Contractors beware: maximising project insurance cover

In SSE Generation v Hochtief Solutions [2018], the employer has been awarded in excess of £100m damages on appeal over a tunnel collapse nearly ten years ago at the Glendoe hydroelectric scheme. The Scottish appeal court decided by a majority that the contractor was liable for costs of repair due to breach of the requirement that erodible rock encountered in the tunnel be shotcreted if not otherwise protected, despite having exercised reasonable skill and care, as defects were in existence at take-over by the employer. The interface between design and workmanship is often contentious for purposes of liability/scope of insurance cover and in this case a limitation of liability to £10m for "design defects" did not apply, based on contract definitions.

The court also reviewed the Works Information requirement for a "design life" of 75 years. Following the Supreme Court decision in MT Højgaard v Eon [2017], this did not mean the contractor guaranteed that the works would last for the specified period without major refurbishment or significant expenditure. Rather, the obligation was met if the contractor handed over the works with such a design life and the employer had the whole of the defects period to determine whether the works did in fact satisfy that design life requirement. The question of compliance therefore fell to be determined at the defects date, which may be difficult to assess in some instances, but not here as the collapse had already occurred.

Finally, the impact of project insurance was considered. In accordance with the Supreme Court decision in Gard Marine v China National Chartering [2017], it was acknowledged that requirements for a joint policy could lead to an implied term that claims between contracting parties are not permitted and use of language in that case such as "inconceivable" and "absurd" when referring to the possibility of a subrogated claim were "powerful contra-indicators". However, the presumption of an implied term was rebutted in the circumstances of this case, in view of express contract terms apportioning liability for claims due to specified events at each party's risk. This aspect of the decision is unfavourable for policyholders, although a further appeal to the Supreme Court is anticipated.

This comes hot on the heels of Haberdashers Aske v Lakehouse [2018], a High Court decision providing welcome clarification on the thorny issue of how sub-contractors in the industry come to obtain the benefit of project policies. Three different analyses were considered - based on agency principles, a standing offer, or acceptance by conduct - and the court held, in any case, that the roofing sub-contractor did not benefit from cover under the policy, as it was required under the contract to obtain separate liability insurance. It was accepted that the project policy would otherwise respond to claims against sub-contractors as additional insureds, and the question of whether a project policy might (partially) respond to claims in excess of separate policy limits was left open.

Haberdashers has been criticised in academic circles on the basis that project insurers believed they were covering all sub-contractors when issuing the policy, which included a waiver of subrogation clause, and it will be interesting to see how the principles develop in subsequent cases. In the meantime, policyholders should seek to avoid onerous contract terms imposing obligations beyond the standard requirement to exercise reasonable skill and care, which can lead to uninsured losses. Likewise contractors agreeing to obtain separate insurance should be alert to the risk of potential subrogated claims from project insurers. If the parties intend to create an insurance fund as the sole avenue for making good the relevant loss, this should be expressed in clear and unambiguous terms.

Amy Lacey is a partner at Fenchurch Law