Joint Insurance – Don’t Be Lulled

Suppose A negligently damages B’s property. B makes a claim on his insurance. The insurers pay out on the claim. Generally speaking, the insurers will have a right to take over any claim which B may have against A, and to sue A in B’s name. This is known as a right of subrogation.
However, in the past the courts have ruled that if, in taking out the insurance, B intends that it should benefit A as well as himself, the insurer may not have a right of subrogation against A. For example, in the 1985 case of Rowlands (Mark) Ltd. v. Berni Inns Ltd., Rowlands leased a restaurant to Berni. Under the lease, the landlord was to insure the building but Berni were obliged to contribute towards the cost of insurance. Under its repairing covenant, Berni was not liable to repair / reinstate in the event of the building being destroyed by a risk covered by the insurance. Rather, the landlord was obliged to apply the insurance money in reinstating the building. Pending reinstatement, Berni was relieved from paying rent. The building was destroyed by fire due – so Rowlands and its insurers alleged – to Berni’s negligence. The Court of Appeal ruled that, taking account of the terms of the lease as a whole, the parties had intended that the insurance taken out by Rowlands would benefit both Rowlands and Berni. It followed that even if there had been negligence on the part of Berni, Rowlands’ insurers had no right of subrogation.
However, the recent decision of the Court of Appeal in Tyco Fire & Integrated Solutions Ltd. v. Rolls-Royce Motor Cars Ltd. demonstrates the need for caution. It is not simply a matter of saying “Joint Insurance = No Right of Subrogation”. Everything turns on the terms of the relevant document or, in the case of a complicated construction project, the combined effect of several documents read together. In Tyco, the Court of Appeal ruled that on the true interpretation of the contractual documentation, an individual contractor had the benefit of the liability insurance effected by Rolls-Royce only in relation to that contractor’s works. If Tyco had negligently damaged other works, Rolls-Royce would be entitled to sue, and the insurers would have a right of subrogation. Previously, Rolls-Royce had recovered over £400K from Tyco in an adjudication. The upshot of the Court of Appeal’s ruling is that Rolls-Royce will be entitled to keep that money provided it can establish that Tyco is liable in negligence.
This is a complex area. It is essential to ensure that issues relating to liability and insurance are dealt with thoroughly. If you would like to know more, please contact Martin Banham-Hall

Filed: 15/05/2008 12:41:05