Out-Law Guide | 19 May 2008 | 10:35 am | 4 min. read
Tyco Fire & Integrated Solutions (UK) Limited v Rolls-Royce Motor Cars Limited
Under a contract dated 14th November 2002, Tyco designed and constructed a fire protection system for Rolls- Royce's new manufacturing plant in West Sussex. In July 2003, a mains supply pipe burst, causing a flood and damaging both Tyco's works and other parts of the plant.
Tyco repaired the damage to its works. The issue was whether it was liable to Rolls-Royce for the damage to "existing structures". For present purposes, it was assumed Tyco's negligence caused the flood.
The construction contract provided that Tyco would indemnify Rolls-Royce against damage or loss arising from a breach of contract, breach of statutory duty or negligence by Tyco ("the Contractor"), Tyco's sub-contractors or suppliers.
Clause 13 provided that "the Works" would be at Tyco's risk until practical completion and that Tyco would maintain public liability cover and (optionally) professional indemnity cover.
Clause 13.5, however, said that Rolls Royce would maintain "in the joint names of [Rolls Royce], the Construction Manager and others including, but not limited to contractors, insurance of existing structures, and in the name of [Rolls-Royce], the Construction manager and the Contractor and his sub-contractors ... insurance of the Works …against the risks covered by [Rolls Royce's] insurance policy referred to in Schedule 2 (i.e. the Specified Perils)…". The specified perils included burst pipes.
Tyco argued that it was not liable for damage to other parts of the development: (1) because its contract with Rolls-Royce (in particular the provision for joint insurance) was intended to exempt it from liability, and (2) because it is a rule of law that one joint insured (or co-insured) cannot recover from another joint insured for the same loss.
The judge found in Tyco's favour, basing his decision on another construction case, Cooperative Retail v Taylor Young, which went to the House of Lords in 2002.
In that case, a building project was severely damaged by fire shortly before completion. The contractor was contractually obliged to (and did) obtain insurance in the joint names of itself and the employer. The insurers paid up and pursued a subrogation action in the name of the employer against the architect and engineer.
The architect and engineer started contribution proceedings against the contractor under the Civil Liability (Contribution Act) 1978, on the grounds that the contractor was liable to the employer for the same loss.
The contractor argued he had no liability to the employer. The House of Lords agreed. As a matter of construction, the terms of the construction contract clearly exempted the contractor from liability that fell within the scope of the insurance.
Consequently, the House of Lords did not need to decide if there is a rule of law that prevents one co-insured from pursuing another. But Lord Hope commented "I would prefer to say that the true basis of the rule is to be found in the contract between the parties".
The parties had specifically provided in their contract that insurance would be taken out in their joint names and other clauses in the contract made it clear the contractor would not be held liable to the employer for negligence that caused damage to the works. In light of this, Lord Hope considered there was an implied term in the contract that neither party could claim against the other for damage covered by the policy.
In Tyco, the High Court judge found the contract set up a similar special liability regime, backed up by insurance, which effectively exempted Tyco from liability. He did not make any decision on the question of a general rule of law about co-insurance. Rolls-Royce appealed.
The Court of Appeal disagreed with the judge. As a matter of construction, the terms of this contract did not amount to a special regime exempting Tyco from liability for damage to existing structures.
That part of clause 13.5 that dealt with the insurance of existing structures did not refer to Tyco (the "Contractor") at all. It merely stated that the insurance covering existing structures comprised a series of joint-name policies which protected "others", including contractors.
Contractors would know from this that, if disaster struck, Rolls-Royce would have resources to reinstate its own property and continue the project. It was not intended to provide Tyco or any individual contractor with liability cover in respect of the existing structures.
This made it unnecessary to decide whether it is a rule of law that one co-insured cannot recover from another co-insured in respect of losses covered by the policy. Lord Justice Rix, however, cautiously put forward the view that there is no such rule.
The position depends on the construction of the underlying contract between the parties. In the Cooperative Retail case, the parties' intention to create an exemption was clear from their contract.
Where the intention is not so clear, the fact that the parties have made express provision for joint names insurance might influence the court's decision. But this could be overridden by terms that envisaged one co-insured being liable to another for negligence that fell within the scope of the insurance cover.
In such a case (and in the absence of an express removal of subrogation rights against a co-insured) Lord Justice Rix did not think there was any general rule of law to prevent one co-insured (or insurers in the name of one co-insured) suing another.
Lord Justice Rix's views on the question of a general rule of law did not form part of the judgment and his comments were made with caution.
Nevertheless, the lesson of this case is that any risk allocation regime in a construction contract needs to be defined as clearly as possible. Contractors should not assume that, because the contract provides that the employer will take out insurance in joint names, they will automatically be immune from subrogated claims brought in the names of their co-insureds.
If it is intended that liability will be excluded to the extent the joint names insurance responds to the loss, this must be set out in clear terms and care taken to ensure that the insurance and indemnity provisions are consistent with each other. The contract should also specify how losses other than those covered by the joint names insurance will be dealt with.