TCC Rules That Sub-Contractors Are Not Automatically Covered By Project Insurance

19/04/2018

Haberdashers' Aske's Federation Trust Ltd and another v Lakehouse Contracts Ltd and another[1]

The issue of whether subcontractors can benefit from project-wide insurance policies has always been uncertain.  Up until now, it has been assumed that, should a policy be in place, a sub-contractor will be covered.  However, the Technology and Construction Court in Haberdashers' Aske's Federation Trust Ltd and another v Lakehouse Contracts Ltd and another has recently confirmed that sub-contractors are expected to take out their own cover, and cannot, therefore, rely on project-wide insurance.  Furthermore, the main contractor (on behalf of the insurers) could recover sums paid out from the project policy from the sub-contractor.

The facts of the case

The first defendant, Lakehouse, was appointed as the main contractor for an extension to be built on a school and had taken out project-wide insurance.  Lakehouse sub-contracted Cambridge Polymer Roofing as sub-contractor to carry out roofing works.  The sub-contract provided that Cambridge Polymer Roofing obtain its own insurance cover for the sum of £5 million.

Following a fire which broke out while Cambridge Polymer Roofing was carrying out works, the claimants, who owned the premises, began proceedings seeking damages against Lakehouse and Cambridge Polymer Roofing.  Lakehouse sought a contribution or an indemnity from Cambridge Polymer Roofing, and Cambridge Polymer Roofing sought a declaration that it could rely on the project insurance.  Lakehouse settled the proceedings by paying the claimants £8.75 million which was paid by the project insurers under the project policy.   

The project insurers sought to bring a subrogated claim against Cambridge Polymer Roofing to recover sums paid in settlement (the project insurers claimed £5 million, being the amount of Cambridge’s insurance cover).  This question was determined by way of preliminary issue, on the assumption that the fire was caused by the subcontractor's negligence.

Cambridge Polymer Roofing argued that, notwithstanding the express term in the sub-contract that it obtain its own insurance, the project insurance had been intended to, and did, include it as an insured party either under the principles of agency and ratification, or because there was a standing offer by the insurers to insure persons subsequently ascertained as members of a defined grouping.  This was namely Lakehouse’s sub-contractors.  Alternatively, it was argued that the insurers had accepted by conduct that Cambridge Polymer Roofing would be included in the project insurance.

The TCC’s decision

Justice Fraser considered the terms of the sub-contract and the project insurance policy, and how a sub-contractor can claim coverage under the project insurance.

The court reasoned a sub-contractor was entitled to coverage via project-wide insurance when the project’s insurers made a standing offer to insure all parties who are identified as part of a defined group.  If the offer was accepted by the sub-contractor before starting work on the project, it would result in an implied term in the contract preventing the sub-contractor being sued by the main contractor for anything covered by the project insurance.

In this case, however, there was an express term in the contract that meant the above term could not be implied.  Essentially, Cambridge Polymer Roofing did not form part of the ‘defined group’ (and therefore no standing offer was made to it).  Even if a standing offer could be established, the express term would contradict the implied term.

Justice Fraser then considered Cambridge Polymer Roofing’s arguments surrounding agency (i.e. that Lakehouse acted as Cambridge’s agent when entering into the project insurance policy).  He doubted that the principles of agency could be applied in matters involving project insurance.

The most important consideration was the intention of the parties, and this was that Cambridge Polymer Roofing would take out its own insurance and not be reliant on the project insurance.

The court also rejected Cambridge Polymer Roofing’s claim that it was permitted to benefit from the project insurance by virtue of the Contracts (Rights of Third Parties) Act 1999.  The sub-contractor tried to rely on a policy endorsement to override a general exclusion of third party rights in the policy terms, but the court held that the endorsement only conferred rights on parties who were insured under the policy (which, considering the court’s findings above, Cambridge Polymer Roofing was not).

In summary

This case provides clarity regarding the circumstances in which a sub-contractor can rely on project-wide insurance.  If a standing offer has not been made, thereby inserting an implied term into the contract, it is likely the sub-contractor will need to organise its own cover.