Commercial Court

This case concerned a claim under section II (liability) of the WELCAR 2001 Offshore Construction Project Policy wording.

The Claimant, Technip, had contracted with an unincorporated joint venture, KJO, to perform construction works to offshore assets owned by KJO in the Khafji Field in Saudi Arabia. Technip was one of the insureds under the policy.

A vessel chartered by Technip to perform work under the contract allided with an unmanned well head platform owned by KJO, causing it significant damage. Technip entered into a settlement with KJO by which it paid KJO some US$25 million (plus other sums) in respect of the damage, on the ground that it had a liability in law to do so. Technip then claimed a corresponding indemnity from the insurer under section II of the policy.

Among a number of issues between the parties were two key points. The first concerned the Damage to Existing Property (DTEP) Exclusion in section II, which provides that liability cover shall not apply to any claim for damage to or loss of use of any property which "the Principal Assured…owns that is not otherwise provided for in this policy".

The general exclusion is then followed by the DTEP buy-back, which disapplies the above exclusion in respect of property identified in the "Schedule of Existing Property below and…anything reasonably ancillary thereto".

It was common ground that the damaged well head platform did not appear among the scheduled assets, and so the issue turned simply on whether or not it constituted an asset owned by the Principal Assured.

The concept of the "Principal Assured" was not in fact defined in the policy, though the court took this as a reference to the "Principal Insureds", a term defined to include Technip, the KJO joint venture partners and other entities. 

Technip observed (correctly) that the policy was composite, not joint. On this basis, they contended that the contract was deemed to be a separate insurance in respect of each Principal Assured (Insured). Reading the policy as a separate insurance for Technip, it followed that the Principal Assured whose property was referred to was Technip alone, not KJO or any other Principal Assured.  Since the property in question was that of KJO, not Technip, they contended that the DTEP exclusion did not apply.

The trial Judge, Jacobs J, rejected this argument. He held that a reasonable person would interpret the clause as meaning that damage caused to existing property owned by any Principal Assured would be excluded, unless the property in question appeared in the buy-back schedule of existing property.

The second point concerned Technip's settlement with KJO, which had been concluded without the consent of insurers, at a time when insurers had already denied the claim and instructed Technip to act as a "prudent uninsured".  Insurers contended that an unapproved settlement did not constitute Damages qualifying for indemnity, where "Damages" were defined in the policy as “compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent…”

In light of the Judge's decision on the first point the second became academic, but the judge nevertheless went on to indicate that he would have found against insurers on this question.  He concluded that it would be “a surprising result if an insurer could defend an insurance claim on the basis of absence of consent to a settlement in circumstances where there had been a denial of liability and the insured had been told to act as a prudent uninsured”. He considered that the court would find little difficulty in concluding that the insurer in those circumstances had waived the requirement of consent or was estopped from relying upon the lack of consent.

This approach, which was an obiter observation in light of the primary decision, is not easily reconcilable with that in the earlier case of Diab v. Regent Insurance Company Ltd,[2] in which the Privy Council held that, where an insurer had declined cover, the insured was still bound by the terms and conditions of the policy, including the obligation to seek the insurer's consent to a settlement[3].

Court of Appeal

Given the importance of the DTEP exclusion to the offshore construction market the Judge gave permission to appeal, on that question only.  The Judgment of the Court of Appeal was handed down on 2 May 2024. 

The Court of Appeal upheld the decision of the trial Judge.  While Technip was clearly right that this was a composite policy, meaning that each is deemed a separate contract, the Court of Appeal rejected the idea that these separate and several policies should therefore be read in the way contended by Technip. Instead, each separate policy contained the same provisions, including the same definition of Principal Assured (Insured). Thus, cover was still excluded under each such several policy in respect of any property owned by any entity falling within the definition of Principal Assured (Insured).

Finally, the Court of Appeal also rejected Technip's argument that commercial common sense pointed to the construction argued for.  Sir Geoffrey Vos MR made a number of observations on that argument including the following:

"…while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight".

[1] [2024] EWCA Civ 481

[2] [2006] UKPC 29

[3] In an analogous reinsurance context see also Lexington Insurance Co v. Multinacional de Seguros SA [2007] EWHC 1170