Do you know what insurance covers?

Joint names all-risks policies: more or less ubiquitous in the construction world. The commercial benefits of this arrangement are well known to all employers and contractors; if there is damage to the works, the insurer pays for it be reinstated and the contracting parties avoid a long and expensive dispute over liability when they could be focussing on completing the project. This case is noteworthy because, having indemnified the employer, the all-risks insurer brought a subrogated claim against a contractor who is co-insured under the policy.

Subrogation generally

Subrogation is the principle that should Party A indemnify Party B in respect of a loss which was caused by Party C, Party A, having so indemnified Party B, is entitled to step into the shoes of Party B and assume any right that Party B may have had to recover its losses from Party C. This prevents Party C from ‘benefitting’ by having Party A pick up the bill for any losses that Party C has caused (this right is most often exercised by insurers as a means to recover amounts they have paid out on their policies).

There is a general principle of English insurance law, central this case, which places a limit on insurers’ rights of subrogation. This principle is that where two parties are jointly insured under the same insurance policy for a certain loss, the insurer cannot bring a subrogated claim in the name of the indemnified party against the other party having the benefit of the same policy, even if that party was responsible for the loss.

This principle underpins the commercial basis of joint names all-risks cover in building contracts. If the employer and the contractor both know that they are protected against losses to the works, then there is no need to stop the project to have a dispute about liability for the damage.

The Rugby Football Union v FM Conway: Background The dispute in this case arose out of preparations for the 2015 Rugby World Cup, as part of which the Rugby Football Union (“RFU”) decided to undertake a substantial programme of upgrade works at Twickenham Stadium. This was a large project involving 16 individual packages, all let independently to various contractors.

Two packages were relevant to this case: package AO7.1, which was let to FM Conway Limited (“Conway”) for the installation of buried ductwork, and package A07.2, for the pulling of high voltage cables through the ductwork, which was let to a different contractor.

The RFU entered into contract with Conway under a JCT Standard Building Contract without Quantities 2011 (with amendments). The RFU had engaged Clark Smith Partnership Limited (“CSP”) to design the ductwork.

The building contract called for standard JCT Option C insurance requiring the RFU as the employer to take an all-risks policy in respect of damage to the Works (as defined in the contract), and a policy protecting the existing structures against damage from Specified Perils (fire, flooding etc.) – both in joint names with Conway. The ‘Works’ for these purposes covered Conway’s works to install the buried ductwork (and nothing else). The contract also included a standard exclusion from the definition of ‘all-risks insurance’ covering any damage caused by Conway’s own defective work. The RFU then procured a single all-risks policy for the whole project under which it was co-insured with the contractors for all 16 packages. The policy also included an express waiver of subrogation rights by the insurer (Royal & Sun Alliance, “RSA”). CSP designed the ductwork, which Conway went on to install. The installed ductwork was defective such that when the following contractor attempted to pull the cables through, the cabling was severely damaged and had to be replaced. The costs ran to c.£3.3m to replace the damaged cables, and a further c.£1.1m to repair the ductwork itself. Under the terms of the all-risks policy, the insurer (Royal & Sun Alliance, “RSA”) was required to indemnify the RFU for the £3.3m to replace the cables, but did not have to pay out for the remaining £1.1m for the ductwork itself. Unusually, RSA then commenced a subrogated claim against Conway. On the face of it this runs contrary to all of the context set out above – Conway was ostensibly an insured party under the policy, and normal legal principle would suggest that it could not be subject to a subrogated claim in the name of a co-insured party. Further still, RSA had apparently waived its rights of subrogation against Conway in this case. Conway raised these points, and the Court ordered a trial of a preliminary issue as to whether RSA could proceed with its subrogated claim.

The decision

Surprisingly, RSA’s case was successful. The problem for Conway, the Court found, was that while it was insured under the all-risks policy, it was not insured to the same extent as the RFU. In key question is why that was, given that Conway was ostensibly insured to the full extent of the policy. This starts with the principle, described above, of ‘no claims between co-insured parties’. The Court reviewed various authorities to establish how this principle actually takes legal effect. It concluded that there is an implied term in the contract between the co-insured parties stating that should the insured loss arise, their sole recourse as between each other will be to the insurance policy. This meant that any contrary express terms of the contract could oust this general principle if it appears that the parties did envisage that claims could be permitted in respect of the insured matters. The Court also decided that Conway was not a party to the insurance policy, and therefore the RFU must have procured the cover on Conway’s behalf. The Court decided that the building contract was central to determining what the intended scope of the insurance cover would be. In other words, the parties had agreed in the contract that the RFU would take out an all risks policy meeting a certain description, and the Court had therefore to conclude that in taking out the actual all-risks policy for the project, it intended to cover Conway to the extent provided for in the building contract, and no more (notwithstanding that Conway apparently benefitted from wider cover on the wording of the policy itself).

The building contract of course provided for JCT Option C Insurance, with the all-risks policy covering Conway’s Works only, with an exclusion of damage caused by defects in the Works – on these terms, Conway would not be covered for the damage to the cables which were installed by a different contractor. Conway argued (with considerable evidence) that there was an undocumented agreement with the RFU that the insurance policy would cover all contractors on the project. The Court was sympathetic to Conway’s witnesses on this point, but decided their evidence did not outweigh the express wording of the contract. Conway was also unable to rely on the express waiver of liability. The Court decided that RSA’s waiver could only be interpreted to apply to the extent that the ‘insured’ parties it referred to were actually insured against the relevant loss. Once it was established that Conway was not insured for the loss of the cables, it therefore also lost the ability to claim that any associated subrogation rights had been waived. There was therefore no basis on which the subrogated claim could be prevented – the implied term of the building contract giving effect to the principle that the RFU (i.e. RSA) cannot bring a claim against Conway under the policy is of no effect where the express wording of the contract places limits on the extent of the co-insurance.

Conclusions The specific lesson here is that parties to building contracts cannot simply rely on their insurance brokers to arrange coverage which is suitable for the risk profile they intend to take on. This case shows that the agreed basis of the all-risks cover for the project must be reflected accurately in the building contract, or the parties risk a mismatch of exactly the type that has hit Conway here. On one level this seems obvious; if a contractor is reliant on an employer to arrange insurance for it or vice versa, it makes complete sense that the party placing such reliance should require a proper record of the agreed terms in the actual contract between the two parties. Insurance is a difficult area in that regard as it is specialist, and the lawyers who draft the contract and the brokers who arrange the policy may not speak to each other as much as they should. However, the lesson is of more general applicability – it is common to see parties in last minute commercial negotiations agree that certain matters will be ‘dealt with on site’, or rectified by some later agreement. This case shows why all agreed matters must be dealt with when the building contract is signed; even if the parties agree in good faith to resolve outstanding matters later, they may find that they are ultimately bound by the wording they have already signed up to.