Talbot v. Nausch Hogan & Murray (CofA)
The Court of Appeal agreed with the first instance judge that, as a matter of construction, this policy did not cover a shipyard as co-insured. The terms of the policy by implication also excluded any right of the shipyard to sue on the contract as an undisclosed principal. Even if that was not the case, the identity of the undisclosed principal was a material fact that ought to have been disclosed to insurers because of its potential effect on their subrogation rights.
DMC Category Rating: Developed
This case note is based on an Article in the July 2006 Edition of the ‘(Re)insurance Bulletin’, published by the Insurance/Reinsurance teams at the international firm of lawyers, DLA Piper. DLA Piper is an International Contributor to this website.
Clause 15.12 of this contract required CPL to arrange Builders' All Risk Insurance that included Sembawang "as an Additional Co-Assured" and a waiver of insurers' subrogation rights. 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 client's instructions. NHM maintained they were not in breach of their duties because Sembawang was, in fact, a co-insured under the policy.
Under the heading "Conditions", the slip set out various Institute clauses to be incorporated and also stated: "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 while the vessel was at Sembawang's shipyard.
NHM appealed. On the construction issue, it argued that Sembawang was an "additional assured" because the words operated to extend cover to any person who had an insurable interest in the vessel's hull and machinery. Alternatively, Sembawang was entitled to sue on the policy as an undisclosed principal and insurers had waived any rights they had to rely on any non-disclosure. In any event, CPL had suffered no loss from NHM's alleged breach because it was entitled to recover under the policy.
In any event, the Court of Appeal concluded that, had the parties really intended to include Sembawang as a co-insured, they would have used much clearer language.
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 completion contract, CPL was authorised to place cover on Sembawang's behalf and at all material times intended to include it as a co-insured. This was reflected in its instructions to its brokers, NHM. The crucial question, however, was whether the terms of the policy demonstrated an unwillingness on the part of insurers to contract with any particular person as an undisclosed principal.
This had to be answered by reference to the terms of the insurance contract and the circumstances surrounding it. There was no reason to think insurers were shown the completion contract, but they were well aware that completion work was to be carried out by Sembawang and so they must have been aware that the vessel might suffer damage as a result of the yard's acts or omissions.
In this context, the absence of any reference to Sembawang and its subcontractors in the policy was striking and must be regarded as a positive indication that insurers were not willing to contract with them. This was a case, therefore, in which the terms of the insurance contract by implication excluded any right on the part of Sembawang to sue as an undisclosed principal.
The judge thought that in many cases the identity of the undisclosed principal would be a matter of indifference to the insurer, but it would be surprising if that was the case here, where Sembawang's inclusion would affect insurers' ability to pursue a subrogation claim against it. The fact that the law generally recognises the right of an undisclosed principal to sue and be sued on a contract does not relieve the nominal insured from the duty to make full disclosure of all material circumstances to insurers, including any which may relate to his undisclosed principal.
Sembawang's entitlement to payment under the completion contract depended on its ability to hand the vessel over in the required condition. After the flooding, therefore, it had no choice but to make good the damage at its own expense. Had it been included in the cover, it would have been entitled to make an insurance claim.
CPL had sustained a loss as a result of NHM's breach. The nature of this loss was that CPL had lost its chance to recover from insurers under the insurance policy. By the time the insurance claim was made, Sembawang had carried out the repairs and it was impossible to say that, by doing so, Sembawang had not intended to make good the loss in respect of which CPL was entitled to claim under the insurance. Consequently, CPL had not suffered a loss that could be recovered from insurers. Had Sembawang been included in the cover, however, Sembawang, as a co-insured, could have recovered in full under the policy and accounted to CPL to the extent of CPL's interest.
In cases where this situation might arise, it is difficult to see how insurers' rights of subrogation would not be significantly affected by the addition of an undisclosed principal and, therefore, why they would not be able to rely on material non-disclosure. The moral of the story is to ensure such parties are named or clearly identifiable within the categories of co-insured.
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