Gard Marine v China National Chartering concerned a ship that sank in the port of Kashima in Japan. The contract provided for the ship owner and the charterer to have joint names hull insurance. The issue was whether this co-insurance precluded the insurer from bringing subrogated/assigned claims in the name of one insured against the other insured.
The majority of the Supreme Court upheld the well-established rule that no such claims could be brought. However, a minority (including Lord Sumption) decided that such claims could be maintained. This minority view may cause comment. However, it is likely to have limited impact.
Examples of co-insurance
Co-insurance/insurance is joint names is encountered in spheres including:
- Shipping - Standard shipping charter-contracts are issued by bodies like the “Baltic and International Maritime Council”. One of these was considered in the Gard Marine case. The contracts provide for what is to happen if a ship is damaged, and allocate risk between the parties. The charterer is the Gard Marine case obtained joint-names insurance at his expense. The owner approved the cover.
- Construction - Standard form contracts issued by the Joint Contracts Tribunal (JCT) provide (in different options/variations) for insurance to be bought by the main contractor. It is possible for each sub-contractor to be explicitly recognised as are insured under a joint names policy (defined by the JCT as:
“a policy of insurance which includes the Employer and the Contractor as composite insured and under which the insurers have no right of recourse against any person named as insured…”) (Keating on Construction Contracts, 10th edition, paragraph 20-394).
- Commercial Property - Leases can provide for landlords to effect insurance in the joint names of the landlord and the tenant. If this is impracticable (eg because the landlord has bought a single policy of a property occupied by many tenants), the tenant can achieve much the same result by (i) having his interest endorsed or the landlord’s policy, and (ii) obtaining the insurer’s waiver of subrogation rights).
Why do people co-insure?
Co-insurance is often part of a complete contractual code in which the parties agree what is to happen, and how risk is to be allocated, in the event of loss. A pot of insurance money is made available, and this avoids costly litigation between the parties to decide who was "at fault".
“It has become a common practice in various industries for the parties to provide for specified loss or damage to be covered by insurance for their mutual benefit, whether caused by one party’s fault or not, thus avoiding potential litigation between them. The question in each case is whether the parties are to be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss or damage, or whether the existence of the fund co-exists with an independent right of action for breach of a term of the contract which has caused that loss. Like all questions of construction, it depends on the provisions of the particular contract…” (Lord Toulson at paragraph 139 in Gard Marine).
Claims between co-insureds are generally not permitted
As can be seen from the quote above, the law supports the obvious commercial benefit of avoiding litigation between parties where the loss is covered by insurance, under which both parties are covered.
In the Gard Marine case, this rule was applied unanimously by the Court of Appeal, and by the majority of the Supreme Court. In upholding the rule, Lord Mance stated as follows:
“It is well established…that, where it is agreed that insurance shall inure to the benefit of both parties to a venture, the parties cannot claim against each other in respect of an insured loss. This principle is now best viewed as resting on the natural interpretation of or implication from the contractual arrangements giving rise to such co-insurance” (Lord Mance at paragraph 114 of Gard Marine).
That reflects, for example, common understanding of the operation of a joint names contractors "all-risks" policy in the construction field. It is common for several parties to be insured under a CAR policy (and as Lord Sumption noted, in a different case, a CAR policy with a sole insured was "unusual" (Sun Alliance (Bahamas) v Scandi). The "Investopedia" website states that:
“The goal of using a CAR insurance policy is to ensure that all parties are covered on a project, regardless of the type of damage to the property or who caused the damage. Insurers who underwrite this type of policy lose the right to subrogation, meaning that if it pays out funds to one party in the contract then it cannot seek to recover those funds from another party in the contract. For example, if the owner of a large building and the contractor working on the building are on the same CAR policy, any costs of damage to the building caused by the contractor can be recovered by the building owner when a claim is filed. The insurer, however, cannot seek to recover funds from the contractor”.
The minority view in the Gard Marine case
The minority in the Supreme Court (and the trial judge) would have allowed claims to proceed between the co-insureds. This may cause comment, given the well-established rule to the contrary. However, the minority view in Gard Marine may be of limited impact even leaving aside the fact it did not prevail:
- One ground for the minority decision was specific to the case itself. It relied on the fact that the relevant term of the contract did not expressly exclude the insurer’s right of subrogation (unlike an alternative clause of the same contract, which did).
- The issue was not necessary to the court’s decision (because there was no breach that could have been the subject of a claim, in any event). In legal jargon, the decision was "obiter".
The Gard Marine case is a useful reminder, at the highest level, of the importance and effect of co-insurance arrangements, which are common across several industries. The minority view is of interest, but unlikely to be of lasting impact. The general rule that parties to joint insurance cannot sue each other for insured loss has been affirmed. This rule applies even if, for example, the limit of indemnity under the policy does not cover the whole loss. As emphasised by the Supreme Court, the impact of co-insurance arrangements will depend on the terms of the particular contract.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.