Contractors' all-risk insurance: benefits and cases

A project policy will often cover the employer, the main contractor and any subcontractors. The benefit of such a single policy is that it is designed to cover the various different parties working on site and their respective financial interests. It also creates a fund to make good any damage to the works, and avoids litigation between the various contracting parties.

Whether a party is covered by the project insurance will turn on the interpretation of the relevant construction contract and the specific wording of the project insurance. This is not always as simple as it seems, as a recent High Court case demonstrated.

In Haberdashers' Ask's Federation Trust Limited v Lakehouse Contracts Limited & Others [2018] EWHC 558, the court was asked to consider whether a subcontractor was covered by a project policy. The project involved extending a school in Lewisham, south-east London, operated by the Haberdashers' Trust. Lakehouse was the main contractor and had subcontracted roofing works to CPR, which had negligently caused a fire during hot works. The court had to determine to what extent, if any, CPR was entitled to the cover provided by the project insurance.

The answer was significant as, if CPR was not insured under the project policy, Lakehouse's insurers – the project insurers – could pursue a subrogated claim against CPR to recover the losses arising from the fire; if CPR was insured, the insurers would be prevented from bringing such a claim.

Briefly, the doctrine of subrogation allows an insurer to recover money it has paid to its insured party – in this case, Lakehouse – from a wrongdoer – in this case, CPR. Under a project policy, insurers normally waive their rights of subrogation between the different insured parties so that litigation between parties is avoided.

There was no doubt that the project policy covered the subcontractors of Lakehouse, to include CPR; however, the roofing subcontract between Lakehouse and CPR contained a term that required CPR to provide its own insurance. The court found that the parties could not have intended for CPR to benefit from the project insurance in circumstances where it had expressly agreed to take out its own insurance under the terms of the roofing subcontract. The court therefore held that CPR was not covered by the project insurance and Lakehouse was able to sue CPR to recover its losses.

This was the first time that the court had been asked to consider how subcontractors come to be covered under project insurance. The court said that where a policy covers a class of unidentified insured parties such as 'all subcontractors of any tier' it is akin to the insurer making a standing offer to all subcontractors to become insured under the policy; the subcontractor accepts that offer when it enters into the subcontract. However, where the subcontract contains a contradictory, express term that thesubcontractor is to obtain its own insurance, that subcontractor will never become part of that class of insured parties.

The decision in this case was probably not the outcome that the subcontractor expected. Fortunately for CPR, the liability insurance it purchased pursuant to the terms of the subcontract did respond, and the claim brought by Lakehouse against it was defended by CPR's liability insurers. However, the fact that the subcontractor unexpectedly found itself unprotected by a key insurance asset apparently taken out for the benefit of all the parties on the construction project is cause for concern.

Many subcontractors will have terms in their contracts requiring them to have insurance, but will also expect to benefit from the project insurance and to avoid subrogated claims in the event the works are damaged by their own negligence. The decision in this case was appealed and due to be heard by the Court of Appeal on 22 January. However, the parties settled at the court door, so this case remains good law.

Rebecca Ransome-Lewis is a senior associate at Pinsent Masons rebecca.ransome-lewis @pinsentmasons.com

Related competencies include: Contract practice