01/12/2015
One of the most confusing areas of insurance law relates to ‘double insurance’ and the principle of contribution. To understand the principle of contribution, one must always keep in the back of their mind that the basic principle of indemnity is as follows:
“ An insured party can insure themselves against loss, but they may not profit from it.”
Where matters become complex is where the same party is insured under two or more policies in respect of the same subject-matter (whether that be property or liability) against the same risks and covering the same interest. The scope of the two overlapping policies need not be identical.
Complex construction projects that have a series of policies in place at any one time may give rise to double insurance problems. If more than one insurance policy covers a particular loss, an insured will have to decide which policy to claim under. In this situation, the insurance company that has to pay out will often look to the other insurer for a contribution.
How Insurance Companies Protect Themselves Against Claims From Other Insurers
To combat the possibility of claims from other insurers many insurers insert protection clauses in their policies. These can include:
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Rateable proportion clauses
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Escape clauses, both basic and with an excess provision
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Double insurance notification clauses
Rateable Proportion Clause
A rateable proportion clause acts to prevent an insured from claiming their full loss from one insurer. Instead, they provide that each insurer will be liable for a rateable proportion only. Typical wording would be:
"If at the time any claim arises under this policy there is any other existing insurance covering the same loss damage or liability the company shall not be liable … to pay or contribute more than its rateable proportion of any loss damage compensation costs or expense."
Escape Clauses
Escape clauses work by absolving the insurer from any liability under the policy in the event of double insurance. Typical wording would be:
"We will not pay any claim if any loss, damage or liability covered under this insurance is also covered wholly or in part under any other insurance except in respect of any excess beyond the amount which would have been covered under such other insurance had this insurance not been affected."
Double Insurance Notification Clauses
These are clauses providing that unless the insured gives a written notice to the insurer regarding the existence of a second insurance policy covering the same risk, the said policy will be void. These clauses work to protect the insurer against fraud. Typical wording would be:
"No claim shall be recoverable if the property insured be previously or subsequently insured elsewhere unless the particulars of such insurance be notified to the company in writing.”
How Double Insurance Conflicts Develop in Respect of Construction Insurance
In theory, if all your construction insurance policies contain the clause;
“this Policy of Insurance will not indemnify you to the extent that you have the benefit of other Insurance”,
then the insured could be left in a ludicrous position of not being able to claim from any of his or her insurance policies.
The solution arrived at by the Courts was that in such instances, both insurers would pay a contribution to the loss and the respective “Escape Clauses” would cancel each other out. (see Gale v Motor Union Insurance Co Ltd [1928] 1 KB 359)
Insurers have attempted to avoid paying contributions in a number of cases. One such example, Bovis Construction Ltd v Commercial Union Assurance Co plc [2001] 1 Lloyd’s Rep 416 illustrated how complex these disputes can be. In this case, a dispute arose from a management contract entered into by Bovis and its client, Rosehaugh in September 1988. Bovis was charged with constructing an apartment block and agreed to remain liable for any defects for a period of 12 months following completion of the project. Within that period, a flood caused £310,000 worth of damage which was exacerbated due to a floor cable opening that had not been properly sealed during construction.
There were multiple insurance arrangements in place. They were as follows:
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Rosehaugh was required to insure in joint names of Rosehaugh and Bovis for injury plus damage to property and damage to the work itself
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The above insurance was with Commercial Union and contained in Section 1an all risks property cover up until the issue of certificate of practical completion plus the defects liability extension. Section 3 of the policy covered public liability risks but excluded any property insured Section 1.
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Rosehaugh had an annual policy with General Accident which covered their properties
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Bovis had a separate public liability cover with Eagle Star
General Star paid Rosehaugh £310,000 through their property insurance. Rosehaugh then claimed losses from Bovis for design and supervision negligence.
Subsequently, Rosehough went into receivership, and the claim was assigned to General Accident. Bovis settled this claim for £350,000 plus costs.
Bovis then sought to recover their loss from Commercial Union who denied the loss was covered by the policy it held with Bovis. Bovis subsequently recovered their outlays from Eagle Star.
A subrogated claim was made (most likely by Eagle Star) to recover all or at least some of the amount paid. The issue in the case concerned subrogation and contribution, and it was held that an insurer who had indemnified its policyholder cannot claim subrogation rights against another insurer who may be liable for the same loss. Any monies recovered must be done so through the principle of contribution. Mr Justice David Steel also confirmed the principle laid down in Legal & General v Drake Insurance [1992] 1 QB 887 that the equitable right of contribution is not available if the insurer in question is a volunteer.
Summing Up
As can be seen from the Bovis case, the issues surrounding contribution can be very complex, and lead to expensive legal bills if solicitors have to be engaged to unpick the matter. Although having double insurance may seem comforting at the start of a massive construction project, the reality is, a single policy per issue may turn out to be much easier to manage if you one day have to make a claim.
Fisher Scoggins Waters are a London based law firm who are experts in construction, manufacturing and engineering matters. If you have any questions regarding double insurance or contribution arising from construction contracts or require legal advice in some other area, please phone us on 0207 993 6960.