Conway and Insurance in Construction Contracts

In the recent case of FM Conway Ltd v Rugby Football Union [2023] [EWCA Civ 418], the Court of Appeal held that the contractor (‘Conway’) was not able to rely on a composite insurance policy as a defence against a claim brought against Conway for defective work.

The facts of Conway are summarised as follows.

• Conway was engaged by Rugby Football Union (RFU) to install ductwork for high voltage power cables which were installed in early 2014 as part of a major refurbishment to Twickenham Stadium before the 2015 Rugby World Cup.
• Conway was named as co-insured under a comprehensive insurance policy with RFU – and all other contractors and/or sub-contractors engaged to provide goods or services in connection with the project. The policy provided cover in respect of 6.5.1 non-negligence insurance, and All Risks insurance for the Works and Existing Structures.
• RFU engaged Clark Smith Partnership Limited to design particular works.
• In early 2013 debris was identified in the ducts and despite further work having been carried out, water was still penetrating the ductwork. Given the need to ensure a reliable electrical system was in place prior to the impending World Cup, RFU decided to replace the high voltage cables which had been installed with waterproof cables at a cost of £3.334million.
• Under the insurance policy, the insurer indemnified RFU for the cost of replacing the damaged cables totalling £3.334m.
• In March 2021 RFU commenced subrogated proceedings against Conway, alleging defects in the design and installation of the ductwork, causing damage and loss totalling £4.44m. This included the £3.334million which the insurers had paid out.
• Conway commenced separate Part 8 proceedings, alleging that because it had the benefit of the joint insurance policy on the same terms as RFU, RFU could not claim against Conway on the terms of that policy. 
• In considering whether Conway could rely on the insurance policy in this case, the High Court provided that the main factor in determining the outcome of the decision is the authority, intention and scope of the insurance policy, the underlying contract and letter of intent together.
• The High Court held that there was insufficient evidence of authority and/or intention in the insurance policy, underlying contract, and letter of intent to suggest that Conway was covered for such claims under the insurance policy.

• Although Conway was named as co-insured under the policy:
  • the cover provided to Conway was restricted by the extent of cover that RFU agreed to procure for Conway pursuant to the building contract;
  • the policy indemnified RFU against those losses;
  • as Conway was not co-insured against those losses there was nothing to preclude the insurer from bringing a subrogated claim against Conway.

• Appealing the decision, Conway argued that the judge at first instance had incorrectly placed reliance on the terms of the building contract – particularly given that it was entered into three months after the insurance policy was put in place, and that as the insurance policy contained an express waiver of rights of subrogation the insurer could not seek to recover from Conway the sums which it had paid out.  

Endorsing and upholding the High Court’s decision, Coulson LJ in the Court of Appeal confirmed that the co-insurance defence was not available to Conway. Neither parties were co-insured under the project policy to the same extent and, in respect of the same loss notwithstanding that that is precisely what the insurance policy purported to confer. In reaching this decision, Coulson LJ provided the following guidance in relation to joint names insurance policies:

• If one party has procured insurance for another, then three factors should be considered: (1) authority (2) intention and (3) scope of cover so as to determine the extent of any such cover.
• An underlying contact between the parties concerned is not a pre-requisite for a proper investigation into the three factors above. An underlying contract will not always provide the complete answer.  
• If there is an underlying contract then, in most cases, this will typically prove to be the key source for evidence of authority, intention and scope of cover. Here, the obligation to insure was in respect of 6.5.1 non-negligence insurance and All Risk Insurance under Option C, which crucially did not extend cover to Conway for damage caused by its own defective works.

Conclusion

Contractors and other parties of construction contracts should be mindful of the decision in Conway when entering into joint names insurance policies. The decision acts as a useful reminder to ensure that the insurance arrangements on a project reflect the extent of cover which the building contract requires and, equally, that both documents reflect the actual intention of the parties. 

We set out a reminder of the key insurance provisions under each of the JCT Design and Build and NEC4 ECC Contracts below for information.

Insurance in Common Forms of Construction Contracts – A recap

The JCT Design and Build 2016 Contract (‘JCT’) contains three insurance options:

• Insurance Option A: New Buildings – which requires the Contractor to effect and maintain All Risk Insurance, covering physical loss or damage to the Works.
• Insurance Option B: New Buildings – which requires the Employer to effect and maintain All Risk Insurance, covering physical loss or damage to the Works.
• Insurance Option C: Joint Names Insurance by Employer of Existing Structures and Works in or Extensions to them – which requires the Employer to effect and maintain insurance, covering physical loss or damage to (a) the Existing Structures and contents by the Specified Perils and (b) the Works caused by All Risks.

Crucially, this insurance obligation expressly excludes loss or damage caused as a result of the Contractor’s own defective design or construction. To ensure that the insurance policy reflects the intention of the building contract parties would therefore need to either (1) amend the insurance provisions to expressly require insurance against this head of loss or (2) negotiate the terms of the insurance policy to specifically exclude this head of loss from the scope of insurance cover.

In contrast, the NEC4 Engineering and Construction Contract (‘NEC4’) takes a briefer approach in relation to insurance provisions, which are contained in core clause 8 (Liabilities and Insurance). Specifically:

1. Clause 81 provides that the Contractor is responsible for:

1.1 loss of or damage to the works, Plant, and Materials and Equipment; and

1.2 loss of or damage to property owned or occupied by the Client other than the works which arises from or in connection with the Contractor providing the Works.

2. Clause 83 provides an insurance table which sets out the types of insurance and the minimum amount of cover required for each insurance type. In addition to insurance against personal injury, the Contractor is required to provide joint names insurance against:

2.1 loss of/or damage to the works, Plant and Materials

2.2 loss of/or damage to Equipment

2.3 loss of/or damage to property (except the works, Plant and Materials and Equipment) and liability for bodily injury to/or death of a person (not an employee of the Contractor) arising from or in connection with the Contractor providing the Works

If you require any assistance in drafting and negotiating insurance provisions as part of overall contract negotiations, please get in touch with our Construction and Engineering Team who will be able to assist.