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Joint insurance policy clauses in the offshore sector

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Contractual clauses requiring parties to obtain joint insurance policies, and the effect those clauses can have on a party’s right to bring a claim against their joint assured, have received close scrutiny recently. The issue was comprehensively considered by the Supreme Court in its obiter judgment in Gard Marine and Energy Limited v China National Chartering Company Limited and others (Ocean Victory) [2017] UKSC 35, on which we have previously commented. More recently, both the English and Scottish courts have dealt with the issue in judgments that are considered here.

At first glance, these cases may appear to be of limited interest to those not working in insurance. Careful consideration shows, however, that the insurance principles addressed may have broader application in the energy sector too.

Haberdashers’ Aske’s Federation Trust Limited and others v Lakehouse Contracts Limited and others [2018] EWHC 558 (TCC)

The recent judgment in Haberdashers’ Aske’s Federation Trust v Lakehouse Contracts cited the Ocean Victory judgment and is an example as to how the judgment may be applicable in the energy field.

In summary, Haberdashers contracted for Lakehouse to undertake the works required to extend the school operated by the former. In turn, Lakehouse entered into a sub-contract with Cambridge Polymer Roofing (“Cambridge”) for the latter to carry out the roofing works. Project insurance was obtained that covered “sub-contractors of any tier”; however, it was a condition of the sub-contract that Cambridge obtain its own insurance, which it did.

A fire broke out and damaged the building, which led to Haberdashers bringing a claim for damages against both Lakehouse and Cambridge. Lakehouse settled the matter with Haberdashers and then sought to recover a contribution from Cambridge.

The judge held that the project policy wording covering “sub-contractors of any tier” was a standing offer to Cambridge to join a joint-assured policy. However, because the sub-contract expressly required Cambridge to obtain its own insurance policy, the judge held that Cambridge was unable to take advantage of the project policy.

This express requirement for Cambridge to obtain its own insurance policy was sufficient for the judge to hold that Lakehouse was able to pursue a claim to recover sums from Cambridge and meant the judge did not construe Cambridge as a joint assured. This shows that the courts will take a broad approach when construing the relevant terms and determining whether contractual counterparties are precluded from bringing claims against each other by the existence of a joint insurance policy.

SSE Generation Ltd v Hochtief Solutions AG and Another [2018] CSIH 26

Another recent case, handed down by the Scottish Inner House, also considered the effect of a joint insurance clause on the parties’ right to sue one another. Whilst this case will not bind English courts, the judgment will have persuasive value should similar facts be disputed in the English courts in the future.

The case of SSE Generation Ltd v Hochtief Solutions AG arose out of the collapse of a tunnel designed and constructed by Hochtief Solutions (“Hochtief”) as part of a hydro-electric scheme for SSE Generation (“SSE”) at Glendoe, Fort Augustus. The work was carried out in the period 2006 to 2008; however, only eight months after takeover, in April 2009, there was a significant tunnel collapse resulting in the blockage of a 70 metre section of the tunnel. The collapse put the scheme out of commission resulting in a significant loss of revenue for SSE of around £130 million.

The parties were unable to reach an agreement for the repair works and Hochtief refused to carry out those works without being paid. SSE ultimately instructed a third party.

The case focused on establishing whether Hochtief’s contractual obligation was to warrant the tunnel’s fitness for purpose at completion and the Inner House held that it was, such that, where Hochtief had failed to fulfil that obligation on the facts, it was liable for the losses suffered by SSE.

Another issue considered by the Inner House, however, concerned the effect of the joint insurance policy on SSE’s right to bring a claim against Hochtief. The judgment considers the effect of the Ocean Victory judgment and notes that a joint insurance clause normally gives rise to an implied term that the parties cannot sue one another. In this case, however, the Inner House held that other clauses permitting the parties to seek to recover any loss not covered by the joint insurance policy from the other party were evidence of the parties’ intention that the joint insurance pool would not represent the parties’ only option to recover losses. Accordingly, the Inner House construed the relevant clauses as showing a clear intent that the existence of a joint insurance policy did not also imply a term preventing one party from bringing a claim against the other.

Joint insurance clauses in the offshore sector

Historically, offshore contracts have typically included knock-for-knock indemnities. Such indemnities are broadly defined as requiring two parties (usually employer and contractor) to indemnify and hold each other harmless in respect of any claims or liabilities arising as a result of damage to their property and personal injury to or death of their personnel. As a result, parties entering into offshore contracts in recent years have not expected to recover property losses from their contractual counterparties and the prevailing view has typically been that such contracts were unaffected by joint insurance issues. However, we have recently seen an increase in the number of offshore contracts in which the parties have drafted provisions carving out or limiting the scope of the knock-for-knock indemnity. As a result, in such circumstances, it may be of relevance whether a party is prevented from claiming against its joint assured by virtue of the joint insurance clause.

Conclusion

Parties entering into contracts requiring that they also enter into joint insurance policies should be aware that they may be prevented from claiming for losses against their contractual counterparty and third parties as a result.

Should parties wish to preserve the right to claim against their contractual counterparty for losses that are otherwise covered by the insurance policy, it is advisable that they ensure that express wording specifically protecting that right is inserted into the contract.

Insurers writing offshore vessel risks should take note that, unless express wording to the contrary is included, joint insurance policy clauses may prevent an insurer’s right to pursue subrogated claims against charterers and third parties.

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