Considering the allocation of risk is crucial when drafting construction and project agreements. Often, insufficient attention is paid to ensuring the prescribed insurance covers are appropriate to the respective parties' risk exposures. When obtaining joint-named insurance the consideration of the allocation of risk as set out in the contracts' indemnities and liabilities provisions is very important.
Historically, the courts have not allowed an insurer to pay out to insured party A and then exercise subrogation rights in order to recover from insured party B. At one time the basis of this rule was "circuity" as it was thought that insured party B would then be entitled to an indemnity under the insurance. In Co-operative Retail Services Limited v. Taylor Young Partnership Limited [2002] 1 WLR 1419 ("the CRS Decision") the House of Lords stated (obiter) that the basis of the 'rule' was found, not in the principle of circuity, but in the underlying construction/project contract between the parties.
In the recent case of Tyco v Rolls Royce [2008] EWCA Civ 286, the Court of Appeal ("CA") had to consider the extent to which the doctrine of joint-named insurance could override express provisions where one of the joint-named insureds was liable for negligence or other default to the other joint insured.
The CA distinguished the contract in the CRS Decision from the one in this case. The former contract contained highly detailed provisions making it completely clear that any possible liability for negligence on the part of the contractor (so far as damage within the scope of the joint names policy provisions was concerned) was excluded. In the present case, the liability clauses were general and not specifically crafted to exclude certain works. There was nothing express in the language of the contract, unless it was to be found in the mere mention of joint named insurance, to emphasise that there was a special regime which excluded Tyco's obligations (including negligence) as found elsewhere in the contract. The contract was not intended to provide Tyco or any individual contractor with separate liability insurance.
The CA did not believe that the observations in the CRS Decision created a rule of law. Its preference was to adopt the reasoning that "the true basis of the rule is to be found in the contract between the parties". In the event the contract was not clear the question would have to be answered case by case although the provision for joint names insurance may influence such construction.
The CA also considered the event where an insurance company might fail. In that event, if upon the true construction of the contract the regime for joint names insurance has supplanted and excluded any liability on the part of the contractor to compensate or indemnify the employer, then that risk will fall on the employer. If, however, the true construction is that the contractor's liability is supplanted only to the extent of a recovery obtained from the insurer, then the risk of the insurer's insolvency would appear to fall back on the contractor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
