Haberdashers v Lakehouse
It is normal practice for contactors to insure the works using their existing CAR insurance, with various stakeholders being added as joint insured for the duration of the project. The stakeholders are usually the client, any funders, and sub-contractors.
In Haberdashers v Lakehouse the court considered how project insurance works in respect of a sub-contractor. The project consisted of works to a school operated by the Trust, where Lakehouse was the main contractor, and CPR was a subcontractor. Three insurers together provided the project cover.
CPR carried out works on the roof of the school, which then caught fire. The Trust sued Lakehouse for £11m for the fire damage. Lakehouse then claimed against CPR, and CPR claimed against the insurers. The insurers paid a settlement of £8.75M to the Trust. The question then was whether or not CPR was covered by the project insurance and if their own insurance could be called upon for a contribution.
The roofing sub-contract expressly required that CPR obtained its own insurance, which it did. CPR’s insurance had a limit of liability of £5m, which the project insurers wanted to claim as a contribution. CPR’s insurers argued that the existence and terms of the project insurance, and the terms of the sub-contract, meant that CPR was a co-insured and entitled to the cover provided by the project insurance. The project insurers argued that the project insurance was the ‘first call’, but that they were entitled to bring a subrogated claim against CPR to recover the losses insured by CPR under its own policy.
In order to decide if CPR’s policy was liable to the project insurers, the court had to consider how subcontractors in the construction industry come to participate in project insurance policies. Three theories were suggested as the routes to participation: agency; standing offer; or acceptance by conduct.
The agency theory was that the subcontractor gives authority to the main contractor to procure insurance on the subcontractor’s behalf, and the subcontractor then ratifies the agent’s procurement of insurance as an undisclosed principal. However, an undisclosed principal has to be capable of being ascertained at the time when the insurance was effected, which is before a subcontractor is usually engaged, and the ratification cannot be done by a person who has no insurable interest at the time of the insurance being effected. The court considered that ignoring these principles of agency was going too far.
The standing offer theory was that there is a unilateral offer made by the insurers to insure anyone who becomes a subcontractor, which each subcontractor accepts by entering into a sub-contract. The court decided that this would be the correct option, but that in this case CPR’s contract with Lakehouse required that CPR would obtain its own insurance, and that this would be enough to preclude CPR from the unilateral offer.
The acceptance by conduct theory was that the insurer accepts by conduct that the subcontractor is included in the project insurance, which obviated the need for an offer and acceptance analysis. The court held that CPR could not be insured on this basis, because it would mean that the acceptance by conduct over-rode the express intention of Lakehouse and CPR in requiring CPR to obtain its own insurance.
It was therefore held that the project insurers were entitled to bring a claim against CPR for its losses from the settlement it paid. To the extent that CPR had its own insurance cover, CPR was not entitled the protection of the project insurance. The project insurers would be able to recover the full amount of CPR’s insurance cover.
Unless or until there is further judicial consideration of the subject, sub-contractors should be careful not to put their own policy at risk.
If you would like further information on this article please contact Derryn Rolfe, or you can give us a call on 0345 070 6000.