Rathbone Brothers Plc & Anor v Novae Corporate Underwriting Ltd

In a professional indemnity policy, paid employee was not confined to common-law employees. It included a consultant who continued to work under the insured company’s supervision and remuneration structure. Personal trustee work could be performed on behalf of the company even though the trustee retained independent fiduciary duties. An excess clause covering insurance and indemnification from any other source could include non-insurance indemnities, but not an indemnity from a co-insured company as the primary source where that would defeat the policy’s commercial purpose. Separate directors’ and officers’ cover excluded the professional negligence claim, including defence costs absent clear wording. The policy and the underlying indemnity structure prevented effective subrogation against the co-insured indemnifier.

Rathbone plc’s Jersey trust business was involved in litigation brought by beneficiaries of the Walker Trust against Paul Egerton-Vernon, a former employee and later consultant who had acted as a personal trustee. The excess insurers disputed whether he was insured, whether the excess clause required him first to rely on the Rathbone indemnity or other policies, and whether they could recover through subrogation.

Burton J held that PEV could recover under the professional indemnity policy, rejected the insurers’ reliance on the excess clause, but held that the insurers had an effective right of subrogation against the Rathbone indemnity: [2013] EWHC 3457 (Comm). The insurers appealed the first two conclusions. Rathbone plc and PEV appealed the subrogation conclusion.

1. Disposition. The Court of Appeal unanimously dismissed the insurers’ appeal on coverage and the excess clause. It allowed Rathbone plc and PEV’s appeal on subrogation. The judgment was given notwithstanding that the underlying dispute had settled.
2. Coverage. The policy’s definition of paid employee was construed in its contractual and commercial context. It covered PEV after he became a consultant because the substance of his relationship with Rathbone Trustees continued, including remuneration, supervision and control. The inability of Rathbone Trustees to dictate how he exercised independent trustee judgment did not remove him from cover. Personal trustee services were declared professional services and could be performed on behalf of Rathbone Trustees without a strict agency relationship. The agreement with a third party did not need to be one to which an insured company was party.
3. Excess and other cover. The excess clause applied in principle to both insurance and non-insurance indemnities. However, indemnification from an external source was contemplated. Treating the indemnity given by Rathbone plc, a co-insured company, as the primary source would undermine the protection for which the premium was paid. The directors’ and officers’ policies excluded professional services. They also gave no free-standing right to defence costs for an uninsured liability because clear wording was absent.
4. Subrogation. Subrogation may be excluded by the policy or rendered ineffective by the underlying contract. Elias LJ and Sharp LJ held that the policy contained an implied term preventing subrogation against Rathbone plc under the indemnity. Beatson LJ did not accept that route, stressing the express wording of the subrogation clause, but agreed that the underlying indemnity made insurance the primary protection and supplied only supplemental cover. Insurance payments therefore discharged Rathbone plc’s indemnity obligation pro tanto, leaving no claim to which subrogation could attach.

• Court of Appeal (Civil Division) — [2014] EWCA Civ 1464 : Rathbone plc and PEV’s subrogation appeal allowed; the insurers’ appeal on coverage and the excess clause dismissed.
• High Court, Queen’s Bench Division, Commercial Court — [2013] EWHC 3457 (Comm) : PEV was covered, the insurers could not rely on the excess clause, but they had an effective right of subrogation against the Rathbone indemnity.