Project Insurance – Are you Covered?

Insurance cover is needed on any construction project, so as to protect against risks like fire. Contractors can typically take out their own cover or be covered as part of an overall “project insurance” policy benefitting the client and each of the contractors involved. One of the benefits for all those parties covered is that none of them need to be concerned by the possibility that another party’s insurer might seek reimbursement of monies paid out under an insurance claim against them by way of what is called “subrogation”.

In a recently reported case, Lakehouse was the main contractor on a school extension project which was covered by a “project insurance” policy. Cambridge Polymer Roofing (“CPR”) was its roofing sub-contractor. A fire occurred during CPR’s works, causing extensive damage. The project insurer paid out £9m to the employer to cover the damage caused. The project insurers then sought to claw back this money from CPR by way of subrogation. They could only succeed if they could prove that CPR was not covered as an “insured party” by the project insurance.

It had been generally assumed that sub-contractors can be covered by such a policy even where the sub-contract is entered into after the policy is in place, which makes sense given that sub-contractors are usually appointed at different stages of any particular project. The court confirmed the legal basis for this, which is that, once the project insurance is in place, there is a standing offer by the project insurers to insure sub-contractors identified as part of a defined group. This is accepted by the sub-contractor when it enters into the sub-contract. This implies a term into the sub-contract meaning that a contractor (or its insurer) cannot bring a claim against the sub-contractor for matters covered by the project insurance.

What was unusual in this case is that CPR’s sub-contract contained an express term that CPR maintain public liability insurance of £5m. This express term superseded any term that might be implied by the project insurance, because it set out clearly that the parties’ intentions were for CPR to maintain its own public liability insurance of £5m, rather than benefit from the project insurance. As a result, CPR was not covered by the project insurance and the contractor’s insurer could therefore bring a claim against CPR.

The important lesson from this case is that contractors and sub-contractors should always check with their respective employer whether there is a project insurance policy in place. If so, and they wish to benefit from this, then they should check that their contract does not impose a separate insurance obligation upon them. This contradiction can easily happen because there are standard default clauses in many construction contracts which oblige the contractor to maintain such insurance themselves.  In these circumstances those default clauses need to be amended.