In Haberdashers’ Aske’s Federation Trust Ltd v Lakehouse Contracts Ltd  EWHC 558 (TCC), England’s Technology and Construction Court had to decide on the extent of coverage (or inclusion) of a project insurance policy for a construction project and how that coverage was affected by a sub-contractor having its own insurance cover. The Court held that to the extent that the sub-contractor had its own insurance cover, it was not entitled to the protection of the project insurance, meaning that the project insurers who had paid out on a claim, could recover the full amount of the insurance cover which the sub-contractor had in place under its own insurance. The Court said that this was the first case in which the court had had to decide on how subcontractors in the construction industry come to participate in project insurance policies.
The London Borough of Lewisham (Lewisham) owns buildings, in which Haberdashers’ operates a school. Lewisham entered into a Design and Build Contract with a Local Education Partnership (LEP). LEP entered into a Design and Build Subcontract with Lakehouse. Although Lakehouse contracted with the LEP, it also entered into a Duty of Care Deed with Haberdashers’, under which Lakehouse owed certain duties directly to Haberdashers’.
In the Design and Build Contract, the LEP was obliged to take out “Required Insurances”. Clause 25.3 stated that Lewisham and Haberdashers shall, where indicated in Schedule 12, be named “as co-insured with any other party maintaining this insurance”. In Schedule 12, the insureds included the LEP, Lewisham, Haberdashers, Lakehouse, andsub-contractors either of LEP, and/or of Lakehouse “of any tier”, each of their respective rights and interests in the project. Also in Schedule 12, Endorsement 2 stated that for the purpose of the policy the insureds must be considered to be separately insured and the insurers waived all rights of subrogation against any insured party. Endorsement 5 stated that the policy was to provide primary cover for the insured parties, as if any other policy held by an insured party covering the loss, damage or liability were not in force.
Lakehouse issued a subcontract order to Cambridge Polymer Roofing Ltd (CPR) in respect of roofing works. It was an express term of this subcontract that CPR obtain its own third party liability insurance.
Due to hot works carried out by CPR, a fire occurred and caused extensive damage to the buildings. Haberdashers’ and Lewisham issued proceedings seeking damages from Lakehouse and CPR, alleging breaches of the Duty of Care Deed, the Design and Build Subcontract and common law duties of care.
Lakehouse issued an additional claim against its co-defendant CPR, seeking a contribution, alternatively an indemnity, in respect of Lakehouse’s liability to Haberdashers’ and Lewisham. CPR issued additional claims against the three Project Insurers, seeking declarations that CPR was entitled to the benefit of the Project Insurance in place, and that this provided CPR with a defence to the additional claim brought by Lakehouse.
Lakehouse entered into a settlement with Haberdashers’ and Lewisham with funds that came from the Project Insurers. This left as a live issue in the proceedings the extent to which (if any), CPR was entitled to the benefit of the Project Insurance.
Standing Offer Approach
The Court said that to determine the issue, an analysis was required of the legal mechanics by which insurance cover would be available to a subcontractor under a Project Insurance policy. The Court looked at different ways of analyzing the situation and decided that the “standing offer” analysis was the correct approach. Under this approach, the offer is “made by the insurer to insure persons who are subsequently ascertained as members of the defined grouping. The offer would be accepted by a sub-contractor joining, upon execution of the subcontract…. The acceptance of that offer leads to the implication of a term in the contract between (here) Lakehouse and CPR.”
A question before the court was whether the express term in the subcontract between Lakehouse and CPR that CPR would take out its own insurance negated the implied term that CPR should take the benefit of the Project Insurance. The Court decided that it did.
The Court said that it was also necessary to consider the intention of the parties. Here, CPR’s intention, objectively assessed on the express terms of the roofing subcontract between Lakehouse and CPR, was to obtain its own insurance, and not to rely upon the Project Insurance.
The Court said that with deemed or actual knowledge of the Project Insurance, CPR expressly agreed a term that governed its relationship with Lakehouse (and hence its involvement in the project) that it would have its own insurance. That was directly contrary to there being an intention that there would be an insurance fund under the main contract which would be the sole avenue for making good the relevant loss and damage. It was an express agreement to create a second insurance fund.
The Court held that CPR did not achieve the status of co-insured and was not entitled to the benefit of the Project Insurance. The Project Insurers could therefore bring a subrogated claim in the name of Lakehouse against CPR for the losses suffered as a result of the settlement with the two claimants.
To conclude, to the extent that CPR and Lakehouse expressly agreed in the roofing subcontract that CPR was required to have its own individual insurance cover, CPR was not entitled to the protection of the Project Insurance. The Project Insurers could therefore recover (alternatively, Lakehouse was not prevented from recovering on their behalf) the full amount of the insurance cover which CPR had in place by reason of its separate policy at the time of the fire.
The Design and Build Contract and the Project Insurance documentation listed sub-contractors either of LEP and/or of Lakehouse “of any tier” (which would encompass CPR) as co-insured. Following from that express term, one would expect that any sub-contractor should be able to accept a standing offer made by the Project Insurers. However, the court interpreted the standing offer made by the Project Insurers in this case as being to insure sub-contractors which have not agreed to take out their own insurance. Hence where sub-contractors had agreed to take out their own insurance in a sub-contract, the sub-contractor could not be a co-insured under the Project Insurance. The Court did, however, make it clear that the answer in any particular case is one of construction and it therefore critically depends upon the provisions of the particular contract in each case. The question in each case, the Court said, was whether the parties are to be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss and damage. In the present case, the court said that the fact that CPR and Lakehouse had expressly agreed (in the roofing subcontract) that CPR would take out its own separate insurance, was directly contrary to there being an intention that there would be such insurance fund.
Note: This case is currently under appeal, with the appeal due to be heard in January 2019.