An arbitration clause was binding on the owner’s insurance company

In a previous newsletter from September 2013 IUNO wrote about a case before the Danish Eastern High Court between an insurance company and a consulting engineer. In the case an owner was held liable for damages on an adjoining property caused during construction works. The insurance company paid damages to the owner of the adjoining property and sued the consulting engineer subsequently before the ordinary courts with a recourse claim. However, the owner and the consulting engineer had agreed on an arbitration clause and the question was therefore whether the owner’s insurance company was bound by this clause.

The Danish Eastern High Court found that the owner’s insurance company was not bound by the arbitration clause between the owner and the consulting engineer, but the consulting engineer appealed against the decision to the Danish Supreme Court.

The Danish Supreme Court reversed the Danish Eastern High Court’s decision

The Danish Supreme Court reached a result contrary to the Danish Eastern High Court.

Initially, the Danish Supreme Court emphasized that the insurance company’s recourse claim against the consulting engineer was a consequence of the consulting engineer’s insufficient execution. Therefore, the Danish Supreme Court found that the insurance company by the payment of damage had subrogated in the insured’s rights, i.e. the owner’s rights. For that reason, the insurance company’s claim against the consulting engineer was covered by the arbitration clause. In relation to this the Danish Supreme Court noted that if the owner had paid the damages himself the owner’s claim against the consulting engineer would be covered by the arbitration clause. Because of that the insurance company’s recourse claim was covered as well.

In addition, the Danish Supreme Court found it irrelevant for the result of the case that the insurance company had been assigned the adjoining property’s claim against the owner and the consulting engineer after the insurance company had paid damages.

Nor did the Danish Supreme Court find that the consulting engineer had lost the right to rely on the arbitration clause by assisting in the survey before the ordinary courts.

IUNO’s opinion

The decision shows that an insurance company subrogates in the rights of the owner when the insurance company’s claim against the owner’s contracting party is a result of a dispute over the consulting engineer’s execution of the work. In a situation like this an insurance company is therefore bound by an arbitration clause if there is a such clause in the parties’ contract.

IUNO recommends that insurance companies pay attention to whether the insurer has agreed on an arbitration clause with his contracting parties. The fundamental principle is that if an arbitration clause has been agreed the insurance company will be bound by it as well.

[Danish Supreme Court judgement of 11 March 2014, Case No. 217/2013]