Note: this decision has been confirmed by the Court of Appeal in a judgment delivered on 29 June 2006. To access the note on the Court of Appeal judgment, click here

DMC Category Rating: Confirmed

This case note is based on an Article in the December 2005 Edition of the ‘(Re) Insurance Bulletin’, published by the Insurance and Reinsurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA is an International Contributor to this website

Background
The insurance in issue in this case related to the vessel "Jascon 5", an offshore pipelay construction barge owned by a company called CPL, which was part of the Sea Trucks group. In March 2003, the vessel was towed from China (where it was built) to Sembawang's shipyard in Singapore for completion, outfitting, commissioning and testing, subject to the terms of a contract between CPL and Sembawang dated 5 October 2002.

Clause 15.12 of this contract required CPL to arrange Builders' All Risk Insurance "which shall include [Sembawang] as an Additional Co-Assured and shall be endorsed to require the underwriters to waive any rights of recourse including in particular, subrogation rights against all Assureds thereunder…". The contract did not expressly require Sembawang to be named as an insured under the policy, although the judge concluded that the surrounding correspondence made it clear that that was what CPL/Sea Trucks wanted.

In May 2003, CPL instructed brokers Nausch Hogan & Murray ("NHM") to obtain the cover and to include Sembawang as a co-insured. NHM instructed London brokers who placed 40% of the risk in London. The rest was placed in Norway (35%) and Russia (25%).

On 14 October 2003, while it was still at the shipyard, the vessel suffered flooding. Sembawang incurred repair costs and claimed indemnity from the London insurers under the policy. The London insurers, however, refused to pay on the ground that Sembawang was not an insured.

Under a settlement agreement dated 28 April 2004, CPL (without any admission of liability) agreed to pay Sembawang US$850,000 in full and final settlement of Sembawang's claims against the London insurers. The terms provided that CPL with Sembawang's assistance was to recover any losses in relation to that claim from relevant third parties, including NHM and the London insurers.

By agreement dated 26 July 2004, CPL, Sea Trucks and Sembawang assigned all their claims against NHM and/or its agents to the London insurers, in return for a payment of just over US$500,000. Exercising those assigned rights, the London insurers brought these proceedings against NHM, claiming damages for the broker's failure to take out insurance cover in accordance with its clients' instructions. NHM maintained they were not in breach of their duties because Sembawang was, in fact, a co-insured under the policy.

The insurance
The slip policy to which the London insurers subscribed described the insured as "Sea Trucks (Nigeria) Ltd and/or Diesel Power (Nigeria) Ltd and/or Dolphin Offshore (Nigeria) Ltd and/or Walvis (Nigeria) Ltd and/or West African Drydock Ltd and/or Subsidiary, Affiliates, Associated and Interrelated Companies and/or Joint Ventures as may be required as their respective rights and interests may appear".

Under the heading "Conditions", the slip set out various Institute clauses to be incorporated and also noted:

"Including Assured, interest of Mortgagees (and Notices of Assignment in respect thereof), Loss Payees, Additional Assureds and Waivers of Subrogation as may be required…".

The slip made no mention of Sembawang, other than to say the cover continued whilst the vessel was at Sembawang's shipyard. NHM's cover note to CPL, however, referred to Sembawang as an insured party - and this arrangement was reflected in the insurance placed in Norway and Russia. But the London insurers maintained they never agreed to insure Sembawang.

Co-insured?
The first issue was one of construction. Did the terms of the slip policy include Sembawang as an insured? NHM argued that Sembawang was an associated company or was in a joint venture with Sea Trucks and/or CPL because there was a commercial contract between the two under which they were engaged in a common enterprise and shared a community of interest.

The judge disagreed. The slip policy set out specifically named entities and referred to additional unnamed entities. But the only legal relationship between CPL/Sea Trucks and Sembawang was the contract for outfitting the vessel. This did not make them associated companies, nor did it give rise to a joint venture.

The clear intention was to cover members of the Sea Trucks group and any joint ventures into which its members had entered. A joint venture is a legal arrangement whereby two or more entities carry out a business activity under some form of common control or management, or at least share a common aim and common interest in pursuing a common enterprise. The contract between CPL and Sembawang was not a joint venture - all the work was to be done by Sembawang and there was no profit-sharing arrangement or common control or management of any kind.

NHM, however, argued that even if this was the case, Sembawang fell within the "additional assured" provision under the Conditions. Once again, the judge disagreed.

The insurance was deliberately framed as a group cover with limited "add-ons" for joint ventures, mortgagees and loss payees. The words "as may be required" did not give the insured carte blanche to add any third party to the cover, without any agreement on the part of insurers or even the need for insurers to be notified. It was highly unlikely that insurers would have agreed to cover additional parties in this way.

On the judge's reading, the words "additional assured" referred to entities that fell within the definition of the insured but which did not exist at the time the cover incepted - in other words, future members of the Sea Trucks Group and their joint ventures and those who took derivative title from them (legal or equitable assignees, mortgagees and loss payees).

Undisclosed principal?
Where a party is not named as an insured and does not fall within a class or description included in the cover, it may nevertheless be found to be covered by the policy as an undisclosed principal.

If the party taking out the insurance (A) is given authority to insure not only on his own behalf, but also on behalf of another (B) and takes out the policy with the intention of covering B's interests as well as his own, he will be acting as agent for B. Once the policy is effected, B will be a party to the insurance. This situation often arises in construction insurance, where A is the main contractor and B a subcontractor. The authority and intention to insure is usually provided by the terms of a contract between A and B, provided those terms do not contradict such an intention.

In this case, under the terms of the outfitting contract, CPL and Sea Trucks were authorised by Sembawang to place cover on Sembawang's behalf and at all material times intended to include it as a co-insured. This was reflected in their instructions to their brokers, NHM.

But, the London insurers argued, the London sub-brokers instructed by NHM had had no such intention. Nor were insurers notified that Sembawang was intended to be a co-insured until after 14 October 2003 (the date of the casualty). Consequently, insurers were unaware of (and could not themselves have had) any intention to include Sembawang in the cover.

The judge agreed with the London insurers. The policy was drafted to cover the interests of the Sea Trucks group and their joint ventures. The failure to include Sembawang in the policy, whether by name or as a category, was highly significant. Just as there was no intention to cover Sembawang directly in the policy, there was no intention for Sembawang to take the benefit of the policy as undisclosed principal.

There was no evidence to suggest the London insurers intended to contract with Sembawang. On the contrary, it was extremely unlikely insurers would have been willing to lose potential subrogation rights by making it a co-insured. While the vessel was being outfitted at a shipbuilder's yard, the interests of shipowners on the one hand and the shipbuilder on the other were in competition. If any claim arose, it was more than likely to be a claim by the owners (and their insurers by way of subrogation) against the shipbuilders.

Consequently, although the outfitting contract authorised CPL/Sea Trucks to obtain the cover on Sembawang's behalf, no sufficient intention to include Sembawang in the policy could be established.

Non-disclosure
Assuming, however, Sembawang was insured as an undisclosed principal, would the London insurers have grounds to avoid the policy for non-disclosure because they were not notified of this fact? If so, had they waived that right?

The London insurers argued that any intention to contract on behalf of Sembawang was a material fact which they would wish to know and which would have affected their underwriting judgment. In particular, the potential loss of subrogation rights was material. Given the nature of the relationship between CPL as owners and Sembawang as shipbuilders, Sembawang was the most likely target for the exercise of such rights.

The judge agreed. Disclosure was required of anything that was material and this included anything in relation to an undisclosed principal. This might be a material fact relevant to, say, moral hazard, or (as in this case) the loss of potentially valuable subrogation rights. Even if Sembawang had been covered as an undisclosed principal, therefore, insurers would have been entitled to avoid the policy.

Was there any waiver of this duty to disclose? Not at presentation, because there was nothing to put the London insurers on notice that cover was being obtained on Sembawang's behalf. Had they subsequently affirmed the contract when they entered into the assignment agreement? The judge found it difficult to see how the London insurers could have affirmed the contract when, throughout, they maintained there was no contract with Sembawang.

The claim against NHM
The London insurers had brought these proceedings as assignees of CPL/Sea Trucks/Sembawang's rights of action against NHM. For the purposes of this hearing, the judge did not have to reach a final conclusion on NHM's liability. But he concluded that there was a real prospect that the claim would succeed.

NHM, as brokers, had a duty to obtain insurance cover that clearly and indisputably met its client's requirements. If NHM had done its job properly by obtaining cover that clearly included Sembawang as a co-insured, no arguments about whether or not Sembawang was covered by the policy would have arisen and no legal costs and expenses would have been incurred.

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