Daniel Crowley discusses whether joint insurance law is no longer so disjointed in Insurance Day
One issue that frequently arises in practice is whether an insurer can bring a subrogated claim for property damage in the name of one insured against another joint insured. The recent Supreme Court decision of Gard Marine & Energy Ltd v China National Chartering Co Ltd (the “Ocean Victory”)  UKSC 35;  Lloyd’s Rep IR 291 has brought some much-needed clarity to this area.
As the Court of Appeal said in the Ocean Victory at :
“Such [insurance] contracts having been giving rise to problems in relation to subrogation for a number of years”.
A typical fact situation arises on a construction project where ‘Construction All Risks’ (‘CAR’) insurance is taken out. The policy is typically taken out by the employer or main contractor. The various parties involved in a construction project are then all insured under the one policy.
If, for example, the project works are damaged by fire caused by the negligence of a sub-contractor, can the insurer subrogate in the name of the employer against the negligent sub-contractor?
The courts generally do not permit such subrogated claims but the justifications against allowing recovery have varied.
The courts have relied on:
- circuity of action. If insurers bring a subrogated claim against the sub-contractor, the sub-contractor will claim on its insurance. However, that insurance is with the same insurer and so the insurer will pay out for the claim it has itself brought. So, the claim goes around in circles;
- Express or implied term in the policy of insurance ;
- implied term in the underlying contract;
- the proper construction of the underlying contract which requires the insurance to be taken out
In the Ocean Victory in the Supreme Court, the Judges agreed that the issue of subrogation turned on the proper construction of the underlying contract (which required the insurance policy to be taken out) but then split 3:2 on what the proper construction of the contract was.
The focus on the underlying contract was underlined by the fact that the Supreme Court decided the appeal without actually seeing the insurance policy. Lord Sumption said at  “… we have not seen the actual policy. What matters, however, is not the actual policy but the policy envisaged [in the underlying contract]”.
A theme which emerges from the cases is that, if by the contract the parties have agreed that the insurance policy will be used to set up a fund for the cost of repairing any damage, then the parties should look to that fund (provided by insurers) to cover any damage, rather than sue each other for the damage.
This was put succinctly by Brooke LJ in Co-operative Retail Services v Taylor Young  Lloyd’s Law Reports 122 at : –
“To put it quite simply [the parties] had entered into contractual arrangements which meant that if a fire occurred, they should look to the joint insurance policy to provide the fund for the cost of restoring and repairing the fire damage…and that they would bear other losses themselves (or cover them by their own separate insurance) rather than indulge in litigation with each other.”
This was echoed by Lord Toulson in the Ocean Victory in the Supreme Court at :
“…It has become a common practice in various industries for the parties to provide for specified loss or damage to be covered by insurance for their mutual benefit, whether caused by one party’s fault or not, thus avoiding potential litigation between them. The question in each case is 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 or damage, or whether the existence of the fund co-exists with an independent right of action for breach of a term of the contract which has caused that loss.”
It was put in slightly more robust terms by Mr Recorder Jackson QC (as then was) in Hopewell Project Management v Ewbank Preece  1 Lloyd’s Law Reports 448 at 458:
“In my view, it would be nonsensical if those parties who were jointly insured under the CAR policy could make claims against one another in respect of damage to the contract works. Such a result could not possibly have been intended by those parties”.
It makes good commercial sense in a construction project for there to be the fund to cover all the repairs if there is property damage during the project, rather than each party taking out its own insurance and suing each other for the damage.
However, as Lord Toulson emphasised, each case depends on the construction of the provisions of the particular contract.
Similar issues arise in landlord and tenant cases where the lease provides that the landlord is to insure the whole building against fire and then lay out the insurance monies in rebuilding the premises, and the insurers want to bring a subrogated claim in the name of the landlord against the negligent tenant for causing the fire. See Mark Rowlands v Berni Inns  QB 211 and Frasca-Judd v Golovina  EWHC 497 (QB);  Lloyd’s Rep IR 447.
An insurer and/or a potential defendant needs to look carefully at the structure and provisions of the lease, especially, the insurance obligations, whether the tenant contributes to the insurance premium and the repairing obligations.
Despite joint insurance giving rise to problems for a number of years, with some clarity having been offered by the decisions in Frasca-Judd and the Ocean Victory, the law of joint insurance is now more joined-up.
This article was originally published in Insurance Day and can be accessed here (behind a paywall).