Insuring clauses in construction contracts: Supreme Court guidance

United Kingdom

A Supreme Court decision issued earlier this week has considerable importance for the interpretation of insuring clauses in construction contracts. In a split decision (3:2) the Supreme Court has narrowly upheld a broader approach to insuring clauses, meaning that such clauses are now more likely to relieve parties of liability for matters falling within their scope, regardless of whether insurance is in fact obtained. 

Gard Marine & Energy v China National Chartering: a recap

As noted in our Law Now on the Court of Appeal’s decision earlier in this litigation (click here to view), this case concerns the recovery of damages in respect of a vessel which ran aground in Japan in 2006.  The charterer of the vessel was obliged to maintain insurance in joint names with the owner against specified risks. Following payment under the insurance policy one of the insurers, Gard Marine, sought to bring a subrogated claim against a sub-charterer.

The charterparty in question included a safe port warranty, breach of which was said to have caused the vessel to run aground. Gard Marine argued that the insuring provisions of the charterparty should not be interpreted as excluding the charterer’s liability for breach of the safe port warranty. The charterparty also contained two alternative insuring clauses. The clause chosen by the parties did not expressly state that rights of subrogation would be waived, whereas the deleted clause did.

The Court of Appeal held that the parties had impliedly waived their rights to seek compensation from one another in respect of matters covered by the insuring clause. The court noted that:

“The prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other. That will be all the more so if it is agreed that the insurance is to be in joint names for the parties' joint interest ..."

The Court of Appeal’s judgement also commented unfavourably on a previous Court of Appeal decision dealing with similar issues in a construction context (Tyco Fire v Rolls Royce), warning against too cautious an approach by reference to the principle that clear words are needed to exclude liability. Instead, the court emphasised that one of the main reasons why parties take out insurance is to be covered for the consequences of their own negligence.

The Supreme Court

By a narrow majority of three judges to two, the Supreme Court has upheld the Court of Appeal’s decision on this point. The reasoning of the majority largely reflects that of the Court of Appeal, with Lord Mance noting that, “under a co-insurance scheme like the present, it is understood implicitly that there will be no such claim [between owners and charters]”. This implication was found to persist despite the express safe port warranty included in the charterparty.

The minority, in a similar way to the court in Tyco Fire,  emphasised the express words of the safe port warranty, which was a specific amendment to the standard form adopted by the parties. They also relied on the express waiver of subrogation contained in the alterative insuring clause not selected by the parties.

Conclusions and implications

In his judgment in this case, Lord Sumption noted that, “[t]he business context in which this [issue] has most commonly arisen is the co-insurance of employer, contractor and subcontractors under standard forms of building contract.” The implications of this decision for construction contracts are therefore significant. As noted in our previous Law-Low:

  • The broader approach to insuring clauses upheld by the Supreme Court is likely to be applicable whenever insurance is agreed to be procured for the joint benefit of the parties regardless of whether it is required to be obtained in joint names.
  • The practical result of such an approach is that, in the absence of contrary drafting, parties agreeing to such insuring clauses will be limited to sums recoverable under the relevant insurance policy even where losses would otherwise be recoverable due to a breach of contract. Parties may therefore face unrecoverable losses where risks are under-insured, an insurer becomes insolvent, or insurance has not been procured as intended. 

  • Whilst the safe port warranty in the present case was held to be insufficient to overcome the implication arising from the insuring clause, it remains unclear to what extent express indemnities may do so. Such an indemnity was upheld over a joint names insuring clause in the Tyco Fire case, but the reservations about that case expressed by the Court of Appeal make the position uncertain.

Overall, it is clear that the more liberal approach adopted by the Court of Appeal in the present case, and now upheld by the Supreme Court, is here to stay. More than ever, parties would be well advised to consider carefully the implications of any insuring clauses contained in their construction contracts.

References:

Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd [2008] EWCA Civ 286

Gard Marine and Energy Limited (Appellant) v China National Chartering Company Limited and another [2017] UKSC 35