When can a co-insured party actually rely on the Co-Insurance Defence to escape liability from a subrogated claim? The law on co-insurance and the complex nature of subrogation in the construction industry have been put to the test in a recent Court of Appeal decision – FM Conway Ltd v The Rugby Football Union and others  EWCA Civ 418 (“Conway v RFU“). Despite the Contractor being co-insured under the same policy, a proper interpretation of the underlying contract revealed that it was unable to rely on the “Co-Insurance Defence” to prevent the insurance company from pursuing a subrogated claim against it – but why?
How does subrogation operate in the Construction industry?
Subrogation allows an insurance company to “step into the shoes of the policyholder”: it enables the insurer, in the name of the policyholder, to pursue a third party who caused or contributed to an insured loss and by doing so, recoup some or all of the insurance monies paid out to the policyholder.
In construction contracts, a single policy of insurance is often taken out in the names of the multiple parties involved in the project; for example, the Employer, main Contractor and Sub-Contractors. Where such a Policy responds to a claim arising due to the action or failure of an insured party, the insurer cannot exercise their right of subrogation against that party because they have the benefit of the policy. This applies even where only one of the insured parties is clearly responsible for the loss and is aptly referred to as “the Co-Insurance Defence”.
Crucially, the ability to make a subrogated claim against a co-insured is only barred where the claim relates to the “same insured risk”. The Co-Insurance Defence, therefore, is not available on every construction project where a joint name insurance policy is taken out. When exactly it can be relied upon was the crux of the discussion in Conway v RFU.
As part of the Rugby Football Union’s (“RFU“) plans to upgrade Twickenham Stadium in advance of the 2015 Rugby World Cup, it appointed FM Conway Limited (“Conway“) to install buried ductwork to enclose and protect high voltage power cables.
The RFU subsequently took out a project-wide all risks insurance policy on a composite basis which expressly stated that “The insurers shall…indemnify the insured against physical loss or damage to the [insured property]…from any cause whatsoever.” The Building Contract (JCT Standard without Quantities 2011), however, stated that whilst a joint name all risks insurance Option C policy must be taken out, any rectification costs for Conway’s own defective work would be excluded from that insurance policy. This is the standard position under Option C unless the contract is amended, which was not the case here.
A clear distinction exists between the insurance policy effected in reality and the insurance policy that RFU were contractually required to procure under the Contract.
This distinction became important when the RFU later alleged that there were defects in the ductwork installed by Conway that became apparent when the power cables were pulled through. The policy responded to a claim by the RFU for the subsequent replacement and rectification costs, and, in turn, the insurance company sought to bring a subrogated claim against Conway (and the Sub-Contractor who designed the ductwork) to recover the £3.3 million-pound loss.
First Instance Decision
Conway’s position was that the insurance company could not bring a subrogated claim against it as it was co-insured under the policy with the RFU and therefore had the benefit of the Co-Insurance Defence.
The question for the first instance judge, Mr Justice Eyre, to decide was whether Conway was in fact co-insured ie to the same extent and for the same insured loss as the RFU – which would enable it to benefit from the Co-Insurance Defence. To do so, he considered the authority and intention of the parties throughout the contractual process and not simply what was written on the face of the policy.
This is where the distinction between the policy effected and the contractual obligations of the RFU came to light.
Despite the fact that the policy to which Conway was an insured party provided cover for damage to the high voltage cables arising from Conway’s own defective ductwork, the agreement regarding the extent of cover under the Building Contract prevailed; Option C expressly excluded rectification costs for Conway’s own defective works. In the circumstances, Mr Justice Eyre held that this was the true intention of the parties.
In reaching his decision, he considered the collective implications of the Letter of Intent, the Building Contract and the Insurance policy and concluded that it was clear that Conway was neither insured to the same extent as the RFU nor indemnified for the same loss as the RFU. The cover available to Conway under the Policy was limited to the extent that the RFU was required to fulfil their contractual obligations under the Building Contract to Conway. The result of this conclusion was that Conway was not insured for damage caused by its own defective work.
As the Court had held that Conway was not insured for the same loss suffered by the RFU, the waiver of subrogation did not come into operation either; had it done so, it would effectively allow insurance through the back door by enabling Conway to rely upon a doctrine arising from something that it was not actually insured against.
Ultimately, the Court held that the Co-Insurance Defence did not apply. As a result, Conway was vulnerable to the insurance companies subrogated claim as one of the responsible parties to recover the funds paid out to the RFU under the Policy.
Conway appealed the decision of the Technology and Construction Court on five grounds – the relevant grounds for our purposes, are that the first instance judge had applied the wrong test when determining the RFU’s authority and intention and that there had been a misinterpretation of the waiver of subrogation.
In particular, Conway sought to rely on the pre-contract discussions between the parties as evidence of the RFU’s intention to insure it for defects caused by its own defective work. However, any such pre-contract discussions and correspondence, whilst indicative, were prohibited by the Entire Agreement clause contained in the Letter of Intent, which itself was subsequently superseded by the terms of the Building Contract. This argument was dismissed.
In fact, the Court of Appeal endorsed Mr Justice Eyre’s reasoning entirely and dismissed all five grounds of appeal. In doing so, they re-emphasised the principle that the mere fact that multiple parties were insured under the same policy will not preclude a subrogated claim against a co-insured party or guarantee the benefit of the Co-Insurance Defence.
Lord Justice Coulson, in upholding the first instance decision, summarised the law on authority and intention where an agent is to procure insurance on the behalf of their principal as follows:
- The fact that A and B are insured under the same policy does not in itself mean that A and B will be covered for the same loss and therefore prohibited from making claims against one another;
- It will usually be necessary to consider authority, intention and the scope of cover when looking at situations where A has procured insurance for B;
- An underlying contract is not a necessary pre-requisite for an investigation into authority, intention and scope, and such a contract may be implied;
- An underlying contract will be the best place to locate evidence of authority, intention and scope (in most cases); and
- An underlying contract may not give the complete answer and it may be necessary to look elsewhere for evidence of authority, intention and scope of cover.
This summary of the law on co-insurance by Lord Justice Coulson is particularly helpful in providing a succinct touchstone for consideration by all interested parties in trying to make sense of this notoriously complex area of law.
What does this mean for insurance in the Construction industry?
Contractors cannot guarantee that the existence of a single composite policy of insurance taken out by the Employer will enable them to benefit from the Co-insurance Defence if they are responsible for the insured loss. The viability of this defence lies in the nature, scope and extent of the Building Contract itself and the contractual insurance provisions. A proper understanding of the contract requirements and of the Policy incepted is fundamental to ascertaining the nature and extent to which a co-insured is protected.
In conclusion, this case clearly highlights that the Co-Insurance Defence requires much more than its name suggests – simply being co-insured is no guarantee that it will apply or can be relied upon. It remains to be seen just how many parties will be caught out by this misconception!
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