UK: Joint Names Insurance And Risk Allocation In Construction Projects

Two recent cases highlight how provision for joint names insurance in construction projects can determine risk allocation.

The employer entered into a JCT With Contractor’s Design (1998 ed) contract with the main contractor. Part of the work under the contract involved retaining a building's facades. The main contractor contracted with the claimant (Hunt) as demolition sub-contractor who, in turn, contracted with the defendant (ASME) as a sub-subcontractor (to provide temporary supports to the facades during demolition). The facades were damaged in a fire caused by ASME's negligence.

Hunt settled a claim brought jointly by the employer and main contractor and then sought to recover the amount paid in settlement from ASME.

Under the main contract, the main contractor gave a general indemnity to the employer against any loss or damage caused, except where the damage involved the works and/or the site materials, or where the damage was caused by a specified peril (including fire) to the existing structures at the site. There was a contractual obligation on the employer to maintain a joint names policy in respect of the existing structures at the site (including the facades). Each of the sub-contractors was required to be recognised as an insured under the joint names policy. It was therefore clear that the main contractor was not liable to the employer in respect of the damage to the facades caused by the fire, as this was expressly excluded from its indemnity. The contract allocated the risk for such damage to insurers.

Despite this, Hunt settled the claim from the employer and main contractor and then sought to recover from ASME by arguing that they, Hunt, had been liable to the employer in negligence. That is, in order to justify their settlement, they tried to argue that the contractual provisions regarding the indemnity and the joint names insurance did not stop a duty of care from existing between Hunt and the employer. In support of their argument, Hunt tried to exploit certain differences in the language used in the main and sub-contracts in relation to the insurance provisions.

In a complex judgment, the Court held that this argument failed. The parties to the main and sub-contracts knew that, if fire (or any Specified Peril) caused damage to the existing structures, the loss would be covered by the joint names insurance. It would be inconsistent with that regime for any party to sidestep the contractual allocation of risk by arguing negligence against a sub-contractor. Hunt were, therefore, not entitled to recover that part of the settlement from ASME.

The claimant designed and installed a fire protection system for the defendant and agreed to indemnify the defendant against any damage which resulted from the claimant's negligence. The defendant was required to maintain joint names insurance in respect of specified perils (including flooding and other water damage). However, it failed to take out this insurance.

There was a leak from one of the sprinklers installed by the claimant, which damaged parts of the building which were not part of the claimant’s works. The defendant claimed damages but the claimant argued that it should not be held liable because the contract required the defendant to take out insurance against the loss that had occurred, i.e. the defendant's recourse should have been against the insurer, not the claimant contractor. The defendant could not foist liability on the claimant simply because it had failed to take out the joint names insurance.

The court agreed with the claimant. It said that the contractual scheme adopted by the parties indicated that the claimant's obligation to indemnify the defendant for the damage caused by the flooding was subject to the defendant’s obligation to maintain joint names insurance. It would clearly be unjust if the defendant’s failure to take out appropriate insurance resulted in the claimant being liable under the indemnity.

What both of these cases demonstrate is that where the parties to a building or engineering project have agreed that one of them is to take out joint names insurance for the benefit of two or more parties, the idea is that the risk of certain types of loss is transferred away from the jointly-named parties to the insurer, regardless of who was at fault. There are usually (but by no means invariably) advantages to this approach, namely (1) it avoids the need for each party to take out its own insurance policy, thus reducing the risk of dual insurance issues and, also, the total insurance cost of the project; and (2) if an insured loss occurs, the insurer picks up the tab without the jointly-insured parties having to claim against each other. What, however, both of these cases also demonstrate is that, as is too often the case, there may be ambiguity in construction contracts (and subcontracts) as to who-bears-the-risk-of-what, with the result that it is left up to the court to decide.

References: John F Hunt Demolition Ltd v ASME Engineering Ltd [2007] EWHC 1507 (TCC) http://www.bailii.org/ew/cases/EWHC/TCC/2007/1507.html Note that the judgment in Hunt v ASME also analyses the circumstances in which amounts paid by way of settlement to third parties can form the basis of a claim for recovery from a defendant.

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Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd [2007] EWHC B7 (TCC) http://www.bailii.org/ew/cases/EWHC/TCC/2007/B7.html

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 08/08/2007.