaway

Parties to construction contracts should always seek clarity as to which party is responsible for ensuring which losses and the extent to which that insurance protects them. Even if, as was the case here, the parties have discussed and commercially agreed insurance arrangements, all parties should ensure that this is fully reflected in their contract.