Project insurance – does it always cover sub-contractors?
Project insurance is becoming increasingly popular on major projects. However, the recent case of Haberdashers’ Aske’s Federation Trust Limited v Lakehouse Contracts Limited could cause concern to contractors who may have assumed that they would always be covered by such project insurance.
This case arose out of a fire at a school being constructed in Lewisham. The building was owned by Lewisham Borough Council. The school was operated by Haberdashers.
Lakehouse was the main contractor for works to extend and refurbish the buildings at the school. Cambridge Polymer Roofing (CPR) was a subcontractor of Lakehouse. Lakehouse also entered into a Duty of Care Deed with Haberdashers. A project insurance policy had been taken out.
CPR was carrying out “hot work” using a blowtorch to stick down roofing membrane. A fire occurred in the area of the hot work, which spread and caused extensive damage to the buildings.
Haberdashers and Lewisham claimed over £11m from Lakehouse and CPR. Lakehouse also brought contribution proceedings against CPR and CPR brought contribution proceedings against the project insurers. These essentially claimed that CPR was entitled to the benefit of that insurance and that this provided CPR with a defence to the claim brought by Lakehouse.
The claim against Lakehouse was settled pursuant to which Lakehouse agreed to pay £8.75m, inclusive of costs, interest and damages in respect of the fire. In reality, these funds came from the project insurers.
The only outstanding issue was between Lakehouse, CPR and the project insurers.
The main contract required construction all risks insurance to be taken out that covered Lewisham Council, Haberdashers, Lakehouse, and subcontractors (or which CPR was one) “of any tier”.
The parties’ positions
The project insurers accepted that, absent the existence of the express requirement for (and existence of) the separate public liability insurance held by CPR under the roofing sub-contract, CPR would be entitled to the benefit of the project insurance.
However, the project insurers argued that in this case CPR was not a member of the class of insureds because CPR and Lakehouse had separately and expressly agreed that CPR would have its own insurance. The project insurers argued that, given the legal device adopted to include any sub-contractor within project insurance is an implied term in the subcontract, an express term to the contrary in such a sub-contract necessarily excludes the existence (and/or the scope) of any such implied term. In essence, CPR argued that there should be no ability for the project insurers to bring a subrogated claim against CPR in this case.
The Court’s decision
The Court analysed that the correct way in which project insurance came to provide insurance to any particular sub-contractor was by a “standing offer”.
The offer is “made by the insurer to insure persons who are subsequently ascertained as members of the defined grouping”. The offer would be accepted by a sub-contractor joining, upon execution of the sub-contract, the “defined grouping”.
The acceptance of that offer leads to the implication of a term in the contract between Lakehouse and CPR. That is the only contract in existence in which a term could be implied that could benefit CPR. However, a term could not be implied into the CPR sub-contract that directly contradicted the express requirement on CPR to hold public liability cover of £5m.
Therefore, the Court held that CPR could not benefit from the project insurance to the extent that it was required by the subcontract to hold (and did hold) public liability insurance of £5m. The Court briefly considered what the position would be if the claim had not been limited to the £5m public liability insurance required by the sub-contract, i.e. could the presence of an express term requiring insurance of a particular limit negate the implication of any term in relation to the whole insurance cover, leading to a claim in excess of the sub-contractor’s insurance cover. The Court doubted that such an argument would succeed.
This case emphasises the importance of the wording of the underlying contract in determining the extent of any insurance and waiver of subrogation rights that may occur. It shows that the terms of the insurance policy may be trumped by the terms of the parties underlying contract. The underlying contract could limit the relevant insurance that would otherwise be available if the express terms of the underlying contract are contrary to such insurance cover. Importantly, subcontractors should not agree terms requiring them to hold their own insurance when the intention is that they will benefit from the project insurance.