Analysis
Rathbone Brothers plc (Rathbone) was a substantial international group whose trust business included the management of family trusts for wealthy clients. Mr Egerton-Vernon (EV) was an employee of, and subsequently a consultant to, its subsidiary, Rathbone Trust Company Jersey Ltd (Trust Company). He was entitled to an indemnity from Rathbone and the trust company for liabilities arising from the performance of his services as a personal trustee of the Walker Trust to a limit of £40m. Rathbone took out insurance for itself and its subsidiaries (including the trust company) with AIG, which was responsible for the first £5m, and with the Members of Lloyd’s Syndicate 2007 and other underwriters (Excess Insurers), for the excess limited to £45m. The beneficiaries of the Walker Trust brought action in the Courts of Jersey alleging that EV had made poor investment decisions in breach of his professional and fiduciary duties. The excess insurers disputed that EV was covered by the policy issued to Rathbone and contended that, even if they were liable, they were only liable for the excess after (inter alia) exhausting the indemnity given to EV. Furthermore, the excess insurers contended that they were entitled to be subrogated to EV’s contractual right to the indemnity. Burton J found that EV could recover under the policy taken out by Rathbone and that the excess insurers were not entitled to rely upon the excess clause. However, he also held that they were entitled to be subrogated to EV’s contractual right to the indemnity once they had paid out under the policy. Both parties appealed the findings which went against them respectively.
Held (allowing the appeal with respect to subrogation but dismissing the other appeals):
- 1) There was no doubt that EV was covered, for the provision of professional services when acting as a personal trustee, by the terms of the policy taken out by Rathbone. Though the provision of these services required the exercise of a personal judgement which could not be overridden by the employer, he was nevertheless under the direct control or supervision of an insured company, even when acting as a consultant to the trust company. In this respect, it did not matter that he was no longer a paid employee working under a contract of employment, as distinct from a consultant engaged under a contract for services, as the definition of ‘paid employee’ had to be construed compatibly with the essence of those intended to be covered as an ‘insured person’. The terms of the policy should be construed within the context of its commercial purpose to achieve common sense and it would require very clear words to exclude from cover the provision of personal trustees. The trust company, on whose behalf the services were provided, would be potentially liable if there was negligence by the personal trustee, and it would in any event wish to protect the person acting for its benefit. An agreement between the Trust Company and the Walker Trust could, if necessary, be implied allowing EV to act as personal trustee. Accordingly, the policy provided cover for the liabilities arising out of the alleged wrongdoing by EV as personal trustee of the walker trust.
- 2) The wording of the excess clause was sufficiently wide to be capable, in principle, of applying not just to other insurance policies but also to other forms of non-insurance indemnification. However, it was not appropriate in this case because, if the excess insurers could take advantage of an indemnity given by one co-insured to another, this would significantly undermine the protection afforded by the policy. As it would frustrate the purpose of professional indemnity insurance to interpret the policy so as to exclude the excess insurers’ liability in the various circumstances where that insurance was most likely to be needed, it would require very clear language to treat the indemnity granted by the insured company to be the primary source of cover ahead of the insurance for which the insured company had paid. Accordingly, the Excess Insurers were not entitled to rely upon the excess clause with respect to the indemnity given by Rathbone and the trust company.
- 3) The terms of the policy expressly confirmed a right of subrogation but the Excess Insurers were not entitled to rely on EV’s contractual right of indemnity. Distinguishing the obiter observations of Rix LJ in Tyco Fire & Integrated Solutions (UK) Ltd v Rolls Royce Motor Cars Ltd, the court by a majority (Beatson, LJ dubitante) should in this case imply a term in the contract, construed in its commercial setting, that the excess insurers would not seek to be subrogated to EV’s rights under the indemnity because it could not have been the intention of the parties that they should be able to enforce rights of indemnity against the co-insured where that co-insured was indemnifying the very same risk as the excess insurers. If it were otherwise, Rathbone and its subsidiaries would be denied the very benefit which the policy was intended to cover – it was pure happenstance that the indemnity was in place and the parties cannot reasonably be taken to have intended to make it the primary source of protection for EV with the insurance being the secondary source. In any event, the court was agreed that the right of subrogation was precluded by the terms of the underlying indemnity. In this respect, the relevant question was to ask whether EV would naturally have understood that his claim under the indemnity had been exhausted once his liability had been fully met under the insurance policy. Essentially, Rathbone had made available two ways in which any liability of EV in professional negligence might be met. For EV, it was a matter of indifference how he was protected provided that, one way or the other, there was the necessary indemnity. They were not co-extensive so that, if in the circumstances the insurance cover did not meet full liability, recourse would then be had to the indemnity. However, to the extent that the liability was discharged by payment under the insurance policy, Rathbone could take advantage of that payment and treat it as discharging pro tanto its own obligation. Accordingly, even if there were a right of subrogation in principle which was not waived by the policy itself, that right had no substance in the circumstances of this case and, consequently, there was no right to which the excess insurers could be subrogated.