Case law analysis:joint names insurance

Gary Peters of Brewer Consulting discusses joint names insurance.

The judgment: Tyco Fire & Integrated Solutions (UK) Ltd (formerly Wormald Ansul (UK) Ltd) -v- Rolls-Royce Motor Cars Ltd (formerly Hireaus Ltd) [2008] EWCA Civ 286

The issue: Joint names insurance and allocation of risk.

The implication: The intention behind joint names insurance is to transfer the risk of certain types of loss away from the jointly-named parties to the insurer regardless of who is at fault, but that intended objective is not always achieved where a contract is not clearly drafted and where conflict exists between the indemnity and insurance clauses.

Construction works are accompanied by risks from natural perils such as storm and flood and from man-made perils such as fire and explosions: these are more commonly known as specified perils. Joint names insurance is commonly used to provide protection against the financial consequences arising from the occurrence of these risks/perils.

The intention behind joint names insurance is to transfer the risk of certain types of loss away from the jointly-named parties to the insurer, regardless of who is at fault, and to prevent an insurer of those risks from exercising its subrogation rights (i.e. its right to stand in the place of the insured and to pursue remedies against the party who actually caused the relevant loss and/or damage) against a co-insured.

Contractual insurance clauses are accompanied by indemnity clauses, which require a contractor to indemnify the employer for loss and/or damage caused by the contractor's breach of contract or negligence.Problems can occur where a contract is not clearly drafted and where conflict exists between the indemnity and insurance clauses, allowing a co-insured to be pursued by an insurer exercising its subrogation rights. Thus, the intended objective of joint names insurance is not always achieved.

In Tyco Fire & Integrated Solutions (UK) Ltd -v- Rolls-Royce Motor Cars Ltd, a water main installed by Tyco burst, causing a flood and damaging both Tyco's work and other parts of the plant. The contract contained an indemnity clause, which provided that Tyco would indemnify Rolls-Royce against any damage, expense and loss caused by Tyco's beach of contract or negligence. Rolls-Royce failed to take out the joint names policy and so it brought its claim against Tyco. The issue was whether Tyco was liable to Rolls-Royce for the damage to existing structures.

Clause 13 provided the 'the works' would be at Tyco's risk until practical completion. Clause 13.5 required Rolls-Royce to "maintain in the joint names of the employer [Rolls-Royce], the construction manager and others, including, but not limited to, contractors, insurance of the existing structures and in the name of the employer, the construction manager and the contractor and his subcontractors of any tier, insurance of the works against the specified perils". Burst pipes were a specified peril.

Liability exemption

Tyco considered that it was not liable for the damage to the other parts of the plant as: the intention of the joint names policy was to exempt it from liability; and it was a rule of law that one co-insured could not recover from another co-insured for the same loss (relying on the decision in Co-Operative Retail Services Ltd and Others -v- Taylor Young Partnership and Others).

The High Court judge decided that Tyco did have the benefit of clause 13.5 and was not liable to Rolls-Royce for the flooding. Rolls-Royce appealed.The Court of Appeal held that Tyco did not have the benefit of any joint names insurance for the existing structures and was liable to Rolls-Royce in respect of damage to such existing structures. The Court of Appeal considered the word 'others' was undefined and did not include Tyco, and emphasised the difference between 'contractors' in lower case and 'Contractor' in the two parts of the clause to mean that Rolls-Royce was not obliged to obtain joint names insurance to cover Tyco in respect of the existing structures.

As to the issue of the rule of law that co-insureds cannot recover losses from each other: the Court of Appeal did not decide the issue but it made observations indicating that no such rule exists, and that such matters would turn on the proper construction of the contract between the parties.

This case highlights the importance of the precise wording in contracts containing clauses for joint names insurance, as the question of whether certain risks have been passed from the co-insured parties to the insurer will turn on the interpretation of the contract in question.

If it is intended that liability will be excluded to the extent that the joint names insurance policy responds to the loss, this must be in clear terms ensuring that the insurance and indemnity provisions are consistent with each other, otherwise a contractor and its subcontractors may not be protected from a subrogated claim, defeating the intended purpose of joint names insurance.