Can an obligation to take out a joint names insurance policy exclude the parties' contractual liability to each other for the insured risks?

The NEC form of contract requires the contractor to take out a Contractor's All Risks (CAR) policy in the joint names of the contractor and employer. But does this exclude the parties' contractual liability to each other for the insured risks? This issue was recently discussed in the case of SSE Generation Limited v Hochtief Solutions AG [2015] CSOH 92.

The building contract in place between SSE and Hochtief required a joint names CAR policy. SSE had employed Hochtief to design and build a hydroelectric scheme but a tunnel collapsed shortly after practical completion, and the plant was shut down. SSE employed another contractor to carry out remedial works and then tried to recover its £130m costs from Hochtief.

Hochtief argued that the requirement to take out the CAR policy meant that the contractual liability of one party to the other was displaced by the insurance policy. In other words, SSE could not raise an action against them because it should have made a claim under the joint names policy.

The court did not agree. The court's starting point was to look at the intention of the parties, as expressed in the wording of the contract between them. The court held that there was "no irrebuttable presumption that they [the parties] had no liability to the other simply because a joint names policy is in place". The contract was the NEC standard form (2^nd edition, November 1995). Clause 83.1 expressly stated that each party undertook to indemnify the other against events which were at their risk. Therefore there was no room for an interpretation that the joint names policy displaced liability between the parties.

The lesson to be learned from this case is that, whether you are an employer or contractor, if you intend a joint names policy to displace your potential liability to the party you are contracting with, make sure this is expressly stated in the contract terms. This prevents unnecessary and expensive disputes over parties' intentions further down the line.

A note of caution: the same principles may not apply to other standard form contracts. The equivalent JCT standard form clauses have been held by the courts to exclude liability between parties. It all comes down to the wording of the contract.

It is also worth bearing in mind that the risk of excluding liability between parties where there is a requirement for joint names insurance is that a Contractor's All Risks policy _ despite the name _ may not cover the particular losses suffered. Retaining the potential liability of one party to the other offers an alternative route to recovery of such losses.