Richard Houseago, partner in Vizards Staples & Bannisters, the City insurance and reinsurance group, re-examines the rights of contribution against joint insureds.
For at least the last 14 years most insurance law commentators would have been able to state confidently that rights of subrogation could not be exercised between joint insureds. Thus, after indemnifying a landlord for a fire loss, the buildings insurer would appreciate that, where the tenant was jointly insured under the same policy it, would not be possible to recover the outlay from him. However, pressing for an analysis of exactly why there was such a bar on the exercise of subrogation rights between joint insureds would give rise to a variety of answers.
One view would hold that the objection was one of "circuitry of action", a procedural rather than a substantive bar. The insurer would have a right of action against the negligent co-insured but he in turn would have his own claim under the policy, so that the two claims would cancel one another. The competing view was that in a case of joint insurance there was implied in the policy some term, either that the insurers would not seek to exercise any subrogation rights, or extinguishing any such rights.
As between the insurer and his insureds, often the ultimate analysis of the position might be of rather academic interest but HHJ Wilcox in the Technology and Construction Court has just decided the position in a context which is of fundamental importance to those concerned with Contractors All Risks (CAR) and professional indemnity risks. Co-Operative Retail Services (CRS) v. Taylor Young Partnership (TYP) and Hoare Lea & Partners (HLP) has significance for all those looking at subrogated recovery situations where joint insurance features.
The case concerned a fire during the construction of new premises for CRS in respect of which TYP was the architect and HLP the mechanical and electrical services consultant. There was joint CAR cover in place between CRS and the principal members of its construction team. The CAR insurers of CRS brought an action to recover the fire damage from the members of the professional team, who were outside the scope of the joint insurance, on the basis of alleged breaches of their respective professional appointments. One part of the professionals case was that the fire was caused or contributed to by negligence on the part of members of the construction team; a fairly typical situation then, but one in which there were no direct rights of action which the professional team could employ against the contractors concerned. The only claim to the professionals was one of contribution under the Civil Liability (Contribution) Act 1978.
By virtue of that Act "Any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)". Therefore, the professionals could only proceed with their claim if there was, or at some time had been, a liability in respect of the same damage on the part of the contractors to CRS.
The factual situation might have been quite typical but the Court had to make a definitive decision on the position between the joint insureds under the CAR cover for the first time. Essentially, the professionals' claim could only proceed if the Court found in favour of the limited "circuitry of action" rationale. In such a context the stakes are high. If the professionals' claim cannot proceed then they are left potentially with 100% of the liability, even if only partially at fault. Conversely, if the professionals' claim can proceed the net effect might arguably be to reduce the subrogated recovery by the extent of the co-insureds' culpability.
HHJ Wilcox found in favour of the more substantive reasoning that, in all the circumstances, there was not merely a procedural objection to the exercise of subrogation rights between joint insureds but that there was actually a prior extinguishment of rights whereby no liability could ever arise between joint insureds in the first place. The professionals' claim against the contractors was struck out accordingly.
The judgment turned on a number of principal findings:
- The Judge preferred, from the earlier insurance authorities, the approach of National Oilwell v. Davy Offshore 1993 and Stone Vickers v. Appledore Ferguson 1992. This was that it was necessary to imply a term into the policy of insurance to avoid the unsatisfactory possibility of an insured being subject to a liability for loss and damage insured to his benefit.
- The Judge regarded the effect of that term as being to prevent any notional liability arising in the first place, not that it merely gave rise to a procedural bar: "on behalf of TYP and HLP (it is) submitted that Petrofina v. Magnaload 1984 is authority for the proposition that an insurer cannot use the name of one insured to sue a co-insured under the same policy because to allow him to do so would result in circuitry of action and that prevention of circuitry of action was a procedural bar not an extinction of liability".
This was consistent with how both liability and insurance was regulated under the main contractual arrangements of the JCT Standard Form of Building Contract where clause 22A insurance was required, as in this case. This provides for joint names cover, the policy proceeds then fund the remedial scheme and any other liabilities between employer and contractor are made subject to this arrangement.
The 1978 Act could not of itself create a right of action where the scheme of contractual arrangements meant that there was no such right before between the concerned parties; "By virtue of the contractual scheme under the JCT neither (contractors) were liable to pay damages to CRS immediately after the fire. This was not a cessation of liability - the contractual scheme exhaustively dealt with liability".
There was no unfairness in the net effect to the professionals; "The insurance arrangements represent a balance between competing interests."
So, the CRS decision moves insurance law to a clarification of the nature of the bar on the exercise of subrogation rights between co-insureds. The fact of the joint insurance extinguishes any potential liabilities even before they might notionally arise.
The effect in the construction context is to emphasise the exposure of the professional who positions himself outside the scope of any joint insuring arrangement and who fails to limit his potential liability to the employer. Such a professional leaves himself 100% at risk. In a wider context, the insurer concerned which is exercising subrogation rights against a stranger to the policy should be resistant to offering any discount on the claim.
The TCC has declined leave for an appeal to the Court of Appeal but it is understood that permission may be sought from the Court of Appeal itself.