Court of Appeal upholds WELCAR exclusion defence

Clyde & Co represented the successful defendant insurer in an English Court of Appeal judgment in an offshore energy construction insurance claim which has highlighted the role of commercial rationale in interpreting ambiguous policy terms.

The Court of Appeal has handed down judgment in Technip Saudi Arabia Limited v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (“MedGulf”) [2024] EWCA Civ 481, unanimously dismissing the insured’s appeal and upholding the High Court’s decision that the insured’s claim was excluded by the Damage to Existing Property (“DTEP”) exclusion in the liability section of an offshore construction all risks insurance policy on the pre-eminent policy wording in use in the energy market (WELCAR).

The judgment is a clear example of how the English court takes into consideration the words on the page as well as the context and purpose of a particular policy wording including commercial rationale.

Facts of the loss

The claim related to an allision in 2015 between a vessel chartered by the insured, Technip, to carry out certain offshore construction works in the Khafji oilfield, offshore Saudi Arabia, with an existing wellhead platform in the vicinity of the project works which was owned by the field operator, KJO.

Technip made a claim in respect of its liability to KJO for the damage to the platform under Section II (the section providing liability cover) of its offshore construction all risks insurance policy, which named both Technip and KJO as “Principal Insureds”.

The dispute

The insurer, MedGulf, had declined cover under Section II on the primary basis that Technip’s liability in respect of the platform was excluded by limb 1 of the policy’s DTEP endorsement, which excluded damage to existing property in the field owned by “the Principal Insured”, in this case, damage to the existing platform owned by KJO. The DTEP endorsement provided an option for cover to be bought back by scheduling the relevant property. Various items of existing property owned by KJO had been scheduled in the DTEP buyback but the platform which was the subject of Technip’s claim had not.

Technip argued that limb 1 only excluded coverage for any existing property owned by the particular Principal Insured making the claim under the policy, and therefore it did not apply as the platform was owned by KJO (not Technip).

First instance decision

At first instance, the High Court held in favour of MedGulf, finding that the DTEP exclusion was properly to be interpreted as excluding claims for damage to property owned by any of the Principal Insureds and, therefore, operated to exclude Technip’s claim under the policy. The judge confirmed that the composite nature of the policy does not change what property falls within the scope of the exclusion.

For further discussion of the High Court’s decision, please see this Clyde & Co article.

Despite the judge being “unpersuaded by all of Technip’s points”, he granted Technip permission to appeal in relation to the proper construction of limb 1 of the DTEP endorsement on the basis that the WELCAR wording is the standard form for offshore construction all risks cover and it is widely used in the offshore industry.

The Court of Appeal’s decision

Technip argued that the judge made three errors: (i) the judge failed to give adequate weight to the primacy of the policy language; (ii) he failed to give effect to the composite nature of the policy; and (iii) he allowed his perceived commercial rationale to override the natural meaning of the DTEP endorsement. 

The Court of Appeal broadly agreed with the reasoning of the first instance judge and dismissed Technip’s appeal on all three grounds. The Court of Appeal held that the first instance judge’s construction accorded with the natural and ordinary meaning of the DTEP endorsement and its commercial purpose:

1. The Court, applying the established principles of contractual interpretation, concluded that the judge was right to find that MedGulf’s interpretation was the correct one as it gave “far greater weight to the language of the policy”. Technip’s interpretation did “far more violence to the natural meaning of the words used” as it required reading more words into the DTEP endorsement than MedGulf’s interpretation. Furthermore, the Court rejected Technip’s assertion that its interpretation was consistent with other usages in the policy, concluding that it “did not find any consistent usage that pointed one way or another…as to the proper meaning of the language of endorsement 2”.
2. The Court rejected Technip’s argument that the judge had failed to give effect to the composite nature of the Policy. The Court agreed that the policy is a composite policy that is expressly “deemed to be a separate insurance in respect of each Principal Insured”, however, the meaning of the term “Principal Assured” was the same in each such nominal separate insurance between each insured and the insurer.
3. The Court rejected Technip’s assertion that the judge had paid excessive regard to the commercial rationale of the DTEP endorsement. On Technip’s interpretation, if a liability claim was to be made under the policy by one of the “Other Insureds”, the exclusion would not bite at all which the Court said is “untenable”. In terms of the commercial rationale of the DTEP endorsement, the Court had in mind “the proper structure to an “existing property” endorsement” which is “intended to exclude claims for damage to property, either owned by or in the custody of the Principal Insureds… unless that coverage is specifically bought back for specific scheduled property”. The Court said that Technip’s interpretation gave “inadequate importance to the fact that [the DTEP endorsement] is an existing property exclusion, and to the buy-back that was an integral part of the coverage (for which the property was listed by Technip itself in its broker’s questionnaire)” and the Court highlighted the total USD1.78 billion total value of the KJO-owned property for which cover was bought-back. The Court concluded that the judge had “appropriate regard to the language and to admissible factual matrix including the commercial rationale” of the DTEP endorsement. 

Accordingly, the Court concluded that the exclusion in the DTEP endorsement was “properly to be interpreted as excluding claims for damage to property owned by any of the Principal Insureds named in the policy. That includes Technip’s claims for damage to the platform, which was not scheduled in the buy-back schedule in endorsement 2.”   On that basis, the Court dismissed Technip’s appeal. 

Comment

It is established case law that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge reasonably available to the parties when they entered into the contract, would have understood the language of the contract to mean. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and this can involve a process whereby each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.

Both the High Court judgment and the Court of Appeal judgment provide clear examples of how these legal principles operate in practice. In reaching its decision, the first instance court took into account broad commercial factors including the purpose of the policy in the industry, the rationale behind the cover being structured in the way that it is, and the commercial consequences of the parties’ rival constructions. The Court of Appeal agreed and further highlighted the relevance of the contractual scheme provided by the structure of the DTEP endorsement, in particular, the buy-back that “was an integral part of coverage (for which the property was listed by Technip itself in its broker’s questionnaire)”, the scale of the project and the value of the existing KJO-owned property in respect of which cover was bought back at US$1.78 billion, and in that context, the fact that the platform was not listed in the broker’s questionnaire or scheduled in the buy-back.

We note that this judgment does leave contractors in a difficult position when the contractor, as opposed to the project owner / operator, arranges the insurance, which is not uncommon in some parts of the world. In this scenario, the contractor may not know who owns the existing property at the project site, which existing property is owned by a Principal Insured and therefore which existing property they are liable for and consequently for which property they need to buy back cover. This is regrettable from the contractor’s perspective, however, insurers plainly need to understand the potential liabilities that they are providing cover for and they are reliant on the insured to provide this information. The reality in this case is that Technip had in fact bought back cover for certain of KJO’s property, just not the platform which suggested they had some level of insight as to the relevant assets, either through KJO or otherwise.

Finally, the Court of Appeal’s judgment provides a useful reminder on the importance of consistent drafting. Technip had sought to argue that its interpretation was consistent with other usage in the policy. However, because the policy had inconsistent language throughout the wording, the Court concluded that it “did not find any consistent usage that pointed one way or another…as to the proper meaning of the language of endorsement 2.” As such, to the extent that the meaning of a clause is disputed and insurers are trying to rely on a specific underwriting intention, it is much harder to do when the policy terms are inconsistent. It is therefore worth highlighting that underwriters should consider how a particular clause fits in with the rest of the policy.

The judgment is available here.

Clyde & Co acted in this matter for MedGulf, led by Angela Flaherty and assisted by Abigail Li and William Oakhill.