Insuring clauses in construction contracts - beware of the risks

A recent Court of Appeal decision is likely to have considerable importance for the interpretation of insuring clauses in construction contracts. Such clauses can in certain circumstances relieve the parties of liability for matters falling within the scope of the clause (whether or not insurance has in fact been obtained). The present decision may signal a more liberal approach to determining whether insuring clauses are to have this effect.

Gard Marine & Energy v China National Chartering

A charterer of a vessel was obliged to maintain insurance in joint names with the ship’s owner against specified risks. The vessel ran aground in a port in Japan and, after paying out under the insurance policy, one of the insurers, Gard Marine, sought to recover damages from the charterer in possession of the vessel at the time it was damaged.

Although finding that the charterer was not in breach of its contract with the owner, the Court of Appeal also considered whether the insurance arrangements agreed by the owner would have had the effect of relieving the charterer of liability in any event. The contract agreed between the parties contained optional provisions for insurance. The joint names option chosen by the parties did not expressly state that rights of subrogation would be waived, in contrast to other options which did have such language. Despite this, the Court of Appeal held that the parties had by implication excluded their right to seek compensation directly from each other in respect of matters covered by the agreed insuring clause.

A more liberal approach

The Court’s decision may suggest a more liberal approach to the interpretation of insuring clauses. The Court made specific reference to its previous decision in Tyco Fire v Rolls Royce (where an insuring clause in a construction contract was not held to exclude liability between the parties) and warned against taking too cautious an approach in applying the principle that clear words are needed to exclude liability for negligence. Rather, the Court emphasised that one of the main reasons why parties take out insurance is to be covered for the consequences of their own negligence.

The Court also articulated the following principle which appears to be of general application to cases involving insuring clauses:

“The prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other. That will be all the more so if it is agreed that the insurance is to be in joint names for the parties’ joint interest…”

This passage is notable because it appears to apply not only to joint names insurance, but whenever a party accepts an obligation to insure the subject matter of a contract. It is also notable that the Court was prepared to apply this principle despite a contrasting reference to waiver of subrogation in an alternative insuring clause not selected by the parties.

Conclusions and implications

The Court’s decision has a number of implications for construction contracts.

• The Court’s findings apply regardless of whether there is a successful insurance recovery. An employer, for example, who is obliged to insure the works and existing structures under a construction contract is unlikely to have any right of recourse against the contractor in the event that it fails to obtain insurance or the insurer becomes insolvent.
• The Court’s decision suggests that any obligation to insure may have this effect, not only obligations for joint names insurance. The key consideration is whether the contract shows an intention that the insurance is to be for the joint benefit of the parties.
• The Court’s decision relates to a claim for breach of contract and it is unclear to what extent a similar approach might apply to limit the terms of express indemnities given under a construction contract. Such an indemnity was held to survive a joint names insuring clause in Tyco Fire v Rolls Royce. To the extent that the principle from Gard Marine rests on an implied term, such indemnities may be said to be inconsistent with any implied exclusion of liability. The JCT form addresses this issue directly by excluding from its standard indemnity for property damage any losses falling within Insurance Option C (i.e. for use where existing structures are involved).

It remains to be seen whether the more liberal approach suggested by the present decision will be adopted in other cases. For the time being, the tension with the Tyco Fire decision is likely to create uncertainty particularly with regard to insuring clauses under construction contracts. Pending further guidance on the subject, parties would be well advised spell out in clear terms how any insuring clause is to affect liabilities under the contract for events falling within the clause.

Reference: Gard Marine & Energy Ltd v China National Chartering Co Ltd [2015] EWCA Civ 16