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English court delivers landmark judgment on project insurance coverage

The High Court has handed down a judgment deciding that a sub-contractor on a construction project was not entitled to coverage from the project insurance policy.

The case is the first in which the Court has had to decide on how subcontractors in the construction industry come to participate in project insurance..

CPR, a roofing sub-contractor, was engaged on the project, extensions to a school, by main contractor Lakehouse. After a fire the school building owner, Lewisham Council, and its operator, Haberdashers’ Aske Federation Trust, sued Lakehouse and CPR for £11 million. Lakehouse settled with the Council and Trust through the project insurance policy, but it remained unclear whether CPR was also covered.

The court ruled that CPR was not entitled to cover provided by project insurance following a fire caused by ‘hot work’ it was carrying out. The judge said that because the terms of the roofing sub-contract expressly said that CPR had to obtain its own 'all-risks' insurance cover for the sub-contract works, it was not covered by the wider project insurance policy.

“A key issue in this case was whether the main project insurers were entitled to bring a subrogated recovery claim against the sub-contractor and if so, whether the sub-contractor was entitled to rely on the defence of co-insurance” said insurance expert Colin Read of Pinsent Masons, the law firm behind Out-Law.com.  Read said the judge’s main emphasis was the courts would give precedence to the underlying contract between the co-insureds, and the intention of the contracting parties, rather than the policy, although it was acknowledged that the intention of the insurers could be relevant. 

Whilst the judge said that the project insurance undoubtedly covered sub-contractors of Lakehouse, whether those were agreed prior to the implementation of the policy insurance or afterwards, he was persuaded by a 1992 ruling in a case between Stone Vickers and Appledore Ferguson Shipbuilders which stated that "...for the purposes of ascertaining intention one may look not only at the policy documents but also at the contract between the assured and the alleged co-assured".
The judge decided that given CPR executed a contract "with an express term that it would obtain, provide, or have its own insurance, as here…", it never fell within the defined group of assureds under the project insurance. 

The court therefore also rejected CPR’s assertion that a subrogated claim ought to be precluded on the basis that it was or ought to be co-insured under the project insurance. The judge said "[I]f my analysis above is correct, and clause 6 of the roofing sub-contract prevents CPR from being an insured party (because the term that would have to be implied for CPR to have that status would be contrary to the express term agreed by the Lakehouse and CPR) then CPR is not entitled to rely upon the waiver of subrogation term within the Policy Insurance."

The decision went further in ruling that because CPR had its own insurance it was not entitled to cover by the main policy despite the fact that it fell within the definition of a subcontractor covered by that policy. The ruling said that CPR was not entitled to rely on a 'waiver of subrogation' clause which would have stopped the project insurers making a claim against CPR's insurer.

Although the loss incurred by the project insurers was £8.75 million, more than the £5m limit of CPR's cover, due to way the case against CPR was pleaded and the specific limit on recovery, the issue of uninsured losses did not arise. The judge said while it was not necessary to determine this issue, he doubted that in a commercial context  the objective intention of the parties would be that CPR would be exposed to all of the losses, regardless of any limit on CPR's insurance cover.

“This decision provides welcome clarification for the construction insurance industry and contracting parties should to take considerable care in drafting construction contracts in terms of allocation of risk between contractors and sub-contractors, given that their intentions will be given precedence over any policy terms," Read said. "Insurance practitioners should consider 'other-insurance' and 'waiver of subrogation' clauses with caution in the context of CAR policies as this case limits the availability of co-insurance as a defence to subrogated claims wherever this is contrary to express contract terms,” Read said. 

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