In Rathbone Brothers plc v Novae Corporate Underwriting  EWCA Civ 1464, the Court of Appeal confirmed that an individual engaged in a consultancy agreement with the policyholder of a professional liability insurance policy was covered by the policy notwithstanding that he was a consultant rather than an employee.
The judgment at first instance was reversed, however, in relation to the question of subrogation. The insurer could not exercise any right of subrogation in order to claim under a contractual indemnity given by the trust company to the trustee.
The Claimants, Rathbone Brothers plc ("Rathbone") (a substantial international group whose trust business included the management of family trusts for wealthy clients) and Mr Egerton-Vernon (an individual who worked for a Jersey based subsidiary of Rathbone ("RTCJ")) sought indemnity from the Defendant/ Appellant insurers (the "Insurers") under a professional liability policy (the "Policy") issued to Rathbone. Mr Egerton-Vernon was an employee of RTCJ during the period 31 March 2000 to 30 June 2007. Thereafter he entered into a consultancy agreement with RTCJ with effect from 3 August 2007.
On 31 July 2003, RTCJ and Rathbone entered into "An Instrument of Release and Indemnity" with Mr Egerton-Vernon (the "Rathbone Indemnity"). Under the terms of the Rathbone Indemnity, Mr Egerton-Vernon would be indemnified by both Rathbone and RTCJ, whose liability was joint and several, for liabilities arising out of the performance of his services excluding liabilities arising from fraud or wilful misconduct.
During the time that Mr Egerton-Vernon worked for RTCJ he acted as personal trustee of one of the trusts established by the late Mr Jack Walker, the industrialist and chairman of Blackburn Rovers (the "Walker Settlement"). Mr Egerton-Vernon retired as personal trustee of the Walker Settlement on 21 July 2009.
Proceedings were brought in 2008 in Jersey against Mr Egerton-Vernon as personal trustee of the Walker Settlement in respect of alleged breaches of his trustee obligations from the end of 1999 onwards. The Jersey Court was considering whether to join Rathbone to proceedings as vicariously liable for the actions of Mr Egerton-Vernon. As a result Rathbone sought cover under their 2008-2009 Professional Liability Insurance for liability potentially arising in the Jersey proceedings and defence costs. AIG, insurer to the primary layer (of £5 million) accepted cover. The Insurers provided the excess layer up to £45million and denied cover.
First instance decision
There were three issues before the Commercial Court at first instance:
- Whether Mr Egerton-Vernon was covered by the Policy for any liability arising from the period he was acting as a consultant for RTCJ;
- If so, whether he had to exhaust other remedies available to him before claiming under the Policy. This issue turned on the meaning of clause 5.14 of the Policy which provided that "Insurance provided by this policy applies excess above insurance and indemnification available from any other source" (the "Excess Clause"); and
- Whether the Insurers had a right of subrogation against the policyholder, Rathbone.
The judge held that Mr Egerton-Vernon could recover under the Policy and that the Excess Clause did not mean that he had to exhaust all other remedies available to him before claiming.
In relation to subrogation, Burton J held that Insurers had a right of subrogation against Rathbone, Mr Egerton-Vernon's co-insured under the Policy, in respect of Mr Egerton-Vernon's indemnity.
Court of Appeal decision
Insurers appealed on the coverage and Excess Clause issues. Rathbone appealed the finding that Insurers had an effective right of subrogation against it. The Court of Appeal dismissed the Insurers' appeal and allowed that of Rathbone on the issue of subrogation.
The first question for the Court of Appeal to consider was whether Mr Egerton-Vernon was a "paid employee working under the direct control or supervision of an insured company" thus making him an Insured Person for the purposes of the Policy.
It was held that he was and ultimately, that the Policy provided cover for liabilities arising out of the alleged wrongdoing by Mr Egerton-Vernon. Specifically, the Court held as follows:
- Mr Egerton-Vernon was acting under the "direct control or supervision" of RTCJ. The provision of trustee services was a major part of RTCJ's business. Indeed, that is one of the principal reasons why it would seek professional indemnity insurance of the kind provided under the Policy. Insurers were undertaking to cover liabilities resulting from the exercise of trustee functions, notwithstanding that RTCJ could not directly control their exercise.
- In any event, the language of the clause is "control or supervision" (emphasis added). There was quite extensive supervision by RTCJ throughout Mr Egerton-Vernon's engagement in relation to the way in which his duties as a personal trustee were performed. Both Jersey regulation and Mr Egerton-Vernon's employment and consultancy contracts, whilst not interfering with Mr Egerton-Vernon's personal duties and responsibilities as a trustee, could sensibly be described as involving the exercise of both control and supervision by RTCJ over his activities.
- Mr Egerton-Vernon remained a "paid employee" for the purposes of the Policy following his move to a consultant for RTCJ in 2007. In substance, he carried on his activities the same way he had done under his previous contract of employment. The literal meaning of the Insured Person definition construed in the context of the commercial purpose of the Policy covered Mr Egerton-Vernon even when he was a consultant.
- Cover was restricted to liabilities resulting from the performance or failure to perform professional services "performed by or on behalf of an insured company pursuant to an agreement with a third party". Mr Egerton-Vernon was performing such services when acting as a personal trustee since he was acting "by or on behalf" of RTCJ. These words did not import any strict agency relationship as was submitted by Insurers.
- Finally, there was no reason why the insured company had to be party to the agreement with the third party to provide professional services. Here, the service was provided for the benefit of the insured company and on its behalf. RTCJ would be potentially liable if there was negligence by Mr Egerton-Vernon and would in any event wish to protect him since he was acting for their benefit. It was held that it was "perfectly sensible" for the Policy to apply in this situation.
The Court of Appeal considered whether the Excess Clause applied to both remedies under other insurance policies and to non-insurance indemnities, specifically the Rathbone Indemnity.
As to non-insurance indemnities, it was held that whilst the plain language of the Excess Clause covered them, it would significantly undermine the protection afforded by the policy if Insurers could take advantage of an indemnity given by one co-insured to another. It was therefore reasonable to construe the Excess Clause so that the non-insured indemnification had to come from some external source as opposed to a co-insured.
In relation to whether remedies should have been exhausted under other policies, Insurers submitted that cover under Rathbone's D&O policies was relevant in this regard. It was held that although Mr Egerton-Vernon was potentially captured under that policy as an "outside entity director", his liability fell within the professional services exclusion. Indeed the insurer under the D&O policies had in fact declined cover on the grounds that these policies were not professional indemnity policies which should properly cover this risk. As for defence costs, liability policies do not habitually give free-standing coverage for defence costs where the liability itself is not insured and there was nothing in the D&O policies to suggest that this was the case.
On the issue of subrogation, the Court of Appeal addressed two main issues: first whether subrogation was precluded by the terms of the Policy; and second whether the exercise of a right of subrogation was precluded by the terms of the Rathbone Indemnity.
It was held that it should be an implied term of the Policy that Insurers would not seek to be subrogated to Mr Egerton-Vernon's rights against RTCJ under the Rathbone Indemnity (Attorney General of Belize v Belize Telecom Ltd  UKPC 10 applied). It could not have been the intention of the parties that the Insurers should be able to enforce the rights of the Rathbone Indemnity against a co-insured where the co-insured was indemnifying the very same risk as the Insurers. To treat the Rathbone Indemnity as the primary source of protection, would undermine the very purpose of the Policy. Lord Justice Beatson dissented on this point, given the wording of the subrogation clause in the Policy which excluded the exercise of subrogation rights against a specific category of insureds not including Rathbone itself.
As to whether the exercise of a right of subrogation was precluded by the terms of the Rathbone Indemnity itself, it was held that it was. Rathbone had made available two ways in which Mr Egerton-Vernon's liability for professional negligence could be met. To the extent that the liability was discharged by the Policy, Rathbone could treat it as discharging pro tanto its own obligations. A term should be implied into the Rathbone Indemnity to the effect that it was intended to provide supplemental protection only once the claim against Insurers had been exhausted.
There is often a disconnect between those who draft contracts generally and those responsible for insurance. There can be no doubt that the Rathbone group, had it thought about it, would not have wanted insurers to take advantage of a fortuitously drafted indemnity nor would it be expected that the insurance premium took into account the reduction in exposure presented by such indemnity. That said, both the wording of the insurance and of the indemnity were clear. The former applied (unusually) in excess both of other insurance and of any other indemnity; the latter was silent as to the effect of insurance on the ambit of the indemnity. The Court of Appeal was left straining to produce the more sensible commercial result by way of implied terms – which for the majority even went as far as disregarding express words on the ambit of the subrogation waiver in the insurance. The key basis for this approach was expressed to be to avoid a construction which would rob the insurance of much of its purpose. The price that is paid by the approach is a lack of certainty in the construction of insurance contracts going forward.