Subrogation and joint insurance: it’s a kind of magic?
Following the recent decisions of the TCC in Haberdashers’ Aske’s Federation Trust Ltd v Lakehouse Contracts Ltd  EWHC 558 (TCC) and Prezzo Ltd v High Point Estates Ltd  EWHC 1851, Neil Hext QC considers the Courts’ approach to contractual interpretation in cases involving joint insurance and the extent to which they are consistent with orthodox principles of construction.
There has always been a tension between the literal application of poorly worded contractual provisions and the need to apply common sense to avoid commercially absurd results. But in recent years, the centre of gravity has moved towards the former and away from the latter. Modern thinking in contractual construction is that the search for the parties’ intention is to be found primarily in the words that they have used. Parties are assumed to have meant what they said and it is not the function of the courts to repair a bad bargain.
One area which has bucked this trend is subrogation in the context of joint insurance provisions. There are a number of commercial fields, in particular the construction industry, in which it is normal for parties to make provision for disaster, and to seek to avoid the inevitable disputes that follow it, by putting in place insurance designed to cover both parties against the ensuing losses. These arrangements often provide for the insurance to be in the joint names of both parties. Sometimes they are accompanied by detailed contractual schemes which emphasise how the losses are to be borne and to whom the insurance money is to be paid. But that is not always the case. Equally prevalent are cases in which the parties have made provision for insurance for their joint benefit, but have failed to adjust the remainder of their contractual arrangements accordingly. That creates internal conflict: should the court give effect, for example, to a clause providing that party A is to indemnify party B, or should it treat the joint insurance provision as exempting party A from liability notwithstanding the existence of the express indemnity?
The direction of travel in the authorities is towards the latter, the rationale being that the parties cannot have intended that the insurer, having paid out to one co-insured, should be able to bring a subrogated claim against another. But two recent cases, Haberdashers’ Aske’s Federation Trust Ltd v Lakehouse Contracts Ltd  EWHC 558 (TCC) and Prezzo Ltd v High Point Estates Ltd  EWHC 1851 (TCC), show that the battle between the two principles of construction is alive and well, and still capable of producing unpredictable results. Before looking at those two cases, it is worth summarising where we have got to with subrogation and joint insurance.
It is now well established that the court will be prepared to imply an exclusion of liability by one party to the other, notwithstanding that party’s breach of contract, where they have put in place between them a scheme for the allocation of risk backed by an insurance in joint names. In such a case (unusually, from the point of the view of a general commercial lawyer) express words are not required to exclude the liability. See Co-op Retail Services Ltd v Taylor Young Ltd  1 WLR 1419.
In addition, where two or more parties have insured themselves under the same policy against the same risk, the insurer, having indemnified one of them, cannot bring a subrogated claim against the other. The explanation for this is thought to be an implied term either in the contract between the parties, where there is one (see Co-op Retail Services), or possibly in the contract of insurance itself (see Lord Sumption in Gard Marine and Energy v China National Chartering  1 WLR 1793, para 99).
So far, so good. What about the case in which there is provision for joint insurance, but the logic of that has not been fully worked through in the contractual provisions? Historically, that was a difficult area for those wanting to argue for exclusion of liability. If the explanation of the Co-op Retail Services principles was rooted in the construction of the contractual arrangements between the parties and the implication of terms, it would surely be an uphill struggle to persuade a court that the commercially sensible, but unstated, exclusion of liability implicit in the joint insurance provisions could resist a clause that unequivocally created such liability.
So it proved in the Court of Appeal decision in Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd  Lloyd’s Rep IR. That case concerned damage to a construction site caused by a burst water pipe. Tyco were the contractors which had installed the pipe. Their contract with the owners of the site contained a provision for joint insurance against risks that included the risk of bursting of pipes. But it also included an unqualified indemnity provision by which Tyco promised to indemnify the owner against loss caused by reason of its (Tyco’s) negligence. Tyco argued that the joint insurance provision trumped the indemnity and that, as a consequence, the owner was not entitled to sue Tyco for the loss. The Court of Appeal disagreed. First it said that, as a matter of technical drafting, Tyco was not in fact covered by the joint insurance scheme. But the court went on to consider more generally the effect of a provision for joint names insurance. Such a provision might give rise to an exemption of liability as between the co-insureds, but whether it did so was a question of construction of the contract between them. Such an exemption could only arise by way of an implied term. But an implied term cannot withstand express language to the contrary. Where the contract elsewhere made clear that the parties intended one co-insured to remain liable, that would prevail.
Tyco was impeccably reasoned and highly influential. But then in 2014, two cases came along that challenged its approach. In Rathbone Brothers plc v Novae Corporate Underwriting Ltd  Lloyd’s Rep IR 95, on quite unusual facts, the Court of Appeal held that an insurer could not bring subrogated proceedings against its own insured in respect of a payment that it was bound to make to another insured under the same policy. This was so notwithstanding the existence of an unqualified contractual indemnity in place between the two co-insureds. The alternative was that the insurer would have been able to recover its outlay against the very party that had arranged and paid for the insurance; the court did not think that could possibly have been the parties’ intention.
And in the well-known case of Gard Marine and Energy Ltd v China National Chartering Co Ltd  1 WLR 1793, the Supreme Court held, by a majority, that a contract that provided for a scheme for joint insurance to cover a ship against various risks had the effect of excluding the right that the owner might otherwise have had to sue the charterer for breach of a safe port warranty. There was nothing in the safe port warranty that gave any hint of such an exclusion of liability. But Lord Toulson, speaking for the majority, considered that the warranty could not have been intended to subvert the commercial purpose of the joint insurance provision, namely (a) to provide a fund to make good the loss, and (b) to avoid the need for litigation between the insureds.
It’s a striking thing about Gard Marine that Tyco is mentioned only once, and then only by way of an indirect reference in one of the dissenting judgments. On a straightforward application of Tyco, one might have thought that Gard Marine was one of those cases in which the express wording of the contract meant that it was not possible to imply an exclusion of liability simply on the ground that it made more commercial sense. And indeed, that reasoning was at the heart of the approach taken by the minority. The inference that one draws from the rejection of that approach by the majority is that Tyco can no longer be regarded as persuasive on this issue.
More recently, the Court of Session (Inner House) in SSE Generation Ltd v Hochtief Solutions AG, 2018 SLT 579, treated Gard Marine as establishing a presumption of an implied exclusion of liability as between co-insureds requiring “powerful contra-indicators” if it is to be disapplied (para 403). An express indemnity granted by one party to the other in that case was not sufficient for this purpose.
Does all this mean that the arguments about the significance of contractual insurance provisions are resolved? Not so fast. The two most recent English cases in this area demonstrate that the battle is not yet over, albeit that it might be said that the skirmishes seem to have moved onto new ground. Haberdashers’ Aske’s Federation Trust Ltd v Lakehouse Contracts Ltd  EWHC 558 (TCC) concerned a fire at a school undergoing extension works. The fire was allegedly caused by the negligence of a roofing sub-contractor. Under the contract between the employer and the main contractor, the former had an obligation to take out project insurance in the joint names of the employer, the main contractor and its subcontractors of any tier. However, under the subcontract between the main contractor and the roofing sub-contractor, there was an express term that the latter indemnify the former in respect of damage to property caused by its negligence, and the sub-contractor was obliged to take out insurance with a limit of indemnity of at least £2 million to cover its potential liability under this clause.
It seems to have been accepted by everyone that if the sub-contractor was an insured under the project policy, it would have been immune from suit on the basis that one co-insured cannot sue another. Insurers argued, however, that the sub-contractor was not an insured under that policy. The judge agreed. He said that, although there was a standing offer by insurers to insure all sub-contractors under the project policy, that offer was never accepted by the roofing sub-contractor. Instead the sub-contractor had agreed with the main contractor that it would have its own insurance.
Unlike Gard Marine and the cases that preceded it, the main issue in the case was whether the sub-contractor was a party to the project insurance in the first place, rather than purely about the construction of the contractual arrangements. But the judge’s reasoning is remarkably reminiscent of the approach in Tyco. There could be no acceptance of the project insurers’ offer to insure because the sub-contractor was party to a contract that required it to get its own insurance. To accept that it was also party to the project insurance would, by implication, negate that express requirement. Implied terms cannot contradict the operation of express terms.
The second case is Prezzo Ltd v High Point Estates Ltd  EWHC 1851. It did not concern joint insurance provisions per se, but rather an obligation of a landlord under a lease to insure the relevant premises. That situation brings into play the closely related decision in Mark Rowlands v Berni Inns Ltd  1 QB 211. As with joint insurance cases, the question is whether, by incorporating a provision of this sort, the parties have agreed that they will both look to the insurance to recoup loss flowing from e.g. a fire, rather than suing each other.
The premises occupied by the tenant were only part of a bigger building. Under the lease, the landlord had an obligation to insure “the Premises in accordance with its obligations as lessee contained in… the Superior Lease.” The Superior Lease required insurance of the entire building. The question was whether the landlord could sue the tenant for fire damage caused to the building as a whole (one assumes, other than the premises occupied by the tenant). The court held that it could. The landlord’s obligation to insure was restricted to insurance of the premises and did not extend to the rest of the building. Thus the tenant had no protection from suit in respect of damage to that part. The words used in the contract were plain; the obligation to insure was solely in respect of the premises; thus the Mark Rowlands principle could not apply to damage elsewhere.
Thus the arguments in this area are not over; they have simply moved on. Both Haberdasher’s Aske’s and Prezzo represent a more literalist approach than that taken by the Supreme Court in Gard Marine. The underlying issue remains the same: to what extent is the court prepared to permit the common-sense implication of an exclusion of liability where the parties have both agreed to insure against the background of contractual (or tortious) obligations that point in the other direction? It is not insignificant that all of the major cases at appellate level in this area have been decided by a majority. They have featured strong dissents from highly respected commercial judges. This is because of the tension between the reasoning expressed in Gard Marine and the modern approach to contractual construction as exemplified in Arnold v Britton  AC 1619. It leads to the question whether there is some special rule being applied to joint insurance cases, inapplicable elsewhere. If there is, the basis for such a rule remains opaque. Until there is greater clarity on this point, the debate about the meaning and effect of joint insurance provisions seems likely to continue.
Disclaimer: this article is not to be relied on as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.