The Rugby Football Union v Clark Smith Partnership Ltd and FM Conway Ltd [2022] EWHC 956 (TCC) (29 April 2022) (Eyre J)

The Rugby Football Union (“RFU”) engaged Conway in 2012 to install ductwork as part of upgrade works to Twickenham Stadium before the 2015 Rugby World Cup. Conway was appointed under an amended JCT Standard Building Contract without Quantities, 2011 edition. RFU separately engaged Clark Smith to design the ductwork.

The Contract required RFU to put in place a joint name, all risks insurance policy under Insurance Option C, which required RFU to effect insurance to cover Conway for physical loss or damage to the work executed or to site materials. The Contract itself provided that the cost of rectifying damage caused by Conway’s own defective work would not be covered by any such policy. This exclusion meant there was no obligation on RFU to put in place project insurance to cover such losses.

The project-wide insurance policy, insured RFU as principal, the “contractor for each Project” and sub-contractors, each for their respective rights and interests, indemnifying the insured “against physical loss or damage… from any cause whatsoever”. The policy included a DE3 exclusion, which excluded damage to the insured property and associated costs resulting from a defect in design or workmanship. The policy provided that the insurer waived “all rights of subrogation which they may have or acquire against any insured party”.

RFU claimed that there were design and workmanship defects in the ductwork, which damaged the high voltage power cables when pulled through it. The RFU was indemnified under the terms of the all-risks policy but said that Clark Smith and Conway were liable for those losses. Proceedings were brought in RFU’s name by the insurer for recovery of those losses with both Clark Smith and Conway denying liability and pursuing contribution claims against the other.

Conway argued that RFU entered into the policy as their undisclosed principal. It claimed that it was co-insured with RFU under the project wide insurance policy, and thus had the benefit of the policy’s cover to the same extent as RFU. Therefore, it argued that RFU could not claim against it for losses covered by the policy, also meaning that RFU’s insurer could not make a subrogated claim against them for sums already paid out, and that Clark Smith could not seek contribution from them for their defective design work under the Civil Liability (Contribution) Act 1978.

As a preliminary issue, the court had to determine whether the insurance was limited to the extent of cover required under the Contract; if it was, then Conway was not co-insured with RFU in respect of the relevant loss and the waiver of subrogation would not preclude the insurer’s claim. Alternatively, if it was not, then whether Conway’s cover under the policy was co-extensive with RFU’s cover in respect of the losses for which RFU had been indemnified, meaning Conway would have the defence of co-insurance.

The law does not allow an action between two persons that are insured under the same policy against the same risk, or ‘co-insured’. The case of Gard Marine and Energy Ltd v China National Chartering Company Ltd [2017] UKSC 35 confirmed that this principle is based on an implied term in the underlying contract between the parties, so a matter of construction for the judge to consider in each case.

Eyre J considered whether Conway was insured for the claimed losses by applying the principles of agency. If RFU had taken out insurance as an agent for Conway, with Conway being the undisclosed principal of RFU, three cumulative conditions had to be satisfied. RFU had to have had authority to contract on Conway’s behalf, had to have intended the policy to cover Conway’s interests, and the terms of the policy could not have precluded the extension of cover to Conway. It was the terms of the underlying contract between the parties that would determine whether, and to what extent, RFU as agent had the requisite authority and objective intention to obtain cover for Conway as principal, and therefore the existence and extent of Conway’s insurance cover under the policy.

Since the building contract required RFU to effect insurance under Option C, which expressly excluded damage caused by Conway’s own defective work, RFU’s authority and intention to procure insurance on Conway’s behalf was limited. Therefore, Conway was not insured for the claimed losses, and its cover was limited to only that which the RFU was required to obtain under the JCT contract. On a proper interpretation of the contract, the parties were not insured to the same extent in respect of the same risk, in particular in respect of losses suffered by RFU resulting from damage caused by Conway’s defective work and for which RFU had been indemnified by its insurers.

The court rejected Conway’s argument that discussions and dealings between the parties around the time the policy was effected, indicated that RFU’s authority and intention went beyond the contract’s insurance obligations, as there was an understanding that RFU would obtain comprehensive insurance for Conway. It was held that it was the underlying building contract’s terms which mattered when ascertaining the intended effect of the policy.

Nothing in the contract, or the prior letter of intent, suggested that RFU intended to take out insurance to cover Conway in respect of liability for loss suffered by RFU as a result of Conway’s defective work, thereby limiting RFU’s recourse to a claim under the policy. Indeed, the documents “are indicative of a very different arrangement” (paragraph 125). There had been a number of bespoke amendments to the JCT contract, but Insurance Option C was not modified or extended.

Eyre J held that Conway’s cover under the insurance policy was not fully co-extensive with RFU’s. The cover was that provided by Insurance Option C of the Contract, and nothing more extensive. It did not provide a common fund recourse to act as RFU’s sole redress for loss flowing from breaches by Conway. Further, as Conway was not precluded by co-insurance under the policy, Clark Smith could seek contribution from it under the Civil Liability (Contribution) Act 1978, because they were liable in respect of the same loss.

A further issue raised was that of subrogation. The common law rules of subrogation allow an insurer who has paid out money under an indemnity insurance policy to recoup all or some of that money from a third party who caused or contributed to that loss, by ‘stepping into the shoes’ of the insured. That is precisely what the case involved here. Where insurance is taken out in joint names, the insurer usually has no right of subrogation against the co-insured who caused the loss. Whether joint insurance will preclude a subrogated claim by insurers will ultimately depend on the interpretation of the terms of the particular policy and underlying contract between the co-insureds.

Conway argued that the express waiver of subrogation in the insurance policy precluded the insurer, from bringing a subrogated claim against it, regardless of whether it was fully co-insured with RFU. Eyre J rejected this, saying, “the starting point in considering the effect of a waiver of subrogation clause is… the underlying contract between the parties” (paragraph 128). He held that the waiver of subrogation in the policy could not protect Conway from insurer’s subrogated claim, arising as it did out of a matter in respect of which Conway was not insured.

A construction contract providing for insurance to be effected in the joint names of the parties, gives rise to an implied term that neither party can claim against the other for damage caused to the works covered by the risks against which the policy insures both parties. This case, however, is an important reminder that it is the express terms of a contract which the court will uphold, and they will not be overridden by implied terms to the contrary. It is also the terms of the underlying contract, rather than the insurance policy, which will determine the extent of cover.

As a take-away, an insurance policy stating that it protects the interests of a third party does not of itself give that third party the right to enforce its terms. A contractor who has been named under a project-wide joint names insurance policy by their employer should not assume that they are automatically covered and should instead carefully review the terms of their underlying contract to determine the scope of coverage.