Construction insurance: contractual indemnities and joint names insurance
There is a great deal of case law which deals with the question of whether an employer who is obligated to take out insurance cover of Works in joint names for himself and a contractor can rely upon a contractual indemnity from the contractor in relation to a loss which might properly to be covered by the policy.
The recent decision of the Court of Appeal in Tyco v. Rolls-Royce (reversing the first instance decision of HH Judge Gilliland QC) is a reminder that issues such as this hinge ultimately on the construction of the building contract and that a different regime may apply where damage is suffered by existing structures (or by the Works after they have been taken over from the contractor) to that applicable while the building work itself is in progress.
Background
Rolls-Royce, the employer under the contract, commissioned Tyco to design and install a fire protection system at its new manufacturing plant. After Rolls-Royce took possession of the site, one of the main supply pipes burst damaging parts of the building which were outside the area of Tyco’s works. For the purposes of the case, it was assumed that this occurred because of Tyco’s negligence.
The case revolved around two clauses in the contract between the parties:
- an indemnity clause by which Tyco agreed to indemnify Rolls-Royce against any negligent act; and
- a clause requiring Rolls-Royce to maintain joint names insurance in respect of “Specified Perils”, including flooding and water damage.
Rolls-Royce failed to take out the joint names insurance and claimed damages from Tyco under the indemnity clause.
Tyco responded by saying that on the proper construction of the Specified Perils clause, and as a principle of law, Rolls-Royce was not entitled to make recovery from Tyco in relation to any loss which should properly have been covered under the policy that Rolls-Royce should have taken out.
Decision of Court of Appeal
The Court of Appeal overturned the first instance decision on the basis of a narrow construction of the insuring clause. It was found that, as a matter of fact, this clause did not require Tyco to be named as an insured on anything other than the Works policy. Because the damage was to parts of the building which were not within the Works, the loss would never have been recoverable under the only policy which Rolls-Royce were required to arrange.
Perhaps more controversially, however, Rix LJ then went on to express the view that the House of Lords’ decision in CRS v. Taylor Young did not provide authority for the proposition that, as a matter of law, a contractor could never be sued by an employer in relation to risks for which the employer had contracted to take out joint names insurance. Rix LJ expressed the view that the question of whether a contractor could be sued was ultimately a question of construction. He also indicated that, in his view, the insurance clause was not intended in the present case to override the contractor’s obligation to indemnify Rolls-Royce in respect of the consequences of the contractor’s breach.
Comment
The cases in this area have arrived at quite different results, which may be explicable only partly by the fact that differing wordings were being considered in each matter. In practice, the outcome of these disputes often depends on whether a particular court’s inclination is to give priority to the parties’ apparent pre-allocation of the risk of negligently caused damage or to the need for the contractor to be held accountable for its own breaches of contract.
It is not yet clear whether the Tyco decision will be appealed further but it is unlikely that the result will provide definitive guidance as to the resolution of future disputes in this area. The truth is that the primary responsibility for avoiding confusion in relation to future contracts lies with those who draft them. It is important to recognise that ensuring that contractual indemnity and insurance provisions mesh properly with each other requires input from specialists who understand both the construction and insurance law issues that can arise. Resorting to industry standard form wordings or precedents developed by pure construction contract lawyers may not be sufficient.
Further reading: Tyco Fire & Integrated Solutions UK Ltd v Rolls Royce Motor Cars Ltd [2008] EWCA Civ 286
