The Limits Of Insurer's Subrogation Rights Against Co-Insureds And Third Parties

The Supreme Court recently handed down judgment in the matter of Gard Marine and Energy Limited v China National Chartering Company Limited [2017] UKSC 35 and ruled, by a majority of 3:2, that a contractual requirement to maintain joint insurance includes an implied term which precludes any claim by owners against the demise charterer, or therefore by the latter down the line to time charterers.

While this judgment was made in the context of international shipping and English law, the Court's findings are relevant in the context of domestic and international construction and engineering projects where it is common for employers and contractors to maintain insurance on a joint basis.

Background

Building and engineering contracts typically provide for insurance to be maintained against all risk of loss or damage to the works to be undertaken. This typically comes in the form of contractor's all risks (CAR) or 'joint-names' policies which are designed to cover multiple insureds to reflect the fragmented nature of the supply chain, where numerous subcontractors may undertake varying construction activities on site at any given time.

It is also useful to note that it is a feature of English insurance law that an insurer may not exercise rights of subrogation1 to bring an action in the name of one co-insured against another co-insured. The juridical basis of this was endorsed by the House of Lords in Co-operative Retail Services Ltd v Taylor Young Partnership [2002] 1 WLR 1419 on the ground that there was an implied term of the contract of insurance and/or the underlying contract between the co-insureds (as it would be absurd for an insurer to bring a subrogated claim against a co-insured when the insurer would be legally liable to indemnify the co-insured in respect of any liability it had to the insurer).

Judgment

A vessel was demise chartered on terms that charterers, D, would procure insurance for the vessel at their expense against marine, war and protection and indemnity risks for the joint interest of themselves and the owners, O.

D subsequently time chartered the vessel to T1, who in turn time chartered the vessel to T2. The vessel was grounded when leaving a port under the instruction of T2 (and thus T1). During the attempted recovery of the grounded vessel the vessel broke in two and the wreck was then subject to a lengthy wreck removal operation.

Two years later, one of the vessel's insurers took assignments of the rights of O and D in...