25 May 2017

The Supreme Court has ruled in the Ocean Victory that two parties who agreed to obtain "joint insurance" had also implicitly agreed to waive liability between each other in respect of the risks covered by the insurance. Although this decision was in the context of shipping, it is of real importance to businesses operating in any sector where contracting parties use "joint insurance" arrangements to manage risks, such as construction, energy and infrastructure.

Does joint insurance imply waived liability between parties?

The case concerned a charterparty agreement (effectively an agreement to hire a ship), where the owner and hirer of the ship agreed that the owner would obtain insurance for the vessel in respect of various risks, which named both the owner and hirer as insureds (commonly referred to as "joint insurance" or "co-insurance" but more accurately described as "composite insurance").

Importantly, nothing in the charterparty explicitly stated that either party was excused of liability to the other in the event that one of the insured risks occurred and the vessel was lost or damaged. In fact, the charterparty included a warranty from the hirer that they would not take the vessel to any ports that were not deemed to be "safe ports". This would appear to many as a clear indication that the parties intended that there should be liability between them (at least in certain situations).

However, the Supreme Court’s view was that by agreeing that one party should procure insurance for the benefit of both parties, it was an implied term of the contract that they had waived their liability to one another in respect of the risks covered by the insurance. In short, the parties had agreed to an "insurance solution" rather than a "liability solution" to an identified risk, and the former entirely displaced the latter in the contract, even though the parties may not have appreciated it when drafting the agreement.

Although the Supreme Court's decision concerned a particular type of contract, it is the now one of a series of cases which demonstrates an increasing willingness by the court to hold that agreements to procure joint insurance result in an implied waiver of liability between the parties. The consequence of a waiver being implied into the contract is that it would apply even where the insurance has not paid out (either in full or at all), leaving one party with a loss and no means of recourse.

What does this mean for parties obtaining joint insurance?

The key message from this case is that if parties are agreeing to obtain "joint insurance" but want to retain liability between themselves in respect of the same risks, express provisions should be used which clearly identify the nature and scope of the liability and how that liability interacts with the insurance. For example, construction contracts sometimes contain provisions that require co-insurance in respect of damage to the works but also expressly retain liability between the parties in respect of any losses over and above the amount actually recovered from the insurance.

Gard Marine and Energy Limited v China National Chartering Company Limited and Daiichi Chuo Kisen Kaisha (2017) UKSC 35 (The Ocean Victory)

Key contact

Matthew Walker

Matthew Kaltsas-Walker Partner

  • Dispute Resolution
  • Financial Services
  • Insurance

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