Are you sure you’re insured?

26 / 07 / 2018

Project insurance may secure a project, but contractors at any level should look to their contracts before relying on such policies.

Haberdashers’ Aske Federation Trust v Lakehouse Contracts [2018] EWHC 558 (TCC)

The recent case of Haberdashers’ Aske Federation Trust v Lakehouse Contracts [2018] EWHC 558 (TCC) (“Haberdashers”) held that a global project insurance policy did not indemnify a sub-contractor who was obliged, under its own sub-contract, to maintain insurance for the sub-contract works (notwithstanding the fact that they would otherwise be insured under the project insurance policy).

In other words: A sub-contractor who is required to maintain insurance under its sub-contract may be prevented from claiming that defects in the sub-contract works are insured under the project insurance policy for the development.

Facts of the Case

A local council (via various de facto development agreements) engaged a contractor, Lakehouse Contracts Limited (“Lakehouse”), to build an extension to a school in Lewisham. As is customary for commercial developments of a similar scope and complexity, the parties to the main contract took out a joint insurance policy to insure the project, which also insured “sub-contractors of [Lakehouse]”. Following the entering into of the project insurance policy, Lakehouse engaged a sub-contractor, Cambridge Polymer Roofing Limited (“CPR”), to carry out roofing works as part of the development. CPR’s sub-contract included an express clause requiring CPR to maintain its own insurance with a limit of indemnity of at least £2 million.

During the course of the works, the property was damaged by the spread of fire, allegedly caused by “hot works” carried out by CPR. The council consequently claimed its losses from Lakehouse, and the project insurers settled the claim for circa £9 million. To recover part of its pay-out, the project insurers then pursued CPR, and by extension CPR’s insurers, by way of a “subrogated” claim (i.e. a claim brought by an insurance carrier against a third party culpable for an insured loss).

The Conflict

Since the employer had already been reimbursed by the project insurers, Haberdashers was a case contended between the insurers of the project insurance policy (the “Claimants”) against CPR’s insurers (the “Defendants”).

The Defendants argued that, if CPR were insured under the project insurance policy (which, of course, the Defendants argued they were), then the Claimants were prevented from bringing claims against CPR for losses which the Claimants had proposed to insure. Contrastingly, whilst the Claimants acknowledged and accepted that the project insurance policy was intended to provide blanket security for the entire development, including the works of any sub-contractors, it was argued that the express requirement for CPR to maintain insurance under their sub-contract overrode any implication that the project insurers should indemnify CPR.

The Decision

It is well established that parties to a joint insurance policy are usually prevented from making claims against one another for losses that are insured under the policy. The question before the court, therefore, was whether or not CPR was effectively and validly insured under the policy.

The court found that the existence of the project insurance amounted to a “standing offer” from Lakehouse to its potential sub-contractors during the negotiation of sub-contracts. The offer was one of being included as a joint insured under the project insurance policy, and it would be implied into any sub-contract which was silent on the matter of insurance that said sub-contractor was so insured.

However, since CPR’s sub-contract specifically required the sub-contractor to maintain its own insurance, the above-mentioned standing offer had been rejected, since Lakehouse and CPR had agreed on a conflicting provision. The subrogated claim was thereby allowed and the Claimants were able to recover part of the original pay-out from the Defendants.

SSE Generation Ltd v Hochtief Solutions AG

In the subsequent case of SSE Generation Ltd v Hochtief Solutions AG [2018] CSIH 26 (“SSE Generation“), a Scottish court had to decide whether or not a project insurance policy would respond to a claim made against a contractor (by the employer) for a failure to rectify defects. The contractor, Hochtief Solutions AG (“Hochtief“), had refused to carry out remedial works without payment, leading the employer to instruct a third party to do so in Hochtief’s place. The court found that Hochtief was ultimately responsible for the defects, but, since the policy in question was only intended to insure against “loss of or damage to the works”, the employer’s claim no longer related to an insured loss. By instructing a third party to carry out the works, the works had already been rectified, so the employer’s claim against Hochtief was for breach of contract only, with such loss not falling within the parameters of the project insurance policy.

The SSE Generation case therefore complemented the decision in Haberdashers by confirming that the terms of the underlying contract and policy wording are becoming increasingly more important when determining whether or not project insurance should respond to certain claims. In this case, the contractor was forced to bear the brunt of the slippage, demonstrating that it is not only sub-contractors which are affected by exclusions in project insurance.

Aftermath

Ultimately, the legal principles which underlie the Haberdashers and SSE Generation decisions are largely insurance related. However, the results have ramifications for the construction industry and the premiums which industry players are expected to pay for joint insurance.

Employers and contractors negotiating project insurance policies should be aware that the policies which they are entering into are now fundamentally less precarious for their insurers. Insofar as employers and contractors ensure that their sub-contracts include insurance provisions (which is common practice), sub-contractors’ insurers should not be able to rely on the terms of project insurance policies to defend subrogated claims. Additionally, project insurance is no longer seen as a “complete code” insuring all contractual losses related to a development, and more prominence is being given to actual policy wording and the express terms of contracts. These factors should provide parties to joint insurance policies a greater ability to demand lower premiums, since insuring a project no longer means indemnifying absolutely every potential loss.

Finally, for sub-contractors, premiums payable for policies may rise as a result of sub-contractors’ insurers’ heightened risk profiles. This may be particularly true for sub-contractors with actual or threatened claims against their existing policies, or those with a history of having claims made against them, since project insurers’ rights of subrogation have been affirmed by the courts.