Background
The parties and the insurance policy
The claimant Technip was the main contractor performing offshore construction works for KJO in Saudi Arabia’s Al-Khafji offshore oil and gas field. KJO, a joint venture between two oil companies, was the project developer and field operator. The works included designing, constructing and installing new power cables, platforms and well jackets.
Technip and KJO were both named as ‘Principal Insureds’ under a composite insurance policy (the Policy) with the defender insurance company, Medgulf (the insurer). The Policy used the standard form wording for offshore construction all risks insurance cover commonly used in the energy industry.1
The composite Policy was expressly deemed to be a separate insurance in respect of each Principal Insured.
Technip crashes into and damages KJO’s platform
During the construction works, a vessel chartered by Technip crashed into a wellhead platform belonging to KJO causing damage. Technip agreed to pay KJO the sum of $25 million for the damage it had caused to KJO’s platform.
Technip makes indemnity claim against the Policy
The coverage provided under … this policy shall not apply to any claim for damage to or loss of use of any property for2 which the Principal Assured owns that is not otherwise provided for in this policy.
The exclusion clause went on to include an option to ‘buy back’ cover for such property by listing it in the buyback schedule (the Buy-back Schedule).Notwithstanding the [Exclusion Clause] above, it shall not apply to any claim for … damage to existing property as per the [Buy-back Schedule] below.
When the Policy was taken out, Technip had exercised the buy-back option in respect of certain property owned by KJO, including various other platforms, structures, cables and pipelines. These assets were listed in the Buy-back Schedule with their values, potential damage and maximum risk. The total value of this buy-back property was $1.78 billion. However, the particular platform which had been damaged was not identified on the Buy-back Schedule list. The insurer successfully argued this meant the buy-back option had not been exercised in respect of KJO’s damaged platform, and the platform was therefore property excluded from cover under the Exclusion Clause.Two possible interpretations of the exclusion clause
As noted by the Court of Appeal, the contract was not a model of clear drafting. The terms ‘principal assured’ and ‘principal insured’ were used seemingly interchangeably throughout the Policy; the exclusion clause wording was certainly not grammatically correct and it permitted two rival interpretations.
Technip’s interpretation
Technip argued that the policy’s composite nature meant that the exclusion clause only excluded cover for property which was owned by the principal assured who was making the claim. It did not, it argued, exclude property owned by the principal assured who was not making a claim. As Technip was the principal assured making the claim, the exclusion clause only excluded damage caused by Technip to its own property, not damage caused by Technip to KJO’s property. Technip unsuccessfully argued that composite insurance policies are always interpreted in this manner.
The insurer’s interpretation
The insurer argued that although it was a composite policy, the exclusion clause still caught property owned by any of the principal assureds under the Policy, regardless of which principal assured was making the claim. While Technip was the principal assured who was making this claim, it could not claim for damaging KJO’s platform because KJO was one of the two Principal Assureds.
Sense: the High Court3
Rules of interpretation in insurance contracts
The High Court noted that an insurance policy, like any other contract must be interpreted objectively – what would a reasonable person with all the background knowledge reasonably available to the parties at the time they entered the contract have understood the language of the contract to mean?4
In the case of ambiguity, the court may opt for the more commercially sensible construction and if there are two possible constructions, the court can prefer that which is most consistent with business common sense. But if the language is unambiguous, the court must apply it (unless plainly wrong or absurd).5 The High Court judge noted:6
In accordance with these authorities, I need to consider the language of the endorsement in the context of the policy as a whole, the relevant factual matrix and the commercial consequences of the parties’ rival constructions.
Technip’s interpretation makes no sense – cover for the platform is excluded
The High Court agreed with the insurer that Technip’s $25 million indemnity claim didn’t even make it to first base because KJO’s damaged platform was excluded from liability cover under the exclusion clause and had not been bought back by listing it in the Buy-back Schedule.
Rejecting Technip’s interpretation, the High Court considered that the obvious purpose of the exclusion is to exclude cover for property owned by KJO. The High Court highlighted that the three-part structure to the Exclusion Clause was:7
- (i) to identify all existing property as being subject to the endorsement;
- (ii) to specify property which the Principal Assured owns (or has custody etc.) as being excluded; but
- (iii) then expressly to provide “Buy-Back” cover in respect of certain identified property, all of which was owned by KJO.
In light of the above scheme, the High Court concluded that a reasonable person with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the Policy to mean that if damage was caused to the existing property of any Principal Assured, then only property which had been identified in the Buy-back Schedule would have coverage. If the property was not identified in the Buy-back Schedule, then the exclusion operated and there was no cover.
The High Court held that Technip’s interpretation makes no commercial sense given the above structure, because it meant that the Exclusion Clause would only apply if a Principal Assured damaged its own property (in which case it would rarely, if ever, incur liability) and because it made Technip’s listing of KJO’s specific property in the Buy-back Schedule irrelevant. It found there was nothing in the Exclusion Clause’s language that produced this complex and rather odd result:8
By contrast, the straightforward reading of the clause advanced by Medgulf, which I accept, makes commercial sense, is supported by the factual matrix and is more consistent with the endorsement as a whole.
Quantum – even if successful, Technip could not recover the full $25 million settlement amount
Anticipating an appeal by Technip of its interpretation decision, the High Court went on to set out how it would have calculated the sum that Technip would have been entitled to recover under the Policy, had KJO’s platform not been excluded from cover.
Technip and KJO had entered a settlement agreement in the amount of $25 million. But the High Court noted that Technip had no legal liability to KJO for anything over the reasonable repair costs. After considering a significant amount of expert evidence, the High Court concluded that the reasonable costs of repair for the platform amounted to only $10 million.
Therefore, even if Technip’s interpretation of the exclusion clause had been successful, it would only have been entitled to recover $10 million from the insurer under the Policy, and not the full $25 million which it had agreed to pay KJO.
Violence: the Court of Appeal9
Technip unsuccessfully appealed in the Court of Appeal, arguing that:
- 1) Composite policies are always interpreted in line with Technip’s interpretation.
- 2) The High Court’s interpretation was not the proper meaning of the Exclusion Clause and it had failed to give adequate weight to the primacy of the policy language.
- 3) The High Court’s interpretation paid excessive regard to commercial rationale.
The Court of Appeal rejected all of Technip’s above arguments, praised the High Court judge’s extensive careful reasoning and confirmed that the judge was right broadly for the reasons he gave.
The Court of Appeal found that the composite nature of the Policy did not affect the interpretation of the Exclusion Clause and that the case law Technip relied on did not support its claim that composite policies are always interpreted in line with Technip’s interpretation.
Further, the Court of Appeal found the High Court judge did not pay excessive regard to commercial common sense – he interpreted it correctly, having regard to the language and admissible factual matrix, including the commercial rationale.
The Court of Appeal explained five reasons why the insurer and the High Court’s interpretation in fact gave far greater weight to the language and structure of the Policy than Technip’s:10
- 1) Technip’s interpretation did far more violence to the natural meaning of the words than the insurer’s interpretation. The insurer’s interpretation involved changing just one word, by replacing ‘the Principal Assured’ with ‘any Principle Assured’. Whereas Technip’s interpretation required much more alteration, changing ‘the Principle Assured’ to ‘the Principal Assured which is making the particular claim concerned’.
- 2) Technip accepted there was no difference between the meanings of ‘Principal Insured’ and ‘Principal Assured’ which had been used interchangeably throughout the Policy.
- 3) Technip’s interpretation made no sense because Technip and KJO were not the only insured parties under the Policy. The Policy (and its Exclusion Clause) also included a class of ‘Other Insureds’, including project managers, subcontractors, suppliers and other companies connected to the project. Technip’s interpretation did not work where the liability claim was being made by one of these Other Insureds.
- 4) There was nothing in the rest of the Policy which pointed to or supported Technip’s unique interpretation of ‘the Principal Assured’ in the Exclusion Clause. The Exclusion Clause was simply excluding coverage for damage to property owned by the Principal Assureds/Insureds.
- 5) The contra proferentum principle of interpretation was not helpful11
because Technip’s interpretation gave inadequate importance to the fact that the Exclusion Clause was an existing property exclusion, and to the buy-back option that was an integral part of the coverage. By contrast, the insurer’s interpretation gave the proper structure to an exclusion which is intended to exclude cover for existing property unless bought back.
Conclusion
The Court of Appeal had no difficulty in rejecting Technip’s interpretation and dismissed the appeal. As the Policy in this case was the widely used standard form wording used for offshore construction all risks insurance, this judgment provides welcome clarity for the energy industry.
References
[1] Using the amended WELCAR 2001 Offshore Construction Project Policy.
[2] It was agreed the word ‘for’ was bad drafting and did not belong there.
[3] Technip Saudi Arabia Limited v The Mediterranean & Gulf Insurance and Reinsurance Company [2023] EWHC 1859 (Comm).
[4] Financial Conduct Authority v Arch Insurance UKSC [2021] at [47].
[5] Rainy Sky SA v Kookmin Bank [2011] UKSC 50 at [21].
[6] Technip, above n 1, at [146].
[7] Technip, above n 1, at [152].
[8] Technip, above n 1, at [161].
[9] Technip Saudi Arabia Limited v The Mediterranean & Gulf Insurance and Reinsurance Co [2024] EWCA Civ 481.
[10] Technip, above n 7, at [26]–[32].
[11] The contra proferentum is a principle of contractual interpretation that an ambiguous term should be interpreted against the interests of the drafter.
