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The limits of insurer's subrogation rights against co-insureds and third parties
- AuthorKieran Fano
The Supreme Court recently handed down judgment in the matter of Gard Marine and Energy Limited v China National Chartering Company Limited  UKSC 35 and ruled, by a majority of 3:2, that a contractual requirement to maintain joint insurance includes an implied term which precludes any claim by owners against the demise charterer, or therefore by the latter down the line to time charterers.
While this judgment was made in the context of international shipping and English law, the Court’s findings are relevant in the context of domestic and international construction and engineering projects where it is common for employers and contractors to maintain insurance on a joint basis.
Building and engineering contracts typically provide for insurance to be maintained against all risk of loss or damage to the works to be undertaken. This typically comes in the form of contractor’s all risks (CAR) or ‘joint-names’ policies which are designed to cover multiple insureds to reflect the fragmented nature of the supply chain, where numerous subcontractors may undertake varying construction activities on site at any given time.
It is also useful to note that it is a feature of English insurance law that an insurer may not exercise rights of subrogation to bring an action in the name of one co-insured against another co-insured. The juridical basis of this was endorsed by the House of Lords in Co-operative Retail Services Ltd v Taylor Young Partnership  1 WLR 1419 on the ground that there was an implied term of the contract of insurance and/or the underlying contract between the co-insureds (as it would be absurd for an insurer to bring a subrogated claim against a co-insured when the insurer would be legally liable to indemnify the co-insured in respect of any liability it had to the insurer).
A vessel was demise chartered on terms that charterers, D, would procure insurance for the vessel at their expense against marine, war and protection and indemnity risks for the joint interest of themselves and the owners, O.
D subsequently time chartered the vessel to T1, who in turn time chartered the vessel to T2. The vessel was grounded when leaving a port under the instruction of T2 (and thus T1). During the attempted recovery of the grounded vessel the vessel broke in two and the wreck was then subject to a lengthy wreck removal operation.
Two years later, one of the vessel’s insurers took assignments of the rights of O and D in respect of the grounding and total loss of the vessel and pursued claims against T1 (which in turn were passed on to T2) for damages for breaches of warranties in the time charterer between D and T1 (and in turn T2).
Following conflicting decisions in the High Court and Court of Appeal, the UK Supreme Court was seised of a number of issues, the second of which concerned whether joint insurance precluded any claim by the vessel’s owners against the charterer (or by the latter down the line).
In respect of this issue, Lords Toulson, Mance and Hodge considered that the insurance scheme in the underlying contract (which provided for joint insurance and a distribution of insurance proceeds) was intended to be comprehensive, the effect of which was to preclude any claim by owners against the charterer and, also, by the latter down the line.
The Supreme Court recognised that the critical question of “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” was a matter of construction. This question was to be answered in the context of the specific provisions of the underlying contract, which were as follows:
“(a) During the Charter period the Vessel shall be kept insured by the Charterers at their expense against marine, war and Protection and Indemnity risks in such form as the Owners shall in writing approve, which approval shall not be unreasonably withheld. Such marine, war and P and I insurances shall be arranged by the Charterers to protect the interests of both the Owners and the Charterers and mortgagees (if any), and the Charterers shall be at liberty to protect under such insurances the interests of any managers they may appoint. All insurance policies shall be in the joint names of the Owners and the Charterers as their interests may appear.
(c) Should the vessel become an actual, constructive, compromised or agreed total loss under the insurances required under sub-clause (a) of clause 12, all insurance payments for such loss shall be paid to the Mortgagee, if any, in the manner described in the Deed(s) of Covenant, who shall distribute the moneys between themselves, the Owners and the Charterers according to their respective interests.”
The Supreme Court’s decision was reached in view of the fact that, irrespective of the cause, “both repairs and total losses fall to be dealt with in accordance with its terms, rather than by litigation to establish who might otherwise be responsible for undertaking them, for bearing the risk of their occurrence or for making them good”.
In reaching this conclusion the Court had regard to the fact that hull insurance provides cover in respect of losses whether or not it was due to the fault of any party and it was not suggested that the principle in Co-operative Retail Services was subject to any exception where the loss was due to fault. As a result of this view, the owner was precluded from bringing any claim by owners against the demise charterer, or therefore by the latter down the line.
While this decision was made on the basis of a 3:2 majority, with Lords Sumption and Clarke dissenting, the majority was cognisant that, due to the way that the matter had been pleaded in the courts below (and thus beyond the scope of argument in the Supreme Court), it did not follow from the Court’s judgment that the demise charterers necessarily had no available remedy against the time charterers. As such, some caution should be applied in relying on this judgment more broadly.
This judgment provides further clarity in relation to the subrogation rights of insurers against third parties.
As a starting point, it is to be recognised that courts are increasingly likely to construe joint insurance arrangements as precluding liability for matters within the scope of such joint insurance.
It is also notable that this decision goes further than Co-operative Retail Services insofar as the Court concluded that subrogated claims against non-co-insureds are precluded by the underlying contract’s comprehensive insurance scheme (whereas in Co-operative Retail Services, the electrical subcontractor, Hall, was a named insured).
While this decision may be welcomed by subcontractors, the nature of the judicial comments was such that it does not necessarily follow that an employer or main contractor would have no available remedy against subcontractors in respect of any breach of warranty.
Like many decisions emanating from the Supreme Court it was emphasised that the question concerning the parties’ subrogation rights was one of construction, which turned on an analysis of the particular provisions of the underlying contract. Indeed, the differences between charter party terms and building contracts are such that the Court’s findings may not be endorsed wholesale in subsequent judgments.
As it therefore remains possible to ‘contract out’, proper consideration of insurance provisions needs to be given to avoid unwittingly excluding liability against third parties.
 i.e. to ‘step into the shoes’ of an insured for the purposes of pursuing those who are legally responsible for an insured loss – essential to the economics of insurance
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.