Clarification on a number of definitions common to construction project insurance policies

United Kingdom
The Hopewell Decision: Clarity of construction


Martin Fox and Keith Webster of the Insurance and Reinsurance Practice Area review the recent judgment of Mr Recorder Jackson QC on Insurable interest and the definition of "contractors and subcontractors"


The recent decision in Hopewell Project Management Limited and Hopewell Energy (Philippines) Corporation -v- Ewbank Preece Limited (unreported) is unlikely to cause too many shock waves. Nevertheless, the judgment should be welcomed as it clarifies a number of definitions common to construction project insurance policies.


The facts


Hopewell Project Management Limited contracted to build a power station in the Philippines and discharged its obligations under this contract through a Filipino subsidiary ("Hopewell"). Hopewell employed Ewbank Preece Limited to provide the requisite engineering services and three Ewbank Preece engineers were assigned to the project.


Hopewell opted to use second-hand gas turbines for the power station. Three such turbines were dismantled from a power station in Colorado, transported to the Philippines and reconstructed in Manila. On start up, two of these turbines suffered significant damage. Investigations into the cause of the damage revealed that a number of bolts holding the thrust bearing housing in place were missing. These had apparently been removed prior to transportation and had never been replaced.


Hopewell alleged negligence on the part of the Ewbank Preece engineers arising from the omission of those bolts. The parties agreed to a preliminary hearing to consider certain specific issues. Whilst a number of these were specific to the facts of the case, two concerned questions of general application.


The preliminary issues


The preliminary issues addressed the scope of the insurance cover obtained by Hopewell for the project. Hopewell had both Contractors' All Risk cover and an Advance Loss of Profits policy. "The Insured", for both policies, was defined in identical terms and included the category "contractors and sub-contractors". The Judge was asked to determine the scope of these terms and to consider whether the engineers, Ewbank Preece, were entitled to cover; if they were, the subrogated claim brought (in fact) by Hopewell's Insurers could not proceed.


Were the engineers "contractors or sub-contractors?"


The Judge heard evidence from expert witnesses from the insurance market and considered both Canadian and English authorities. He approved the judgment in Canadian Pacific Limited -v- Base-Fault Security Services (1991) and, in particular, the opinion of Hollinrake J.A.. This held that to fall within the definition of a "contractor", a person must be an 'integral and necessary part of the construction process itself'. In applying this, the Judge held that the phrase "contractors and sub-contractors" encompassed 'persons, firms or companies whose activities involved, or at least included,'physical construction work'. Ewbank Preece, in their capacity as engineers, were not within this definition.


Consultants, of course, are occasionally insured along with contractors and sub-contractors within a project policy. However, in such circumstance there are usually limitations to the cover. The relevant project policy will not usually cover professional risks which should be covered by a professional indemnity policy.


Did the engineers have an insurable interest?


The second general area considered was whether Ewbank Preece had an insurable interest in the project. The issue needed to be considered only if the Judge was wrong in his first conclusion, namely that Ewbank Preece were not within the term "The Insured" in either project policy and he proceeded on that assumption. Importantly, the Judge rejected argument to the effect that the Court of Appeal's decision in Glengate - KG Properties Limited -v- Norwich Union Fire Insurance Society Ltd [1996] 2 All ER 487 altered the position set out in Petrofina UK Limited -v- Magnaload Limited [1984] QB 127 and National Oilwell UK Limited -v- Davy Offshore Limited [1993] 2 Lloyd's Rep 582. In order to have an insurable interest it is not necessary to own any part of the contract works; If a party's actions might cause damage to any or all of the contract works, and this damage could give rise to liability, an insurable interest exists. Consequently, had Ewbank Preece come within the definition of "Insured" in the policies, the engineers would have possessed an insurable interest under those policies.


Comment


This decision is in line both with industry practice and commercial 'common sense'. The employment of professional advisers on a project does not make those advisers sub-contractors. Whilst certain of their obligations may be closely aligned to those of a sub-contractor, this is not their main purpose of employment. As with all professional advisers, engineers, owe a duty of care to their clients and it is necessary for them to obtain insurance to cover any liability arising under this duty. It will surprise few people that the Court has reinforced the view that it is for the professional to obtain this insurance rather than the client.