Subrogation: Not so plain sailing

Construction contracts frequently include provisions for a joint names insurance policy - where two or more parties have separate insurable interests but insure with the same insurer under a single policy. For example, an employer and the building contractor can be jointly insured on an all risks insurance policy.

The insurance policy will usually state that, in the event of a claim, neither of the joint insured can recover more than their individual loss. Generally, an insurer can step into the shoes of the insured and claim against those that may have been responsible for the insured’s loss. In doing so the insurer is said to be exercising its rights of subrogation. Importantly, the insurer cannot generally claim against either of the joint insured party.

The Court of Appeal decision in Gard Marine & Energy Ltd vs China National Chartering Co Ltd (2015) considered the issue of subrogation. The case concerned hire of a chartered boat by a third party.

The contract between the owner of the boat and the charterer provided that joint insurance would be taken out for their joint benefit. The boat suffered problems in port and eventually broke up, becoming a total loss.

The insurers paid out to the owner and sought to bring an assigned claim against the third party claiming that it had breached the safe port warranty included in the contract between itself and the charterer.

The contract between the owner of the boat and the charterer provided that joint insurance would be taken out for their joint benefit. The boat suffered problems in port and eventually broke up, becoming a total loss

The third party argued that the claim failed as the charterer had suffered no loss because the insurance had paid out and the insurer could not pursue the charterer in the name of the owner because they were jointly insured.

Why, you may well ask, is this relevant to a construction contract?

In its judgment, the Court of Appeal dealt with the important matter of whether even in the absence of joint insurance “if a loss occurs as a result of a breach of contract or negligent conduct on the part of the party who pays the premium, can the insurer use the name of the ‘innocent’ party to sue the ‘guilty’ party once the insurer has paid for the loss?”

In this contract the joint names option selected by the parties did not expressly state that rights of subrogation would be waived. Nevertheless the court considered that, where insurance was to be held in joint names, it was likely that, as the insurance was for the parties’ joint benefit, this would normally mean that the parties had agreed on an insurance solution without any right of subrogation.

Thus, even if the charterer had been in breach (which in this case the court found it had not been) they were not liable to the owner for compensation. Thus the charterer had no liability to pass down the “hiring chain”.

The court went further still and confirmed that even where there is no provision for joint name insurance, there will still be no right of subrogation for insurers if it is clear that, having reviewed the surrounding circumstances, the insurance was intended to be for the benefit of both parties.

It has to be said that the court’s observations on joint insurance were obiter dicta (additional remarks by the judge which are not necessary to reaching a decision) as the court had found that there had been no underlying breach.

It remains to be seen how widely these comments will be considered by the courts in the future, owing to the fact that they were obiter and therefore did not produce new law.

However, the court’s comments are a valuable guide when drafting construction contracts where the issue of joint insurance and subrogation often arise.

This case demonstrates that when assessing the underlying agreement between parties, a court may look to such a contract to see whether there was in fact a true intention that the insurance (which is ancillary to the contract) was for the joint benefit of the parties notwithstanding the absence of joint insurance, thereby denying the insurer the ability to exercise its rights of subrogation.

Steven Carey is a partner in the real estate, construction and engineering team at Charles Russell Speechlys