Joint names insurance, where both the employer and contractor are insured parties under one insurance policy, can have significant benefits.

According to Simon Nurney a partner in the construction and engineering group of City law firm  Macfarlanes, this can mean that parties may avoid having to prove fault for a defect, that the defect can be rectified faster and that costs can be saved.

However, if parties want such a joint names policy to be their only remedy for defective work, and so prevent the employer suing the contractor for any defects, careful wording is required and the parties must ensure the appropriate insurance is in place.

He says that over the past 18 months the courts have had to consider this very issue. In the case of Tyco Fire and Integrated Solutions v Rolls-Royce Motor Cars, the contract to install a fire protection system at a car plant required the employer to take out joint names insurance for ‘specified perils’, which included ‘flood, bursting or overflowing of water tanks, apparatus or pipes’.

Unfortunately the employer failed to take out such insurance and sought to claim against Tyco when there was a leak. Tyco argued that Rolls-Royce could only have had a claim under a joint names insurance policy and its failure to set up the policy meant the employer was left with no claim.

The court agreed that parties can allocate the risk of defects to a joint names policy and they can avoid any other contractual claims. But if they intend that the joint names policy is to be the only remedy for defects, this must be set out in the contract in clear terms. In this case, the contract had also provided that the contractor was to indemnify the employer for any acts of negligence. In other words, insurance was not the only remedy available.

He adds that despite the fact that Rolls-Royce finally won in April 2008, and was able to get its money back from Tyco, the dispute was long and costly.

Additionally, Mr Nurney says that if insurance is to be the only remedy for defects, the contract must say so clearly and the insurance regime must fit in with the overall contractual regime to avoid any loopholes. This case also illustrates the need to remember to take out the insurance policy.