The Devil is in the Detail – Coinsurance in Construction Insurance Policies: The Rugby Football Union v Clark Smith Partnership Ltd and FM Conway Ltd [2022] EWHC 956 (TCC)

Construction all risks insurance project policies are designed to cover risks affecting various parties working on a construction site, including employers and contractors. However, it is dangerous to assume that a project policy will cover every eventuality. In the recent decision of The Rugby Football Union v Clark Smith Partnership Ltd & FM Conway Ltd, the court considered one such project policy, holding that it was necessary to look to the terms of the underlying contract between the parties in order to determine whether a claim is covered.

Background

This case concerned the extensive renovation project that took place at Twickenham stadium in preparation for its hosting of the 2015 Rugby World Cup. As part of the project, the Rugby Football Union (“RFU”) engaged Clark Smith Partnership Ltd (“Clark Smith”) to design the ductwork and FM Conway Ltd (“Conway”) to install it. Conway was initially engaged pursuant to a letter of intent, with the parties subsequently entering into a contract adopting (with amendments) the terms of the JCT Standard Building Contract without Quantities 2011 (“the Contract”).

Pursuant to the terms of the Contract, RFU was required to arrange a ‘Joint Names’, all risks insurance policy under Insurance Option C, which required RFU to effect insurance with Conway as composite insured against physical loss and damage to the work executed or to site materials. However, the Contract contained an exclusion specifying that the cost of rectifying damage caused by Conway’s defective work would not be covered by the policy. RFU entered into an all risks policy covering the project, with Royal & Sun Alliance Plc (“RSA”) as its insurer.

The RFU subsequently brought a claim against Clark Smith and Conway, alleging defects in the ductwork which caused damage to the cables at the stadium. RSA indemnified RFU and brought a subrogated claim against Clark Smith and Conway to recover the cost of replacing the damaged cables and rectifying the ductwork.

At a preliminary issue hearing, Conway sought declarations to the effect that it was a co-insured with RFU under the policy such that RFU could not claim against it in respect of losses covered by the policy and RSA was not entitled to make a subrogated claim against it.

Coinsurance Principles

As a matter of law, the court held that the starting point in addressing the preliminary issues is the principle that “the law [does] not allow an action between two or more persons who [are] insured under the same policy against the same risk” (para 61 of Co-operative Retail Services Ltd v Taylor Young Ltd [2002] UKHL 17). As a consequence, insurers who have indemnified one co-insured “cannot exercise rights of subrogation against a co-assured under an insurance on property in which the co-assured has the benefit of cover which protects him against the very loss or damage to the insured property which forms the basis of the claim which [the] underwriters seek to pursue by way of subrogation” (para 614 of National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyds Rep 582).

The Decision

The court held that in order to determine whether a policy effected by the employer applies to the contractor and, if so, to what extent (including the extent to which they are co-insured), it is necessary to look to the terms of the contract between those parties. The contractual terms will “provide the key to the existence and extent of the insurance cover” [para 74].

Conway sought to argue that the discussions between the parties at the time the Contract and policy were entered into should be taken into account in support of its contention that RFU’s intention was to obtain comprehensive insurance for Conway including cover for any defective works. This argument was rejected by the court, which held that there was nothing in the Contract or the letter of intent to indicate that RFU intended the policy to be the sole remedy for losses suffered by RFU as a consequence of breach by Conway. The court noted that the terms of the letter of intent and Contract made no reference to such an arrangement and were indicative of a very different arrangement.

The court held that the letter of intent, Contract and policy were to be read according to their terms. The policy insured both RFU and Conway, but not to the same extent in respect of the same risk. In particular, they were not co-insured in respect of the losses arising from the defects in the ductwork.

In relation to the issue of subrogation, the court held that the waiver of subrogation could not operate to protect Conway against RSA’s claim, arising as it did out of a matter in respect of which it was not insured.

The court therefore held that RSA was entitled to continue to pursue a subrogated claim against Conway for the relevant losses.

Comment

This decision highlights the crucial importance of the terms of a contract in defining the scope of insurance cover. Employers and contractors should not assume that a project policy will respond to all losses that may arise – the extent of cover may well be limited by exclusions in the contract. Parties should carefully analyse the terms of their contract to identify any potential gaps in cover and ensure that any pre-contractual discussions as to the extent of cover are properly reflected in the contractual documentation in order to avoid future disputes.

If you require advice regarding the insurance provisions in a construction contract, or any other insurance-related matter, please do not hesitate to contact Kate Dwyer or any member of our Insurance Litigation team.

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