High Court in England and Wales holds that project insurers can bring a subrogation claim against a sub-contractor on a project where the sub-contractor has expressly agreed to obtain separate insurance cover for the project. Haberdashers’ Aske’s Federation Trust v Lakehouse Contracts & Ors  EWH 558 (TCC)
It is common practice in the construction industry for the contracting parties on a project and the sub-contractors to be covered jointly for specified loss and damage by project insurance (often referred to as Contractors’ All Risk insurance). The project insurance will cover specified loss or damage arising whether caused by one party’s fault or not, so as to avoid potential litigation between the parties.
Such was the case in these proceedings, where it was a term between the main contractor (and First Defendant), Lakehouse Contracts Ltd (“Lakehouse”), who had been contracted by the Claimants to undertake major work at a school, that project insurance would be taken out to cover the parties and the sub-contractors, and that the project insurers would waive all rights of subrogation against any insured party.
Lakehouse subsequently entered into a number of sub-contracts, including with the Second Defendant, Cambridge Polymer Roofing Ltd (“CPR”) who were to carry out roofing works. It was an express term of that sub-contract that CPR would obtain its own liability insurance for £5 million.
Following hot works undertaken by CPR, a fire broke out causing extensive damage to the building, its contents and the works totaling £11 million. The Claimants subsequently issued proceedings against Lakehouse and a settlement of £8.75 million was paid by the project insurers. The project insurers then sought to recover £5 million (being the policy limits of CPR’s policy) from CPR by way of a subrogated claim in the name of Lakehouse.
CPR’s insurers argued that CPR was a co-insured under the project insurance because the project policy was effectively a standing offer by the project insurers to cover anyone who subsequently became a sub-contractor on the project as a co-insured, and therefore Lakehouse was barred from pursuing a subrogation claim against those sub-contractors.
The project insurers accepted that the sub-contractors who Lakehouse contracted with, both before and after the inception of the project policy, would be covered under the project policy, however they argued that there was an exception to this position in the case of CPR, as there was an express term in the sub-contract that required CPR to take out its own liability insurance. As a result, CPR were not co-insureds under the project insurance, and the project insurers were therefore free to pursue them by way of a subrogated claim.
After analysing the ways in which cover becomes available to a sub-contractor under a Project Insurance policy, the Judge agreed with the project insurers that the project policy is a standing offer to insure unnamed contractors who, on the execution of a relevant sub-contract, become co-insureds and beneficiaries of the project policy and are implicitly protected from subrogation claims brought by the main contractor. In examining the contention that CPR was nevertheless still liable, the Judge held that regardless of any “standing offer”, the intention of the parties is key. In this instance, the express term in the sub-contract requiring the sub-contractor to obtain its own insurance meant the sub-contractor would have intended to rely on its own insurance rather than the project insurance. CPR had no right to rely on a waiver of subrogation clause under the project policy.
It is worth noting that in this case, the subrogating project insurers only sued CPR for £5million (being CPR’s indemnity under its own insurance policy) rather than the full £8.75 million it had paid out under the policy. However, the Judge indicated that the £3.75 million which fell outside the scope of CPR’s own cover would not have been recoverable from CPR, because it would not have been the intention of the parties to expose the sub-contractor to the whole liability for losses arising out of the occurrence of an insured event under the project policy, without regard to the sub-contractors own insurance policy.
Comment: This Court’s finding serves as useful guidance on the question of whether or not a sub-contractor is a co-insured on a Contractors’ All Risk policy and whether the policy insurers can subrogate against that particular sub-contractor. It comes as welcome news for subrogating insurers, who have now been given the means to circumvent their way around a defence of co-insurance in subrogated claims against sub-contractors, if they can demonstrate that such a defence would be contrary to the express terms of the sub-contract. However, the decision will be unwelcome news for sub-contractors who will want to avoid any specific insurance obligations in the sub-contracts, or at least ensure that the terms of the sub-contracts are consistent with any Contractors’ All Risk policies in place so that they are considered to be co-insured.
The official transcript can be found here: