Authority and intention, and the importance of the underlying contract to co-insurance arrangements
In the recent Court of Appeal case of FM Conway Limited v (1) The Rugby Football Union, (2) Royal and Sun Alliance Insurance plc, and (3) Clark Smith Partnership Limited  EWCA Civ 418, the court heard FM Conway Limited’s (“Conway”) appeal of a decision by the TCC concerning the “nature, scope and effect” of a co-insurance policy arranged in connection with works procured by The Rugby Football Union (“RFU”) at Twickenham Stadium prior to the 2015 Rugby World Cup (“World Cup”). Coulson LJ’s comprehensive leading judgment addresses the background circumstances, the full first instance judgement, and each of the grounds for appeal in detail.
Clark Smith Partnership (“CSP”) were appointed by RFU to design cabling ductwork at Twickenham Stadium Conway as part of pre-World Cup refurbishment works (“Project”), and Conway were appointed by RFU to install that ductwork. Conway was appointed by RFU under a letter of intent sent by RFU to Conway in June 2012 (“LOI”) which, amongst other things, incorporated the terms and conditions of the main contract (importantly in the LOI an expressly referenced, comprehensive and developed contract form based on the JCT SBXQ2011), followed in due course by the JCT SBXQ2011 contract itself, entered into in October 2012 in materially the form referred to in the LOI (“Contract”).
Under the Contract, insurance Option C was specified as applicable, meaning that insurance was to be taken out by RFU as Employer. The detailed description at the Option C insurance paragraph C.1 entry included “a Joint Names Policy in respect of the existing structures … together with the contents … for the full cost of repair and replacement of loss or damage due to any of the Specified Perils”, and at paragraph C.2 “a Joint Names Policy for All Risks Insurance … for no less than the full reinstatement value of the Works”.
In the TCC there was extensive reference to and analysis of background discussions that were said to have taken place around the extent and nature of the insurance policy that RFU should procure for the Project, with the expectation according to those involved in those discussions being that a comprehensive project insurance policy covering all the contractors was advisable and had been decided on.
The insurance policy that was ultimately taken out, effective from the date on which Conway commenced work under the LOI i.e. prior to the date of the Contract, specified both RFU and certain categories of contractor and engaged parties as co-insured, “for their respective rights and interests”. Conway was an insured party under the policy by either of two possible descriptive categories set out. The policy covered the ductwork installed by Conway, and expressly referenced JCT insurance Option C as the basis under which it was taken out.
In paragraph 23 of his judgment, Coulson LJ notes that the policy also included a waiver of subrogation rights against any insured party, subject to certain excluded circumstances in which the insurer could enforce subrogation rights – the application of these would be central to the first instance case and the subsequent appeal.
Due to losses subsequently claimed by RFU for alleged defects in the design and installation of the ductwork, a claim was made under the works insurance policy. The insurer (“RSA”) indemnified RFU for the circa £3.3 million cost of replacement of the resultant damaged cables.
There was no argument at first instance or at appeal as to whether or not the policy covered the loss suffered (patently it was covered as evidenced by RSA paying out to RFU under the policy). Nor was there any argument as to whether or not Conway was co-insured under the policy.
The first instance issue raised by Conway was essentially that if it and RFU were co-insured under the policy, could the cover afforded to each of them be construed as different to the extent and with the result that RSA could validly bring a subrogated claim against Conway to seek to recover the amounts paid out?
This was covered by two Preliminary Issues: (1) whether or not the insured losses were irrecoverable as between RSA and Conway because of the waiver of subrogation rights or otherwise under the policy or the JCT contract; and (2) if RSA could not recover its insured losses from Conway, did that prevent CSP from claiming civil contribution from Conway.
Ultimately, the judge in the TCC, calling on “the relevant authorities relating to co-insurance”, concluded that:
- by reference to the principles of principal and agent, RFU had the authority to obtain cover for Conway and the intention to do so;
- the terms of the underlying contract – being a combination of the LOI and the Contract – were key to ascertaining the effect of the insurance which was obtained; and
- crucially, although the policy insured both RFU and Conway, it did not do so to the same extent in respect of the same risk. That meant that the waiver of subrogation, which extended to matters for which Conway was insured under the policy, did not assist Conway. RSA could therefore bring the subrogated proceedings against Conway.
As that resolved the first Preliminary Issue, the second did not need to be addressed.
Grounds for appeal and appeal judgement
There were five grounds for the appeal:
- Did the TCC judge apply the wrong test (when looking to assess and ascertain authority and intention for RFU’s taking out of the policy)?
- The relevance or otherwise of the Contract;
- Does Conway only have to show authority, not intention?
- Conway’s alternative case as to undisclosed principal; and
- The correct interpretation of the waiver provision.
Coulson LJ concluded that the first ground was the most significant of the first four, to the extent that “if Ground 1 fails, so too must Grounds 2, 3 and 4” as grounds 2, 3 and 4 “arise out of matters of fact rather than any point of principle”. At appeal all four of grounds 1 to 4 failed, for which Coulson LJ set out detailed reasoning, as he noted that although ground 1 “permeated through Grounds 2, 3 and 4” there were complete answers to all four.
Coulson LJ made the point that Conway could have failed on grounds 1 to 4, but still won on ground 5.
Ground 5 – as to whether or not the waiver of subrogation wording prevented RSA from bringing a claim against Conway because it would be a claim concerning an insured loss made against an insured party – was rejected for three reasons, set out at paragraphs 104 to 111 of the judgment. These were:
(i) for reasons of commercial common sense,
(ii) (because the submission made in respect of it was contrary to the law, and
(iii) because as a point of principle the policy amounted to insurance of the respective rights and interests of each of the co-insured with the effect that Conway was not insured for its own default so the waiver of subrogation clause could not affect the claim. This final point was identified and highlighted by Coulson LJ as a conclusion with “a consequence that goes well beyond Ground 5 of [the] appeal” as it provided:
“further support … for the approach taken by the [first instance] judge … to consider the scope of the insurance cover by reference to Conway’s rights and interests, assessed primarily by reference to the underlying contract.”
Conclusions and reminders from Coulson LJ’s judgment
The comprehensive and thorough judgment draws on a wide range of authorities to provide:
- a useful and succinct distinction between joint insurance policies and composite policies and the legitimacy of differing cover for different insured parties under the same policy;
- a summary of the importance of the “contractual scheme” to identifying and understanding a principal’s authority and intention as to the nature, scope and effect of a joint insurance policy taken out under a contract containing obligations to do so; and
- briefly, a reminder of the validity and effectiveness of incorporation of a main contract’s terms, in this case in particular those relating to insurance, into a letter of intent.
1. Distinction between joint insurance policies and composite policies and differing cover for different insured parties
This distinction is touched on briefly in Coulson LJ’s summary of the law and the relevant authorities that underpin the conclusions reached both at first instance and at appeal. In paragraph 39, the judgment states by reference to the relevant authority:
“A joint insurance policy could only exist in respect of joint interests. Where the co-insured had different interests, a policy which named more than one insured was a composite policy. … The distinction between joint and composite policies has been maintained in subsequent cases.”
As later summarised in paragraph 63, the policy “was a composite insurance policy, which meant that each co-insured was to be treated as if they had their own policy”. That allowed for the conclusion that Conway was not an insured party for its own defective work and the waiver of subrogation clause could therefore not prevent RSA’s subrogated claim against it.
This is important to understand and bear in mind for parties to construction contracts and other contracts which require joint names insurance policies, as this distinction and the true extent of cover afforded separately to the co-insured parties may otherwise not be fully realised until it becomes more of a live issue.
2. The importance of the “contractual scheme”
Coulson LJ devoted thirteen paragraphs to analyses of the authorities for the centrality of the “contractual scheme” to establishing whether or not “the principal assured … had express or implied actual authority … to bind some other party as co-assured” and to what extent.
Here, the extent of the authority and of the intention was fundamental, as it dictated and set out whether or not Conway was insured in the way that it hoped to be for the purposes of its appeal. Coulson LJ’s judgment concludes in this section with numerous helpful and succinct statements on the “importance of the underlying contract”. The point here was that although the insurance policy was taken out by RFU and Conway was co-insured under it, “the mere fact that A and B are insured under the same policy does not, by itself, mean that A and B are covered for the same loss or cannot make claims against one another”.
Applying this approach to the facts of the appeal, Coulson LJ upheld the TCC judgment, suggesting that “where there is an underlying contract … it would be counter-intuitive if that was not at least the starting point for any consideration of authority and intention”. RFU’s obligation under the LOI and the Contract was to “provide Option C cover, but nothing more”, rather than one to arrange insurance which “would be the sole avenue for redress for damage of the kind which occurred”, for which “further amendments to the standard JCT contract could have been made so as to provide for that in clear and express terms”.
The importance of this was highlighted throughout Coulson LJ’s judgment, both by reference to the TCC decision and in its own right. As the parties expressly recorded the specifics of the insurance arrangements intended to be put in place via the LOI, including by incorporating into it the terms of the Contract, which was later retrospectively effective, there was no weight to the argument that RFU had or had intended to procure any wider cover to Conway’s benefit than the policy it had actually taken out.
Although this is unsurprising to an extent and it seems simplistic to say so, this is a clear reminder that, as a general principle, care should be taken to ensure that agreed terms, and in particular any unique or unusual deviation from a standard contract form, are clearly and unambiguously recorded and included in any contract prior to entering into it.
3. Incorporation of a main contract’s terms into a letter of intent
Finally, the contractual arrangements which underpinned the dealings between the parties meant that useful and clear reminders were provided in the judgment as to how and with what effect contractual terms from an intended building contract can be effectively incorporated into a letter of intent, and the retrospective effect of a building contract’s terms when it is ultimately entered into.
When summarising the background to the circumstances, Coulson LJ flagged up specific wording of the LOI as effective mechanisms by which the JCT contractual “terms and conditions … apply to any work carried out by [Conway] pursuant to … this letter”. The validity and effectiveness of this established approach was returned to later in the judgement, as “the Letter of Intent meant that there was already a binding contract between the parties” to the extent that the intended insurance arrangements under the Contract when entered into were applicable to the LOI which “contained all the relevant terms, including Option C”.
The retrospective effect of the Contract on the insurance obligations of RFU and the contractual arrangements between the parties more generally was described as:
“the conventional position: where a detailed building contract is entered into in the identical form that was expressly referred to in the Letter of Intent, the building contract will usually be treated as having retrospective effect, although ultimately that is a matter of construction of the Letter of Intent.”
In this section of the judgment, a helpful reminder and a neat summary was provided both of the validity of this approach and of the importance, once again, of ensuring that the agreed and intended terms of any contract whether a letter of intent or otherwise are accurately and precisely set out within it.