Are you covered? Project wide insurance policy may offer different cover to co-insureds

• United Kingdom

• Construction and engineering

13-07-2022

Project insurance policies, under which a number of parties working on a project are insured under the same policy, are increasingly common. In principle, this type of policy can be used when the employer and its contractors need to take out all risks cover for works to an existing building and to cover damage to third party property. However as the recent case of The Rugby Football Union v Clark Smith Partnership and FM Conway¹ shows, care should be taken to assess the scope of the policy and it should not be assumed that the same level of cover applies for each of the co-insured parties, as this will depend upon the terms of the underlying contract between the employer and contractor.

Advantages in having a project wide insurance policy

The Rugby Football Union (RFU) was engaged in substantial upgrade works to Twickenham stadium in preparation for the rugby world cup. This required a number of contractors to each be appointed under separate work packages. The RFU’s project manager decided that a comprehensive project insurance policy covering all the contractors would be appropriate. It was considered that this would prevent expensive delays, avert claims arising between contractors and their separate insurance companies, and avoid any possible issues with gaps in insurance cover.

Part of the works involved the installation of high voltage power cables in buried ductwork. RFU engaged Clark Smith Partnership (Clark Smith) to design the ductwork and FM Conway (Conway) to install it. .

The policy was taken out before contracts were entered into and before the identity of some of the sub-contractors was known. In the normal way, the policy described as insured parties “all other contractors or sub-contractors of any tier”.

Insurance requirements under a JCT contract

Conway was appointed by RFU under a JCT Standard Building Contract Without Quantities 2011 (the JCT Contract). RFU was required under insurance Option C to take out all-risks insurance under a joint names policy, which was to cover physical loss or damage to the work executed, “but excluding the cost necessary to repair, replace or rectify…..any work executed or any Site Materials lost or damaged as a result of its own defect in design, specification, material or workmanship or any other work executed which is lost or damaged in consequence thereof”. The joint names policy was to have RFU and Conway named as composite insured and “under which the insurers have no right of recourse against any person named as an insured.”

In addition, under clause 6.2 Conway was to remain liable for and indemnify RFU against any loss, injury or damage to any property that arises out of the “carrying out of the Works and to the extent that the same is caused by the negligence, breach of statutory duty, omission or default of the Contractor or of any of the Contractor’s Persons.”

Claim under the insurance policy

It was found that the installation of the ductwork carried out by Conway was defective and this caused damage to the cables when they were pulled through. RFU claimed over £3m for the cost of replacing the damaged cables and over £1m for the cost of rectifying the ductwork. RFU was indemnified under its project policy with Royal & Sun Alliance Plc (“RSA”) for the replacement cables to the value of just over £3m.

RSA sought to recover this financial outlay by using rights of subrogation against Conway. Subrogation is where an insurer indemnifies an insured in respect of its claim, but then “steps into the shoes” of the insured to recover its outlay from the party who caused the loss. In short, RSA sought to recover from Conway the money it had paid out under the insurance policy to RFU. RSA effectively exercised RFU’s right to compensation under the terms of the JCT Contract for the loss caused to RFU by Conway.

Dispute over the insurance cover

Conway brought Part 8 proceedings against RFU and RSA, seeking declarations regarding the effect of the project insurance policy. Conway claimed:

• it was co-insured with RFU under the policy;

• it had the benefit of cover under the policy to the same extent as RFU;

• RFU could not claim against Conway for alleged losses that were covered by the policy; and

• RSA were not able to make a subrogated claim against Conway to cover the cost of the cables.

These arguments were made on the basis that:

1. RFU had the necessary authority to procure the project policy on the basis that Conway would be jointly insured alongside RFU and to the same extent as RFU; and

2. the project policy and the JCT Contract were to be read together and established that Conway was to be insured to the same extent as RFU.

Considerations for the court

The question for the court therefore was whether:

• Conway’s insurance under the policy was limited to the extent of the cover that was required under Option C of the JCT Contract, which would mean that Conway was not co-insured for the relevant loss and RSA could make a subrogation claim, or

• Conway’s cover under the policy was fully co-extensive with RFU’s and so covered the losses for which RFU was indemnified for under the policy. This would mean that Conway would be entitled to the benefit of the waiver of subrogation and RSA could not pursue their claim.

Court decides JCT Contract did not permit the contractor to be fully co-insured

In making his judgement, The Honourable Mr Justice Eyre decided that Conway and RFU were not co-insured for the same loss and therefore RSA could bring a subrogation claim against Conway for the cost of replacing the cables. This was on the basis the cost of rectifying damage caused by Conway’s own defective works was excluded from the insurance policy, as it had been excluded under the JCT Contract. Conway found itself on the receiving end of a substantial claim, for which it was not insured under the project policy (even though it had expected to be covered for such risks).

This was decided on the basis that the JCT Contract only required RFU to procure insurance to the extent of Option C (i.e. all risks insurance) and this did not include a requirement upon RFU to take out public liability insurance for Conway, which Conway, as the Contractor, remained responsible for under the JCT Contract.

The court considered how, and the extent to which, a party becomes an insured party to a policy which is arranged by a third party. This is a common scenario where an employer is taking out a project policy which purportedly covers all sub-contractors as insured parties. The court concluded that either:

1. a project policy is deemed to be a standing offer from insurers to insure sub-contractors, which can be accepted upon execution of a sub-contract (although the offer could also be rejected depending on the terms of the sub-contract); or

2.  the underlying contract may have provided authority from the sub-contractor to the employer to take out a policy on its behalf.

On the facts, the judge concluded that, “If the parties had been contracting on the footing that recourse to the insurance would be the sole avenue for redress for damage of the kind which occurred then further amendments to the standard JCT contract could have been made so as to provide for that in clear and express terms.”

For that reason, it was found that RFU did not have the authority to procure the insurance on behalf of Conway beyond what was required under Option C within the JCT Contract. Therefore, even though both Conway and RFU were co-insured under the same project policy, the cover for Conway was limited to what was envisaged under the JCT Contract.

Lessons learnt

This was a preliminary issues trial, but the case may prove to be a costly mishap for a contractor who believed that they were fully insured under the project policy,

This shows that reliance on project policies should be exercised with care, so that the parties are fully aware of the level of coverage offered. Further, great care should be taken when preparing the insurance provisions in contracts as these will inform the extent of cover. If the parties do intend for such cover to be more extensive than typically envisaged under a JCT contract then the contract should be amended to reflect this and to provide the employer with the required authority to procure the insurance for the contractor’s benefit.