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Are you covered? Lakehouse ruling exposes SME insurance pitfalls

Paul Lowe

A landmark high court judgement shows subcontractors can’t always expect to rely on their contractor’s project insurance. Firms must be vigilant, or risk being hit by costly claims from insurers recouping their losses, says Weightmans’ Paul Lowe.

The High Court’s recent ruling in Haberdashers’ Aske’s Federation Trust Ltd v Lakehouse Contracts Ltd and others [2018] EWHC 558 (TCC) has given important clarification over when a subcontractor is covered under its employer’s project insurance.

The court found roofing firm CPR wasn’t protected by its contractor’s policy because it had agreed to maintain its own insurance as a part of its original contract.

The precedent set by this decision calls into question the effectiveness of project insurance as a means to encourage collaboration in the construction industry and places a greater financial risk on subcontractors.

Haberdashers v Lakehouse

The case revolved around a dispute over who was liable for fire damage at a school managed by Haberdashers’ Aske’s Federation Trust. The trust hired Lakehouse Contractors, and its subcontractor Cambridge Polymer Roofing (CPR), to extend the school, but when a fire caused by works undertaken by CPR resulted in damage to the premises, Haberdasher took legal action against Lakehouse and CPR.

Lakehouse’s insurer ultimately paid the owners of the school £8.75m to cover remediation costs.

The most contentious aspect of the case arose when Lakehouse’s insurer sought a contribution from CPR to cover its losses. The roofer (CPR) disagreed with the claim because it was named as a covered party on Lakehouse’s project insurance.

The court eventually ruled against CPR on the basis it had to maintain its own separate insurance policy, which CPR was obliged to do as a part of its contract with Lakehouse. CPR’s own policy superseded the co-insured status CPR thought it enjoyed as a part of Lakehouse’s insurance cover. Lakehouse’s insurer was therefore entitled to the full £5m-value of CPR’s own policy.

What subcontractors must learn

Subcontractors are usually named as covered parties in construction project insurance policies, so many firms – like CPR – will assume they are adequately protected under that policy.

“Even if adequate insurance is in place, the implications of a substantial insurance payout can be disastrous for a construction business”

However, a project insurance policy may be of little use if a subcontractor is obliged to maintain its own insurance as part of its contract. The upshot is that the liability for onsite damage could shift to the subcontractor entirely. CPR was fortunate because it had complied with it contractual obligation to have its own policy in place, so it was CPR’s insurer that had to foot the £5m bill.

Even if adequate insurance is in place, the implications of a substantial insurance payout can be disastrous for a construction business – especially if they fall into the SME bracket. Alongside the reputational damage, a payout could cause a firm’s premiums to rise and affect its ability to tender for new work.

The position would, however, be much worse if a subcontractor didn’t have insurance. If a subcontractor misses the requirement to take out its own policy, there is a real danger it would have to foot the bill alone. That worst-case scenario could have catastrophic financial consequences for a subcontractor.

Cookie-cutter shortcomings

The construction industry is guilty of using standardised, cookie-cutter contracts that are often signed without proper examination from either party. To avoid problems later, firms must be certain that their insurance position is sound at the outset of a project.

Companies should ensure they understand their obligations and risks before they sign contracts and check that there isn’t any overlapping, conflicting obligations. Those currently engaged in live works should speak to their employer to check if the wording of the contract they have signed means they are covered by their project insurance policy, and check contracts carefully to see whether they must also maintain their own policy and, if so, check that it is in place.

Project insurance policies are meant to spread the risk of onsite damages across all the parties involved in a project. If subcontractors aren’t protected under those polices and fail to take out any other proper cover, subcontractors are left wide open to increased claims from insurers like the one levied at CPR.

The industry needs to work with the insurance community to undertake a revaluation of project insurance policies to ensure proper protection for all.

Paul Lowe is an associate and construction specialist at Weightmans

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