Common sense prevails in co-insurance dispute

FM Conway Limited v (1) The Rugby Football Union (2) Royal & Sun Alliance Insurance PLC and (3) Clark Smith Partnership Limited [2023] EWCA Civ 418

Keoghs has successfully acted for Clark Smith Partnership Limited (CSP) in the Court of Appeal, following the Court’s decision to dismiss an appeal by FM Conway Limited (FMC), in which FMC was seeking to rely on a co-insurance defence in response to claims against it by the Rugby Football Union (RFU).

In the judgment handed down on 19 April 2023, the Court of Appeal held that the judge at first instance, Eyre J, was correct for the reasons that he gave in rejecting FMC’s co-insurance defence and that his analysis was entirely in accordance with the existing legal authorities, which the Court found “point in a clear and common sense direction”.

Background

The underlying claim concerns improvement works at Twickenham Stadium in advance of the 2015 Rugby World Cup. Part of these works involved the design and installation of buried ductwork for HV cables. CSP was the civil engineer responsible for the design of the ductwork and FMC was the contractor engaged to install it.

In March 2021, the RFU commenced proceedings in the High Court against FMC and CSP, alleging that the ductwork was deficient (either due to its design and/or installation) and caused it to incur significant loss and damage in the total sum of c. £4.5m. It is common ground between the parties that the Contractors’ All Risks project policy taken out by the RFU (the Policy) indemnified the RFU for the majority of its losses (c. £3.5m), and that the principle insurer, RSA, is therefore pursuing a subrogated claim in respect of the insured losses.

CSP and FMC both deny liability on the merits and have issued additional claims against each other for contribution under the Civil Liability (Contribution) Act 1978.

The co-insurance dispute

FMC claimed to have the benefit of a co-insurance defence and brought separate proceedings against the RFU and RSA seeking declarations that, as it was co-insured under the Policy, FMC had the benefit of the same cover as the RFU. As such, FMC maintained that the RFU could not claim against it in respect of losses covered by the Policy (c. £3.5m) and that RSA was not entitled to pursue a subrogated claim against it. FMC also argued that CSP could not seek a contribution in respect of those losses, on the basis that it was not liable to the RFU for the same damage. 

FMC relied heavily on the pre-contractual discussions and dealings between its Director of Civil Engineering and the Project Manager appointed for the RFU, which it claimed demonstrated the necessary authority and intention for the RFU to take out project-wide insurance which would cover FMC for the same losses being claimed by RFU/RSA. 

Although CSP is a defendant in the underlying claim, it shared the RFU/RSA’s position that FMC’s co-insurance defence should be rejected.

Whilst CSP and the RFU/RSA did not dispute that FMC was a co-insured under the Policy, they did dispute the extent of that cover, which they argued should be circumscribed by the underlying contractual documents (in this case the Letter of Intent and the JCT Contract), and the RFU’s obligation to insure. CSP and the RFU/RSA argued that those documents, properly constructed, demonstrated that the RFU was obliged and intended to provide JCT Insurance Option C cover only, and nothing more, meaning that the RFU was not required to take out insurance under which FMC would be insured for the costs of rectifying damage caused by its own defective work.

In rejecting FMC’s appeal, the Court of Appeal has recently determined the issue in favour of CSP and the RFU/RSA. It has also helpfully summarised the relevant case law which the Court found provides a complete answer to the “conundrum” in this matter.

The decision

After a detailed and considered analysis of the existing legal authorities, the Court of Appeal (Lord Justice Coulson, which whom Lord Justice Baker and Lady Justice Nicola Davies agreed) comprehensively rejected FMC’s appeal on all five grounds, and held that Eyre J was correct for the reasons that he gave and in applying the correct principles of law. Moreover, the Court of Appeal concluded that Eyre J’s mixed findings of fact and law were also fatal to FMC’s appeal.

On the issue of the extent of cover available to FMC, the Court of Appeal agreed with Eyre J that the question to be asked was whether the parties “intended to create an insurance fund which would be the sole avenue for making good any loss…” (as per Lord Toulson in Gard Marine[1]).

Whilst answering that question is, of course, a matter of fact, consistent with the decision of Eyre J, the Court of Appeal found that all the existing legal authorities “speak with one voice” and that, as a matter of principle, when the Court considers authority and intention in the co-insurance context “it is inevitable that its investigations will start (and possibly finish) with the underlying contractual arrangements agreed between the parties”.

In this case, at the date the Policy was incepted, there was a Letter of Intent (i.e. a binding contract between the parties), which provided that: (i) the form of the contract would be the JCT Standard Form (which was already in existence and specifically identified in the Letter of Intent); (ii) all the terms and conditions in that contract would apply to the project works; (iii) JCT insurance Option C would apply; and (iv) there was an entire agreement clause which excluded any prior discussions and negotiations.

The Court of Appeal therefore concluded that the underlying contract between the parties was to the effect that the insurance cover was to be in the form of JCT Insurance Option C and nothing else.

Notwithstanding the above, like Eyre J, the Court of Appeal did consider FMC’s attempts to rely on the pre-contractual communications for the necessary authority and intention, but found its arguments on that issue to be “untenable” on the facts of this case. Importantly, the Court of Appeal concluded that FMC’s argument failed to distinguish between individual employees and the companies who would be entering into the relevant contractual documents and would “make for complete uncertainty”.

As for FMC’s separate argument that it was entitled to rely on the Policy’s waiver of subrogation clause, given the decision reached on the extent of FMC’s cover, the Court of Appeal rejected FMC’s submissions on the basis that it would, again, be contrary to commercial common sense (as it would essentially be a back door attempt to cover that would not otherwise exist), as well as being contrary to the existing authorities and, specifically, National Oilwell[2].

The Court of Appeal also provided some clarity on the meaning of “each to their respective rights and interests” in the definition of the ‘insured’ in the Policy and agreed with the submissions of CSP and the RFU/RSA that the natural meaning of those words included all relevant rights, including their contractual rights. This, therefore, meant that the insurance cover was limited to the respective rights and interests of each of the co-insureds and, as FMC’s rights and interests did not extend to the right to insurance for its own defective workmanship (as it was not required under JCT Insurance Option C), the waiver of subrogation clause should not apply.

Comments

Thankfully, common sense prevailed and the Court of Appeal’s decision should provide some further comfort to insurers and employers on construction projects that the underlying contract remains key to determining the existence and extent of insurance cover.

The judgment is also an important reminder to construction professionals to make sure that all the contractual documents and insurance policies correctly reflect the intentions and expectations of the parties, in order to prevent any disputes over the extent of cover.

The full Court of Appeal Judgment can be viewed here
The full First Instance Judgment can be viewed here

Keoghs acted for CSP, who were a named Respondent in the Appeal, and instructed Counsel, Michael Wheater and Catherine Piercy KC of Gatehouse Chambers, to represent CSP on the Appeal.

[1] Gard Marine Energy Limited v China National Chartering Co Limited & Anr [2017] UKSC 35; [2017] 1WLR 1793
[2] National Oilwell (UK) Ltd v Davy Offshore Ltd, [1993] 2 Lloyd’s Rep. 582

Authors: Dale Hilton, Partner & Scarlett Lamoureux, Lawyer