When is a sub-contractor entitled to cover under a project insurance policy?

Building fireInsurance has a key role in facilitating projects and their funding; the comprehensive insurance and reinsurance programmes put in place form a vital part of the lenders’ security. However, the complexities of the contractual arrangements and the multi-faceted relationships involved can cause problems, as illustrated by the recent Technology and Construction Court decision in Haberdashers’ Aske Federation Trust v Lakehouse Contracts.

The project in question consisted of extension works to a school operated by the Claimant, Haberdashers. Haberdashers engaged Lakehouse to undertake the works and Lakehouse sub-contracted roofing works to Cambridge Polymer Roofing (“Cambridge”). Project insurance was provided by Zurich, QBE and CNA (“Project Insurers”), covering “subcontractors of any tier”. In addition, it was an express term of the roofing sub-contract that Cambridge obtain its own insurance, which it did. Following fire damage, Haberdashers sought damages from Lakehouse and Cambridge. Lakehouse settled the proceedings against it by paying Haberdashers £8.75 million (funded by the Project Insurers) and the Project Insurers, by way of subrogation, sought to recover £5 million from Cambridge (the limit of the insurance procured by Cambridge pursuant to the sub-contract).

The issue for the court was whether Cambridge was a co-insured under the project insurance notwithstanding the express requirement under the sub-contract that it procure its own insurance.

Project Insurers relied on the 1992 Court of Appeal decision in Stone Vickers v Appledore Ferguson Shipbuilders. In that case it was held that a sub-contractor under a ship-building contract did not have the benefit of a policy under which the insurers agreed to include “Sub-Contractors as additional co-assured for their respective rights and interests”. Lord Justice Parker stated that “…for the purposes of ascertaining intention one may look not only at the policy documents but also at the contract between the assured and the alleged co-assured.” Project Insurers accepted that the project insurance was to provide cover to all who worked on the site, which obviously included the main contractor – Lakehouse – and any sub-contractors. If, at the time the insurance was taken out, Lakehouse had already agreed contractual terms with a particular sub-contractor, that sub-contractor would be covered from the time of inception of the policy, because it would be an existing and named members of a definable class, namely a sub-contractor of Lakehouse. If a sub-contractor were subsequently to be appointed by Lakehouse, when the policy was already in place, this sub-contractor would also be covered by the insurance, by means of an implied term in the sub-contract between it and Lakehouse. The exception, the Project Insurers argued, was where – as here – an express term had been agreed between the contractor and the sub-contractor that the latter would procure its own insurance.

Cambridge sought to argue that the decision in Stone Vickers was distinguishable from the circumstances of this case. They also submitted that the context in which the issues had to be determined was that it was the intention of the parties, if not, the intention of the whole scheme of project insurance generally, that cover be provided to the whole spectrum of contract, sub-contractor and sub-sub-contractors who would be working on the site.

Mr Justice Fraser held that the approach in Stone Vickers was correct and that it applied to the situation at hand. The terms agreed by Lakehouse and Cambridge were, he held, of central relevance. The presence of the express term in the sub-contract requiring Cambridge to procure its own insurance prevented Cambridge from being covered by the project insurance because this prevented the implication of the term necessary to make Cambridge an insured.

This case appears to be the first judicial consideration of the circumstances in which sub-contractors in the construction industry become parties to project insurance policies. The judgment makes it clear that the question of whether the cover taken out in respect of a particular project extends to cover a particular sub-contractor, will depend on the terms of that sub-contract. It is also one of the first cases following the Supreme Court decision in The Ocean Victory (see: https://inceinsurance.com/2017/06/01/ocean-victory-serious-consequences-for-hull-insurers/) to consider issues of co-insurance and waiver of subrogation. Along with that judgment, this decision provides a further reminder of the need for the parties  in co-insurance arrangements to be clear as to the extent of their respective benefits and obligations and to ensure that the relevant insurance policies and underlying contracts are consistent.

Brian Boahene