UK: Cape Distribution v Cape Intermediate Holdings: Whether Company Was A Co-Insured And Whether A Subrogated Claim Could Be Brought Against It/Whether Policy Was Continuous

Last Updated: 1 June 2016
Article by Nigel Brook

Weekly Update 14/12 referred to the earlier decision in this case (Chandler v Cape Plc), in which it was held that a parent company ("the parent company") was (on the facts of the case) liable to the employees of its wholly-owned subsidiary ("the subsidiary") who had contracted asbestosis as a result of working for the subsidiary. The subsidiary's employers' liability insurer therefore sought to bring a subrogated claim against the parent company, seeking a contribution under the Civil Liability (Contribution) Act 1978.

In 1964, the subsidiary had sold all its assets to the parent, in return for an indemnity from the parent company. Some months later, an endorsement was added to the subsidiary's employers' liability policy which, it was argued, precluded the subrogated claim because the parent company had been added as an insured. Various issues fell to be considered in this case, including the following:

1) Picken J rejected an argument that the indemnity in the sale agreement between the parent company and the subsidiary was available only insofar the subsidiary's liability was not made good by insurance recoveries. The subsidiary was under no obligation in the sale agreement to maintain its insurance coverage (employers' liability insurance not being compulsory in 1964) and there was no express agreement that the indemnity would be net of insurance recoveries.

2) Had there been a single employers' liability policy from 1956 until 1966? The judge held not. The policy had provided that the Period of Insurance would be for a specified 1 year period and then "any subsequent period for which the [subsidiary] shall pay and the [insurer] shall agree to accept a renewal premium". The judge held that accordingly there was no automatic right to extend the policy on expiry and so there had been a series of contracts which came into existence on each renewal. It made no difference that the policy number remained the same throughout the 10 year period.

3) Had the parent company become an insured on the policy? The judge held that although the wording could have been clearer, the phrase in the endorsement that "all interest in this Policy is now vested in [the parent company]...who shall be deemed henceforth to be "the Insured"" was enough to make the parent company an insured and the endorsement did not merely note that the parent company had an interest.

4) The policy indemnified against "liability at law for damages" and contained an exclusion for "liability which attaches by virtue of an agreement but which would not have attached in the absence of such agreement".

Applying prior caselaw, Picken J held that "liability at law for damages" included the parent company's liability to make a statutory contribution under the 1978 Act. However, if the parent company is eventually found to only be liable because of the indemnity in the sale agreement, the exclusion would apply.

5) Is the employer's liability insurer entitled to bring a subrogated claim against the parent company, which is a co-insured under the policy?

The judge examined earlier caselaw on the issue of whether an insurer can bring a subrogated claim against a co-insured. He held that the fact that two parties are named as co-insureds will usually be enough (without more) to prevent a subrogated claim: "in the present case, the interests of [the subsidiary] and [the parent company] under the policy were coterminous. Put another way, the same damage that was visited upon [the subsidiary] as a result of employees' claims is now sought to be visited upon [the parent company] through the subrogated claims brought by [the insurer] in the [subsidiary]'s name. The policy responds to bodily injury suffered during the course of employment. The fact that the relevant employees were employed by [the subsidiary] rather than by [the parent company] seems to me to be immaterial. What matters is that the employees who were claiming compensation were doing so. Nothing else matters. It is that claim which the Policy covers. The position of [the parent company] is, for relevant purposes, coterminous with that of [the subsidiary]. Their interests are "inseparably connected". They are "pervasive"." It therefore made no difference that the parent company's liability would arise only from vicarious liability: "the relevant question is not how the liability arises but what the underlying claim is, in the sense of what the individual employee alleges is the bodily injury which has been suffered".

6) Although not required to decide the point, in view of his finding above, the judge also considered what the situation would have been had the parent company not been a co-insured but the subsidiary had bought the policy (paid for by the parent company) for the joint benefit of both companies. The parent company sought to rely on Mark Rowlands v Berni Inns [1986]. In that case, a landlord took out a policy in his name alone (but the tenant paid the landlord towards the premium). The lease contained a clause that the tenant would have no liability to repair building if there was a fire (instead, the landlord would claim under the policy). As a result, it was held that the insurer couldn't subrogate against the tenant. This case was said to differ from Berni Inns though: here, crucially, there had been no mention of insurance at all in the sale agreement, and no obligation on the part of the subsidiary to maintain insurance.

COMMENT: The judge's conclusion on the reason why the subrogated claim could not be pursued is interesting. Recent caselaw has tended to focus on the underlying contract between the insureds (the insurer having no better rights than the co-insured into whose shoes the insurer is subrogated), rather than on the terms of the insurance policy. For example, in Tyco Fire v Rolls Royce (see Weekly Update 14/08) Rix LJ noted that it was said that the true basis of the "rule" lies in the contract between the parties. He said that it is possible for that underlying contract to provide that a co-insured may still be liable to another co-insured for negligence, and hence an insurer can bring a subrogated claim against a negligent co-insured for recovery of the insurance proceeds. In Gard Marine v China National Chartering (see Weekly Update 4/15), the Court of Appeal held 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 approach has attracted some academic criticism, though, and in this case there was no focus on the sale agreement to explain why a subrogated claim could not be made (perhaps because the subrogated claim relied (in the alternative) upon a statutory indemnity, rather than the underlying contract). Instead the focus was on what the policy itself was intended to cover, namely, a claim against personal injury. That, said the judge, was what the insurer was "on the hook" for.

Cape Distribution v Cape Intermediate Holdings: Whether Company Was A Co-Insured And Whether A Subrogated Claim Could Be Brought Against It/Whether Policy Was Continuous

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Nigel Brook
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