Co-insurance proves tricky in construction contracts

As highlighted by the Court of Appeal in its recent judgment handed down on April 19 in FM Conway v The
Rugby Football Union and others (2023), co-insurance in the construction industry is common, but it has
historically given rise to some potentially complex issues.

This case concerned a contractor, Conway, seeking to rely on the co-insurance policy – an all-risks policy – to avoid liability for what was alleged to be its own defective work. On the one hand, the scope of cover it was arguing it should receive the benefit of was beyond the cover its employer, the Rugby Football Union (RFU), was contractually obliged to procure for it.  However, as the court highlighted, the policy by its scope did in fact cover the loss that arose; if it had not, the insurer, RSA, would not have paid out to the RFU.

The genesis of the proceedings concerned the major refurbishment of Twickenham Stadium before the 2015 Rugby World Cup. The RFU engaged Conway further to a JCT Standard Building Contract to install ductwork that was designed by another contracting party to accommodate high-voltage power cables. The RFU alleged there were defects in the design and installation of the ductwork that caused damage to the cables when they were pulled through. The insurer, RSA, paid the RFU £3.3m ($4.1m) in respect of the cost of replacing the damaged cables and brought a subrogated claim against Conway for the sum paid out.

Conway’s argument

It was agreed Conway was a co-insured under the policy. Conway argued it gave the RFU wide authority to enter into the RSA policy, it was the intention of both the RFU and Conway that the policy be as inclusive as possible and so it had cover for all losses the RFU was insured for, including the damaged cables.

Consequently, it had a co-insurance defence and neither the RFU could sue it nor could RSA exercise subrogation rights against Conway for the indemnity sums it paid to the RFU.

Against that, while the policy did insure both the RFU and Conway, the RFU/RSA argued Conway’s cover under the policy was more limited, extending only to the losses the RFU was required to insure pursuant to the insurance provisions of the JCT contract. Under that contract, it was not agreed that cover would be procured for Conway that extended to covering the cables. Conway was therefore not insured to the same extent, in respect of the same risk, as the RFU.

The High Court ruled against Conway. The judge held the RFU’s authority to procure insurance was indeed limited to and co-extensive with its contractual obligations assumed under the JCT contract and no more. That obligation did not extend to obtaining cover for the damaged cables, so Conway was not covered to the same extent as the RFU and Conway was not covered for the damage to the cables. Conway’s co-insurance defence failed and there was no bar to the subrogation claim.

On appeal, Coulson LJ summarised the key relevant legal principles that were to be derived from a number of potentially relevant past cases.

Legal Findings

He concluded the mere fact two parties are insured under the same policy did not, by itself, mean they are each covered for the same loss or cannot make claims against one another.

Where it is alleged one party has procured insurance for another, it will usually be necessary to consider whether there was requisite authority and intention to procure such cover and its relevant agreed scope. It is not a necessary pre-requisite for such matters for an underlying contract to exist between the relevant parties but, where one exists, in most cases that will be the best place to find evidence of such authority, intention and scope of cover. However, that was not to say the existence of an underlying contract would always provide complete answers.

Coulson LJ dismissed Conway’s appeal. The High Court had applied the correct legal tests. The judge had correctly regarded the JCT terms as a starting point for consideration of these issues and those terms were clear. The parties were professionally advised and if they had intended to procure the wider cover for Conway as Conway contended, that would have been reflected by the JCT contract terms. They did not.

For project parties, this judgment makes clear how important their contractual arrangements are in determining the extent of their respective insurance coverage, even if co-insured. However, the case also impresses the need for insurers to pay close attention to the project contractual arrangements as well, because these may well dictate the extent of their subrogation rights in the event they pay out a claim under the policy they issue.