Project Insurance: A trap for the unwary subcontractor and their insurers
On 19 March, the High Court gave judgment in the case of Haberdashers’ Aske’s Federation Trust Limited and The London Borough of Lewisham v Lakehouse Contracts Limited, Cambridge Polymer Roofing Limited v Zurich Insurance and their joint project insurers.
Lakehouse was the main contractor on a school extension project and took out project insurance intended to cover the school, the council, itself and its subcontractors. In the case of (at least) one subcontractor, Cambridge Polymer Roofing (CPR), however, the subcontract obliged them to take out their own works and third party/public liability insurance. Then the worst happened. CPR were carrying out hot work to the roof of the new extension and it caught fire.
Lakehouse and the project insurers settled the claim with Lewisham Council and the school at £8.75m. The project insurers then claimed to have the right, under the doctrine of subrogation, to step into Lakehouse’s shoes and sue CPR for their losses.
In fact, the insurers only sued CPR for £5m. That was the extent of the insurance cover which CPR was obliged to and did take out.
CPR argued that it was co-insured under the project insurance and therefore the project insurers had waived their rights of subrogation and could not recover any of their loss from CPR. The insurers claimed that the fact that the subcontract required CPR to take out its own insurance meant that CPR were not covered by the project insurance at all. The court agreed with the insurers and CPR must therefore pay the full £5m and look to recover it from their insurers.
The most obvious point to come out of this is, of course, that subcontractors should think carefully before signing up to a standard form of subcontract which obliges them to take out their own insurance where the employer or, perhaps, someone even higher up the chain, has obtained project insurance intended to cover everyone including the subcontractor. In those circumstances, the subcontractor should always take professional advice from its insurance brokers and/or lawyers.
Interestingly, the judge suggested that if the project insurers had sued CPR for more than £5m, they would only have got judgment for the £5m. In his opinion, the fact that CPR were only obliged to take out £5m worth of cover meant that this sum should cap any claim against them. However, that opinion was not part of his formal judgment and is not therefore a statement that can be relied on. It will be much safer to provide specifically in a subcontract, if it is agreed, that the liability of the subcontractor is to be capped at the level of the insurance it takes out.
The court also spent considerable time discussing how project insurance works. Three theories were discussed. The first was that the subcontractor gives authority to the main contractor to procure insurance on the subcontractor’s behalf and then the subcontractor ratifies that insurance. The court was not impressed by this approach, on the basis that the “undisclosed principal” has to be capable of being ascertained at the time the insurance is effective, which would not be the case where the subcontractor is appointed sometime afterwards.
The second theory was that the insurer makes a standing unilateral offer to anyone who will in due course become a subcontractor and that this offer is accepted when the subcontractor signs its contract. The court felt this was the correct approach. Because CPR’s contract required them to obtain their own insurance, this meant, the court said, that CPR never joined the “defined group” of subcontractors to whom the unilateral offer was made by the project insurers.
The third theory is that the insurer accepts by conduct that the subcontractor is included in the project insurance. The court did not say this was positively wrong but based its judgment on the standing offer theory.
This case emphasises how vital it is to ensure that all the right insurances are in place, that there is no doubt about who can rely on which insurance policies, that there is no double insurance and that any caps on liability are specifically stated.