Subrogation And Joint Insurance: It's A Kind Of Magic?

There has always been a tension between the literal application of poorly worded contractual provisions and the need to apply common sense to avoid commercially absurd results. But in recent years, the centre of gravity has moved towards the former and away from the latter. Modern thinking in contractual construction is that the search for the parties' intention is to be found primarily in the words that they have used. Parties are assumed to have meant what they said and it is not the function of the courts to repair a bad bargain.

One area which has bucked this trend is subrogation in the context of joint insurance provisions. There are a number of commercial fields, in particular the construction industry, in which it is normal for parties to make provision for disaster, and to seek to avoid the inevitable disputes that follow it, by putting in place insurance designed to cover both parties against the ensuing losses. These arrangements often provide for the insurance to be in the joint names of both parties. Sometimes they are accompanied by detailed contractual schemes which emphasise how the losses are to be borne and to whom the insurance money is to be paid. But that is not always the case. Equally prevalent are cases in which the parties have made provision for insurance for their joint benefit, but have failed to adjust the remainder of their contractual arrangements accordingly. That creates internal conflict: should the court give effect, for example, to a clause providing that party A is to indemnify party B, or should it treat the joint insurance provision as exempting party A from liability notwithstanding the existence of the express indemnity?

The direction of travel in the authorities is towards the latter, the rationale being that the parties cannot have intended that the insurer, having paid out to one co-insured, should be able to bring a subrogated claim against another. But two recent cases, Haberdashers' Aske's Federation Trust Ltd v. Lakehouse Contracts Ltd [2018] EWHC 558 (TCC) and Prezzo Ltd v. High Point Estates Ltd [2018] EWHC 1851 (TCC), show that the battle between the two principles of construction is alive and well, and still capable of producing unpredictable results. Before looking at those two cases, it is worth summarising where we have got to with subrogation and joint insurance.

It is now well established that the court will be prepared to imply an exclusion of liability by one party to the other, notwithstanding that party's breach of contract, where they have put in place between them a scheme for the allocation of risk backed by an insurance in joint names. In such a case (unusually, from the point of the view of a general commercial lawyer) express words are not required to exclude the liability. See Co-op...