Definition

8m. In return to paying ICI’s damages Amoco was granted an unconditional release from any and all claims by ICI as well as an assignment of all ICI’s rights under the insurance policy. When Amoco made a claim against the insurer the insurer claimed to deduct the amount settled with ICI. Potter J rejected Amoco’s argument that the settlement amount had to be disregarded for the reason that the payment was to be regarded as equivalent to a ‘gift’. The judge distinguished Burnand reasoning that the intention underlying the payment was to be ascertained from construction of the Act of Congress. The plain intention of the Act was to compensate for uninsured losses and the Act was not one in respect of which the payee enjoyed any right of action for enforcement. ‘It was only a gift to which the assured had no right at any time until it was placed in their hands’.⁶⁹ The appeal was dismissed.⁷⁰ In agreement with Potter J at first instance, Hirst LJ at the Court of Appeal referred to the wording of the assignment to determine the intention of the payment to ICI. Accordingly, by payment and assignment, the parties intended to

… resolve any disputes that exist or may arise between them as a result of the transactions … and this desire is fulfilled by cl. 1.2 under which ICI release and discharge Amoco from … all claims liabilities obligations and causes of action whatsoever contingent or not contingent, known or unknown, which it now has, had or may have arising out of the transaction …

This was a true commercial settlement of any possible claims by Amoco against ICI irrespective of any liability by the former against the latter. Moreover, the assignment was expressly qualified by the words ‘except to the extent of the insurance underwriter’s subrogation rights’. Hirst LJ construed the words in their wide sense, so as to include Colonia’s rights as against ICI to treat Amoco’s payment as diminishing (in fact in this instance extinguishing) ICI’s loss.

Obligations of the assured and the insurer

Permission to use his name by the insurer

The assured has his right against the third party irrespective of full or partial indemnity from the insurer.⁷¹ If the assured did not retain his right to recovery from the third party, the insurer would have nothing to subrogate into. As stated above the insurer must bring the subrogation action (unless there is an assignment of the assured’s rights to the insurer) in the name of the assured. The assured is therefore required to permit the insurer to use his name in the action against the third party. The insurer, on payment, may request the assured to sign a letter of subrogation, authorising the insurer to proceed in the name of the assured against any wrongdoer who has caused the relevant damage to the assured. If the assured refuses to permit the insurer to use his name in a claim against the third party the insurer can bring proceedings to compel him to do so.⁷² In such a case insurers bring an action against both the assured and the third party, in which (1) they claim an order that the assured shall authorise him to proceed against the third party in the name of the assured, and (2) they seek to proceed (so authorised) against the third party.⁷³

Acting in good faith (not to prejudice the insurers’ subrogation rights)

An assured may compromise any claim he has against a third party in respect of his insured losses.⁷⁴ By such a compromise if the assured prejudices the insurer’s subrogation rights the insurer will be entitled to seek a remedy from the assured. The remedy depends on the timing of the compromise of the claim in question. If the assured, for instance, enters into an agreement with a third party which prejudices the insurer’s subrogation rights before the insurance contract is concluded, the existence of such an agreement is likely to be regarded as a material fact which needs to be disclosed to the insurer.⁷⁵ As fully discussed in Chapter 4 of this work, breach of duty of disclosure in business insurance entitles the insurer to avoid the insurance contract. The Court of Appeal discussed the matter in Tate & Sons v Hyslop⁷⁶ in which the assured made an agreement with lightermen under which the latter were to be liable only for negligence and were not to face the more onerous duties owed by common carriers. The Court of Appeal accepted that as a result of such an arrangement the underwriters would not have the same valuable recourse over against the lightermen as they otherwise would have had but for such an arrangement. The Court highlighted that in the case in which the lightermen carried the goods without his full liability attaching, they would charge a larger premium than they would in the case where there was such full liability. Consequently, the arrangement which minimised the lightermen’s liability to the assured, and therefore the insurer’s right of subrogation, was found as a material fact which should have been disclosed to the insurer. It should be noted that the Court of Appeal did not analyse the matter as a general principle of whether prejudicing the insurer’s subrogation right before the contract is concluded is always a material fact that should be disclosed. In this case it was clear that the cargo insurer operated a dual premium structure under which a higher premium was charged where lightermen were liable only in negligence. When a similar dispute arises the insurer doubtless has to prove that the arrangements existed between the assured and the insurer before the insurance contract was made a material fact and non-disclosure of such a material fact induced the insurer to enter into the contract. Non-disclosure of it before the insurance contract is concluded will entitle the insurer to avoid the contract for breach of the duty of good faith.

Once the insurance contract is made, the assured’s obligation not to prejudice the insurers’ subrogation right becomes contractual. It is implied into an insurance contract that in exercising his rights of action against third parties the assured will act in good faith for the benefit of himself as well as for the benefit of the insurer.⁷⁷ Breach of this implied term will entitle the insurer to claim damages suffered as a result of such breach by the assured.⁷⁸ This would be either not indemnifying the assured or if the payment had already been made by the insurer to claim the amount paid back by way of damages for prejudice of the insurer’s subrogation rights. It is important to determine the time at which the insurer’s subrogation rights arise. Two stages might be considered here: (1) The insurer’s subrogation rights arise once the contract is concluded;⁷⁹ It is inherent in the insurance contract that the insurer has a contingent right of subrogation, which attaches and vests in them at the moment when the policy is effected by the insurer; (2) It arises upon payment after the loss occurs. If the second view is correct, an agreement between the assured and the third party, which has an effect of prejudicing the insurer’s (future) subrogation right, will not give any remedy to the insurer as the insurer’s right has not arisen, therefore nothing has been prejudiced at that stage. However, if subrogation is a contingent right in the sense that the state of affairs postulated may never arise, once the contingency has arisen, the right vested as a contingency has become an effective right and the assured’s abovementioned agreement will thereby be in breach of an implied term of the contract which prejudiced the insurer’s subrogation right. As also analysed below under ‘increased risk policy’ it is submitted that the latter is the approach that should be adopted for a fair and just solution for the parties to an insurance contract.

A recent example of this is seen in Horwood v Land of Leather Ltd⁸⁰ in which Land of Leather suffered loss as a result of selling some leather products by Linkwise, which caused skin allergies to the people who purchased them. Land of Leather had to return the stocks and had to deal with adverse media coverage. Land of Leather and Linkwise entered into a settlement agreement that contained the following:

Land of Leather Holdings PLC & Linkwise Furniture Co Ltd agree that in return for a credit note from Linkwise of US$900,000 payable in six instalments of US$150,000 Land of Leather will undertake to buy US20,000,000 of products from Linkwise in 2008.
   Land of Leather also confirm they will make no further claim on Linkwise in respect of alleged allergic reactions to their products though no proof exists that the cause was Linkwise products.

The claims by customers against Land of Leather were claims in respect of which Land of Leather was insured under a products liability policy. The insurer clearly had an interest in claiming an indemnity from any person whose conduct caused Land of Leather to be liable in respect of such claims. According to the policy terms it was a condition precedent that the assured shall not, except at his own cost take any steps to compromise or settle any claim or admit liability without specific instructions in writing from the Insurer. The assured was clearly in breach of this clause which provided the remedy that the insurer sought. Teare J nevertheless considered the assured’s prejudice of the insurer’s subrogation rights. Accordingly, the judge accepted that a term was implied in the policy that required the assured to act reasonably and in good faith and with due regard to insurer’s interests and rights of subrogation under the policy. In the words of Teare J,⁸¹ ‘the implied term arises because the insurer has a right to be subrogated to the rights of the insured when he indemnifies him pursuant to the policy of insurance. If the insured acts without regard to that contingent right he may harm the value of that right to the insurer. The most obvious harm occurs where the insured settles a claim he may have against a third party for an indemnity and so deprives the insurer of its benefit in whole or in part. But in principle, harm may be caused to the insurer’s rights of subrogation where the claim against the third party is not lost or reduced in value by settlement. For example, the documents necessary to establish such claim may be destroyed. I therefore consider that the implied duty must be one which obliges the insured to act in good faith and reasonably with regard to the interests of the insurer’.

Standard clauses incorporated in marine policies may impose express obligation on the assured to preserve the insurer’s subrogation rights against third parties. For instance the Institute Cargo Clauses (A) 1963 cl.9 provided ‘It is the duty of the Assured and their Agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss and to ensure that all rights against carriers, bailees or other third parties are properly preserved and exercised.’ In such a case the question may arise as to the insurer’s liability for the expenses incurred by the assured to preserve the insurer’s interest. This was discussed in Netherlands Insurance Co Est 1845 Ltd v Karl Ljungberg & Co AB (The Mammoth Pine)⁸² in which a consignment of plywood was insured for a voyage from Singapore to Denmark. The policy incorporated a sue and labour clause as well as the Institute Cargo Clauses (A) 1963 cl.9. When the goods were discharged in Denmark in March, 1980, some of the goods were found to be missing and others to be damaged. Any claim against the carriers would become time barred in March, 1981. The assured made his claim against the insurers under the policy in January 1981, and liability was denied by them shortly afterwards. As he was contractually obliged to do so, the assured sued the carrier in Japan in order to preserve the time bar. His action in Singapore against the insurer for the loss of the cargo was compromised. However, the insurer refused to pay the expenses that the assured incurred to sue the carrier in Japan to preserve the insurer’s rights under the insurance contract. The insurer argued that the bailee clause in the policy imposed upon the assured the obligation to preserve the claim against the carriers for the benefit of the insurers but at the assured’s expense.

As the Privy Council held, it was the obligation of the assured under the bailee clause to commence the Japanese proceedings in order to ensure that all rights against the carriers were properly preserved. Clearly, costs may be incurred in performing such an obligation by commencing litigation to preserve a time bar and also in pursuing litigation so commenced in order to prevent it from lapsing or being otherwise prejudiced by delay. There was no express term in the contract imposing an obligation on the insurer to indemnify the assured against any expenditure thereby incurred. Thus, the Privy Council discussed whether business efficacy required implying a term into the policy with the effect of entitling the assured to claim such expenses from the insurer. The first part of cl.9 obligated the assured to sue and labour, namely that the assured was required to take reasonable steps to prevent and minimise the insured loss.⁸³ The assured is entitled to claim expenses incurred for such steps and such a claim is supplementary to the amount insured by the policy. In order to answer the question that arose in The Mammoth Pine, the Privy Council tried to reconcile the sue and labour clause with the assured’s duty to preserve the insurer’s rights; while the former entitled the assured to claim the expenses by law, there is no such general principle applicable to the latter and the contract did not expressly provide that such expenses can be claimed.

The Privy Council doubted that the terms of the sue and labour clause in the standard form had much impact upon the construction of the bailee clause included in the Institute Cargo Clauses. Their Lordships did not accept a general proposition that the mere fact that an obligation is imposed upon one party to a contract for the benefit of the other, that it carried with it an implied term that the latter shall reimburse the former for his costs incurred in performance of the obligation. However, the Privy Council noted that the relevant obligation was indeed for the benefit of the insurers and it was a material factor which should be taken into account. Thus their Lordships concluded that a term was implied in the contract, in order to give business efficacy to it, that expenses incurred by an assured in performing his obligations under the second limb of the bailee clause shall be recoverable by him from the insurers insofar as they relate to the preservation or exercise of rights in respect of loss or damage for which the insurers were liable under the policy.

It is submitted that sue and labour and a term imposing an obligation on the assured to preserve the insurer’s subrogation right represent two distinct principles. The expenses which may be covered under a sue and labour clause are those incurred to prevent or minimise the insured loss, that is mainly the loss that will cause harm to the assured which then might lead the assured to claim under the insurance contract. It may be necessary to take such steps before or after the loss occurs as the case may be, depending on the facts of each case. Moreover, in order to establish a sue and labour claim it is necessary to prove that the assured has incurred such expenses whilst an imminent danger to the subject matter insured was present. However, no such danger is required in respect of performance of the assured’s duty not to prejudice the insurer’s subrogation rights. An action of the assured performed at a time when no danger in terms of the insured loss is in question may prejudice the insurer’s rights. For instance the assured and the third party may reach an agreement to the effect of limiting the third party’s liability to the assured. Such an agreement will prejudice the insurer’s subrogation rights if it is made before the insured loss occurs but after the insurance contract was concluded, and if the cover provided by the policy is higher than the limitation agreed between the assured and the third party. In such a case no issue of sue and labour will arise. The agreement between the assured and the third party will limit what the assured and therefore the insurer after subrogation can claim against the third party but it will have no bearing on the occurrence of the loss insured under the policy or the amount of the actual loss that the assured may suffer upon the occurrence of the insured risk. The incentive in enabling the assured to claim sue and labour expenses is to encourage the assured to take steps to prevent or minimise the loss which may then reduce the insurer’s exposure under the insurance contract. In this respect the assured’s action in The Mammoth Pine which aimed to preserve the time bar might have had the double effect of (1) reducing the insurer’s exposure under the insurance contract because the assured may recover some from the third party and (2) preserving the insurer’s subrogation rights. However, the first objective, again, is distinct from sue and labour because the loss has already occurred and can be assessed, the action against the third party in Japan will not reduce or increase the actual loss suffered.⁸⁴ The action in Japan was for the benefit of the insurer as well as the assured. The reason for holding the insurer liable pro rata for expenses incurred was not because the action in Japan amounted to a sue and labour expense but because of the double benefit that was gained by the insurer as well as the assured. Thus it was just and fair to ask the insurer to contribute to such an expense. Moreover, if that action was sue and labour, the assured might be able to claim the whole expense, not merely the proportion representing his protected interest. Sue and Labour and a duty to preserve the insurer’s subrogation rights may be regulated under the same clause as seen in International Cargo Clauses (A, B and C) 2009 clause 16. In such a case the courts analyse the duty to sue and labour and preserve the insurer’s rights (bailee clause) separately.⁸⁵

International Hull Clauses cl.49 provides that insurers shall pay the reasonable costs incurred by the assured to preserve the insurer’s subrogation rights in the same proportion as the insured losses bear to the total of the insured and uninsured losses. The Institute Cargo Clauses 2009 (A, B and C) cl.16.2 provides it as the duty of the assured ‘to ensure that all rights against carriers, bailees or other third parties are properly preserved and exercised and the Insurers will, in addition to any loss recoverable hereunder, reimburse the Assured for any charges properly and reasonably incurred in pursuance of these duties’. Breach of cl.16 gives rise to a cross-claim for damages which in appropriate circumstances may amount to a full defence to a claim under the policy.⁸⁶

A further question might be whether the assured’s inactivity, in the absence of an express contractual obligation requiring him to take steps to preserve the insurer’s rights, entitles the insurer to seek remedy against the assured. It was submitted that, as found in IHC cl.9, such inactivity might be breach of an implied term to the effect that the assured should take reasonable steps to preserve the insurer’s rights.⁸⁷ Horwood v Land of Leather might be brought to support such an argument to further allege that the assured might be in breach of the duty of good faith by staying inactive while being aware of the necessity of the steps that should be taken to preserve the insurer’s subrogation rights.⁸⁸ Two further issues will arise here – if the assured’s inactivity is a breach of contract or breach of duty of good faith, what will the remedy be for such a breach or breaches? Second, the expenses that the assured will incur to preserve the insurer’s right will be an issue if he rejects to reimburse the assured with regard to such expenses. The remedy is most likely to be that the assured will lose his right of indemnification to the extent that his inaction prejudiced the insurer’s subrogation rights. Remedy for breach of post-contractual duty of good faith is fully analysed in Chapter 4 where it is seen that there is no unified applicable remedy for breach of the post-contractual duty of good faith but the judges may rely on the duty to find a just solution to the dispute in question. It is arguable that such a just solution might be awarding damages for the insurer to the extent that his subrogation rights are prejudiced. With regard to the second matter, as seen above, in Netherlands Insurance Co Est 1845 Ltd v Karl Ljungberg & Co AB (The Mammoth Pine),⁸⁹ the insurer was held to cover the expenses recoverable insofar as they related to the preservation or exercise of rights in respect of loss or damage for which the insurers were liable under the policy. In The Mammoth Pine the insurance contract expressly obligated the assured to take such steps that would protect the insurer’s interest. In the absence of such an express provision it will be difficult to prove both that the assured has an implied term requiring him to take steps to protect the insurer’s subrogation rights and the insurer will indemnify the assured for the expenses incurred. The safest approach to protect the insurers’ interest will be to expressly indicate these issues under the policy.

The insurer’s duty not to prejudice the rights of the assured

An insurance contract contains an implied term that the insurer will not exercise rights of subrogation to the prejudice of the assured.⁹⁰ The insurer’s breach of such an implied term, however, will not deprive the insurer of his subrogation rights.⁹¹ Subrogation confers proprietary interest (in the form of a lien) in favour of the insurer over sums received by the assured from third parties; such an interest cannot be undermined by inequitable conduct by the insurer.⁹² HHJ Thornton QC held in England v Guardian Insurance Ltd,⁹³ that if the assured suffers loss as a result of the insurer’s conduct the assured can still rely on his rights under the policy of insurance. It will be open to the assured to seek to set-off as damages any loss which the insurer’s conduct has caused them, since that conduct would constitute a breach of that implied term.

Subrogation action against co-assured

As stated above, a subrogation action has to be brought in the name of the assured which necessitates the limitation that a subrogation action cannot be brought against the assured if it is they who are liable for the loss, as the assured cannot sue himself. While the position is very clear when the assured and the wrongdoer is the same person,⁹⁴ it has become very controversial in English law whether an insurer is entitled to bring a subrogation action against a co-assured in a composite insurance policy where one of the co-assureds is the wrongdoer.

It is here necessary to point out the distinction between joint and composite policies.⁹⁵ In joint insurance the interests of the assured persons in the subject matter of the insurance are joint, meaning that all the joint assureds are exposed to the same risks and suffer a joint loss by an insured peril. A typical example is insurance of their house by husband and wife. In composite insurance several assureds may insure their own interests which are not necessarily the same. The insurance is known as composite insurance where a number of persons who are individually interested in the subject matter of a marine adventure take out insurance for the benefit of all in which each has a right to sue in respect of his own interest.⁹⁶ For instance, a shipowner and a demise charterer may insure the vessel in a composite policy in which the assured’s property right and the demise charterer’s interest in using the vessel might be taken into consideration. Alternatively, while the shipowner may insure his interest in ownership in a hull insurance; the demise charterer, under the same policy, may insure his liability to the shipowner in case the vessel’s hull is damaged by the charterer’s negligence. The starting point should be the principle that the assured cannot sue himself. A co-assured is certainly an insured person under the insurance contract. But does he fall outside the insurance contract or is he regarded as a third party when the injured party who has a claim against the assured is the other co-assured?

The cases that discussed the matter first questioned if there was a rule of law preventing the insurer from bringing a subrogation action against a co-assured in relation to the claim that was insured under a composite insurance policy. In The Yasin⁹⁷ Lloyd J was of the view that the reason for the insurer being prevented from bringing a subrogation action against the co-assured was not due to a fundamental principle to this effect, but was rather as a result of ordinary rules about circuity. In other words, where one of the co-assureds claims under the policy the insurer may indemnify if the insurance contract covers the loss but then the insurer may subrogate into the indemnified co-assured’s rights against the other co-assured who then in return is entitled to claim under the insurance contract. However, if the subject matter insured is a property which belongs to one of the co-assureds, A, and if the other co-assured, B’s claim against the insurer is for his liability to A, as the insurance contract covered the loss of or damage to property but not the liability of B, there would be no obstacle for the insurer to bring a subrogation action against B as the circuity principle will not help B.

Apart from some disputes which arose from a policy taken out for the benefit of landlords and tenants, the issue mentioned here has mostly been discussed in insurance in relation to construction contracts including contracts to build ships, power plants and oil platforms. The common nature of such contracts is that normally the employer who owns the construction – the subject matter of insurance – enters into contracts with contractors who may then sub-contract the project. The construction contract is likely to contain a clause that requires either the employer or the contractor to purchase an insurance contract covering the parties involved in the agreement. The premium for such an insurance is sometimes paid by the contractor and sometimes by the employer, depending on the underlying contract between them which is independent to the insurance contract. Again, it has been seen in many occasions that the work or the extensions of the work might get damaged as a result of a fire which was caused by the contractors’ (or sub-contractors’) negligence. It is a generally accepted principle that, save deliberate conduct of the assured, if a fire is an insured peril, the damage caused by fire is covered irrespective of the negligence of the assured.⁹⁸ After indemnifying the co-assured who suffered loss the insurer will inevitably look into his subrogation rights against the wrongdoer who will most likely to be a co-assured under the same policy. Can the insurer succeed in his claim against the co-assured? More precisely, the question should be, is the insurer entitled to bring a subrogation action against a co-assured? The question has been discussed in a number of cases. In Petrofina (UK) Ltd v Magnaload Ltd,⁹⁹ Lloyd J decided in favour of the co-assured in a similar matter. The reason for such holding was the principle of circuity. In Petrofina the main contractors for the construction of an extension at an oil refinery took out a contractors’ all risks insurance policy indemnifying the assured against loss and damage to the property in question. The definition of the persons insured included the employer, the main contractor and the sub-contractors, and the defendants were one of the sub-contractors on the site. Due to alleged negligence on the part of the defendants, a gantry became displaced and fell so as to cause considerable damage to the work in progress. The employer claimed against the insurers under the policy, who duly paid the claim. The insurers then brought an action in the name of the employer against the defendants, claiming damages for negligence. The preliminary issue was whether the insurers had the necessary right of subrogation to sue in the name of the employer. It was held that since the defendants were co-assured with the employer, and since the main contractor had been entitled to effect the insurance upon the whole of the property in the name or on behalf of all the assured, including the defendants, the insurers had no right of subrogation to bring the action in the name of the employer. Lloyd J rejected the argument that each assured was only insured in respect of his own property, or property for which he is responsible, as each of the named assured, including all the sub-contractors, were insured in respect of the whole of the contract works¹⁰⁰ including property belonging to any other of the assured, or for which any other of the assured were responsible. Another case in which the insurer’s subrogation action was rejected is Mark Rowlands Ltd v Berni Inns Ltd¹⁰¹. In this case fire destroyed the entire building that belonged to the claimant. The fire was caused by negligence of the tenant. The quantum of the claim included the cost of reinstating the whole building with the monies that the landlord received from their insurers. The underlying contract required the tenant to pay an ‘insurance rent’ through which the tenant paid 25 per cent of the annual premiums. Although the policy was in the name of the landlord the court was of the view that the mutual intention of the parties should be to insure for the benefit of the tenant as well as the landlord. Petrofina was distinguishable on its facts as the defendants were co-assured with the claimants under the same policy whereas in Mark Rowlands, the insurance was on the name of the landlord only.

The circuity doctrine did not find much support. The problem with circuity is that while a co-assured may suffer loss for damage to his property, the other co-assured who caused the loss will be sued for his negligence, in other words, his liability to the co-assured. If the insurance contract insures the property but not liability of the co-assured, circuity will not stop the insurer from bringing his subrogation action. An alternative justification to the circuity doctrine is that a term is implied in the underlying contract that once the parties agree to take out a composite policy they agree not to claim against each other. Therefore, when there is a loss the insurer will be the party to whom the claim should be addressed. Since the underlying contract contains such an implied undertaking, the insurer will have no claim against the co-assured to subrogate into. For instance in Hopewell Project Management Ltd v Ewbank Preece Ltd,¹⁰² Mr Recorder Jackson QC obiter commented that on the assumption that the defendants were co-assureds,¹⁰³ the subrogation action by the insurer would have been rejected given that ‘it would be nonsensical if those parties who were jointly insured under the CAR policy could make claims against one another in respect of damage to the contract works. Such a result could not possibly have been intended by those parties.’ The judge had little doubt that they would have said so to an officious bystander. Lord Hope in Cooperative Retail Services Ltd v Taylor Young Partnership Ltd¹⁰⁴ again obiter, expressed his agreement with Mr Recorder Jackson QC on this matter. In CRS the point did not arise for determination for the reason that the underlying contract between the co-assureds rendered the contractor not liable to the employer for the loss in question. Thus, the employer had no claim against the contractor under the contract, which would therefore not give any right of action to the insurer. Nevertheless, both Lord Bingham and Hope referred to the principle in question and they commented against subrogation action against the co-assured. Lord Bingham defined it as an obvious absurdity¹⁰⁵ bringing an action against the co-assured whom will be indemnified by the insurer for his liability under the underlying contract with the employer. Although his Lordship stated that the rationale of this rule may be a matter of some controversy Lord Bingham found the rule itself beyond doubt.¹⁰⁶ Having agreed with Mr Recorder Jackson QC’s aforementioned statement, Lord Hope¹⁰⁷ stated that had it been necessary to decide, the co-assureds would have been able to resist the claim against them for the reasons stated in Hopewell.

At this stage, it is worth mentioning three other cases which either applied or distinguished CRS. In Surrey Heath Borough Council v Lovell Construction Ltd,¹⁰⁸ the contract provided for the contractor to obtain a joint names policy to cover specified perils but also required the contractor to indemnify the employer for damage to the works caused by the contractor’s negligence. It was argued that there is an overriding principle, derived from insurance law, that where a policy of insurance is effected for the benefit of two persons jointly, neither can sue the other in respect of any matter within the policy even if there is apparently a collateral contractual term between them entitling the one to sue. Dillon LJ however found this submission too wide¹⁰⁹ and left the matter to construction of the insurance and construction contracts. It was held that the obligation on the contractor to provide an indemnity applied even if the loss was one which was required to be insured under the joint names policy.

Surrey Heath was distinguished in CRS for the reason that in the former the court was concerned with a contract which did not expressly exclude the works from the property in relation to which the contractor provided the employer with an indemnity if it was damaged through his negligence. In CRS, however, the contractual arrangements meant that if a fire occurred, they should look to the joint insurance policy to provide the fund for the cost of restoring and repairing the fire damage (and for paying any consequential professional fees) and that they would bear other losses themselves (or cover them by their own separate insurance) rather than indulge in litigation with each other.

Slightly different facts came before the court in Scottish & Newcastle plc v GD Construction (St Albans) Ltd,¹¹⁰ which involved a dispute in which the employer failed to take out an insurance policy which was required to contain an express subrogation waiver by the insurer against the co-assureds. The policy was expected to cover any damage to the existing structure caused by a number of specified perils, including fire. A fire damaged the work. The preliminary issue was whether liability for damage to identified property which results from a negligently caused fire was excluded as it was required to be insured by the employer against specified perils, including fire. The contractor was liable to the employer against any expense, liability, loss, claim or proceedings in respect of any loss, injury or damage whatsoever to any property real or personal insofar as such loss, injury or damage arises out of or in the course of or by reason of the carrying out of the works. Scottish & Newcastle was slightly different to CRS because in CRS the insurance contract did not have a clause by which the insurer expressly waived his subrogation rights, whereas in Scottish & Newcastle