Key Court of Appeal decision demonstrates limits of co-insurance defence

In FM Conway Limited v The Rugby Football Union, the Court of Appeal dismissed a contractor's attempts to rely on a co-insurance defence to claims brought by the Rugby Football Union (RFU).

Notably, the Court of Appeal held that the contractor was not insured under the project policy for damage caused by its own defective work – despite the policy, on its face, extending cover for the damage in question to both the RFU and the contractor.

We summarise below the background to the decision, what is meant by the "co-insurance defence" and why the Court of Appeal held that the contractor, in this case, was not entitled to rely upon it.

Background facts

• The dispute arose out of construction works carried out as part of an upgrade of Twickenham Stadium in advance of the 2015 Rugby World Cup.
• The Rugby Football Union (RFU) engaged:
  • Clark Smith Partnership Limited (CSP) to design ductwork to accommodate high voltage power cables; and
  • FM Conway Limited (Conway) to install the ductwork.
• Conway was appointed under an amended 2011 JCT Standard Building Contract (the Building Contract), incorporating Insurance Option C. Option C required the RFU to effect and maintain a Joint Names Policy for All Risk Insurance.
• RFU took out a project insurance policy (the Policy) with Royal & Sun Alliance Insurance (RSA), which expressly referred to JCT Option C in respect of the ductwork package, and under which Conway was named as a co-insured.
• It was common ground between the parties that Option C did not require the RFU to effect insurance, on Conway's behalf, that would insure Conway against the cost of rectifying damage caused by Conway's own defective work.
• The policy also contained a waiver of "all rights of subrogation which [the insurer] may have or acquire against any insured party".
• Following practical completion of the ductwork, water and debris were noted in the ducts, and damage was caused to high voltage cables that were pulled through the ductwork (as part of another contractor's works package).
• The RFU commenced proceedings against CSP and Conway, seeking damages of around £4.4 million in respect of alleged defects in both the design and installation of the ductwork. This was made up of around £3.3 million in respect of the cost of replacing the damaged cables (the replacement costs), and £1.1 million relating to the cost of rectifying the ductwork itself.
• The RFU recovered the replacement costs of £3.3 million under the insurance policy. RSA, the insurer, then brought a subrogated claim against Conway to recover the sum paid out.
• Conway commenced Part 8 proceedings against the RFU and RSA, seeking declarations that:
  1. Conway was fully co-insured with the RFU under the policy and as such, had the benefit of the policy on the same terms as the RFU;
  2. The RFU could not claim against Conway under the policy; and
  3. The RSA could not exercise subrogation rights against Conway because the loss and damage was covered under the terms of the policy.

The co-insurance defence

The "co-insurance defence", as asserted by Conway, may arise in cases where parties are co-insured in respect of the same damage. Whilst this can arise in a number of different sectors, it is particularly common in the construction industry for parties to effect a single insurance policy for their mutual benefit.

The key principles of the co-insurance defence were set out in the 2017 Supreme Court decision in Gard Marine & Energy Ltd v China National Chartering Co Ltd. As noted by Lord Toulson, there are two key questions that must be considered:

1. whether the parties intended to create an "insurance fund which would be the sole avenue for making good the relevant loss or damage". In such case, and provided there is no express wording to the contrary in the underlying contract, the parties will have no recourse against each other in respect of that damage; or
2. whether the fund "co-exists with an independent right of action for breach of a term of the contract which has caused that loss."

The "critical question" as set out in Gard Marine, is whether the "contractual scheme" between the parties, i.e. the underlying contract, precludes any claim between the co-insured parties in respect of the insured loss.

The decision at first instance

Mr Justice Eyre in the Technology and Construction Court (TCC) held that recourse to the insurance policy was not, nor was it intended to be, the "sole remedy for loss suffered by the RFU as a consequence of breach or other default by Conway." He held, amongst other things, that the policy:

• had been effected on the basis that it provided "the cover contemplated by Option C in the JCT contract";
• did not provide a "common fund recourse to which was to be the RFU's sole redress for loss flowing from breaches by Conway or any other contractor"; and
• insured both the RFU and Conway, although they were "not insured to the same extent in respect of the same risk. In particular they were not co-insured in respect of the losses which the RFU is said to have suffered by reason of damage to the cables resulting from defects in the ductwork and for which the RFU has been indemnified by RSA."

Since Conway was not co-insured for these losses, the TCC held that the co-insurance defence was not available to it. Further, RSA was entitled to bring a subrogated claim in the name of RFU against Conway, since the waiver of subrogation clause could not operate to protect Conway "against claims arising out of matters in respect of which it is not insured".

The Court of Appeal decision

The co-insurance defence

The Court dismissed Conway's appeal and unanimously upheld Eyre J's decision at first instance, which it described as "unassailable" and "entirely in accordance with the authorities".

With respect to co-insurance, the Court applied the guidance set out by the Supreme Court in Gard Marine. It held that:

• the "mere fact that A and B are insured under the same policy does not, by itself, mean that A and B are covered for the same loss or cannot make claims against one another". The Court noted that the policy was a composite policy, under which the co-insured were covered "each for their respective rights and interests" – and under which each insured was to be treated as if they had their own policy. This can be contrasted with a joint policy – under which the co-insured have joint interests;
• where A has procured insurance for B, it will be necessary to consider issues such as authority, intention and scope of cover; and
• where there is an underlying contract, this will in most cases be the "most obvious source" to find evidence of authority, intention and scope.

The Court of Appeal found that Eyre J had correctly concluded that there was no evidence of any intention and / or authority to effect cover that was wider than JCT Option C. Evidence of pre-contractual discussions that were put before the Court as to the scope of the insurance cover did not displace the authority of the underlying contractual regime.

Option C did not require the RFU to effect insurance, on Conway's behalf, that would insure Conway against the cost of rectifying damage caused by Conway's own defective work.

Accordingly – and strikingly, even though the wording of the policy, on its face, suggested otherwise – Conway was insured only insofar as required by the JCT insurance clause. Its co-insurance defence therefore failed.

Subrogation

Lord Justice Coulson also rejected Conway's arguments in respect of subrogation, noting that the same rationale would extend to this point. If Conway was not insured in respect of damage caused by their own default, it would be an "extraordinary result" and "contrary to commercial common sense" if the waiver of subrogation clause were to operate to protect Conway from subrogated claims in respect of such damage. Accordingly, the RSA was permitted to bring its subrogated claim on behalf of the RFU.

Commentary

This is an important decision from the Court of Appeal in an area of law it described as "notoriously complex". It reiterates existing authorities on the extent of the co-insurance defence, notably Gard Marine. As this issue arises often in the construction sector, it is useful to have an appellate level binding authority. It serves as a useful reminder that the nature, scope and extent of co-insurance cannot be determined by looking at the policy in isolation – this must be read in conjunction with the insurance provisions of the underlying contract.

So, the most important thing to remember is to look at the wider contractual background – and not just the policy terms to be sure about the extent of your insurance cover.

If you have any questions about this article, please get in touch with Ashley Pigott, Sam Holland or Jatinder Sahota.