Policyholders must understand insurers' subrogation rights: lessons learnt from the Rathbones litigation

In June 2014, legal proceedings concerning the scope of an insurer’s subrogation rights resulted in a decision with potentially alarming consequences for corporate policyholders. In the case of Rathbone Brothers Plc & Another v Novae Corporate Underwriting & Ors[1], the court upheld the rights of the insurer to exercise subrogation to sue the actual policyholder.

The Court of Appeal has now overturned that decision allowing commonsense to prevail, but there are lessons to be learnt. Mark Pring and Lindsey Clegg of Addleshaw Goddard LLP, who acted for Rathbones at both the first instance and Court of Appeal stages, explain. 

Insurers routinely bring subrogated actions once they have paid claims to their policyholders, particularly in sectors such as construction.  It is therefore important to understand what those rights are and how they operate.

In principle, subrogation is straightforward. Once an insurer pays a claim, subrogation rights automatically arise (subject to contract terms) and, most significantly, allow the insurer to bring proceedings against any third party potentially liable for the loss. The rights are "subrogated" because the insurer has to act in the name of the policyholder as against the third party.

Difficulties can arise in, for instance, the context of a group cover. In the Novae case, Rathbone Brothers Plc (“Rathbones”) had acquired a Jersey subsidiary, Rathbone Trust Company Jersey Limited (RTCJL), which provided the services of professional trustees to clients, among other matters.

One such trustee, PEV, a solicitor based in Jersey, had been provided with an express contractual indemnity (“the Indemnity”) from both his employer, RTCJL, and its parent, Rathbones.

In April 2008, Rathbones renewed its annual civil liability insurance (“the Insurance”) for the Rathbones group (along with other covers). Trust-related activities, including the provision of trustees, were declared in the renewal submission.

In July 2008, a notification was made under the Insurance in relation to complaints against PEV (and other trustees) by certain beneficiaries of the "Jack Walker (1987) Trust". The beneficiaries alleged that the trustees had made poor investment decisions on behalf of the trust over many years.

The beneficiaries eventually commenced Jersey court proceedings in 2012, which crystallised PEV's claim under the Insurance. The excess layer insurers under the Insurance (“Excess”) denied cover on a number of grounds[2]. Rathbones and PEV therefore commenced proceedings in the English Commercial Court, seeking declarations to the effect that PEV was covered under the Insurance.

In his first instance judgment, Burton J held that PEV was covered and he confirmed that the Indemnity was secondary to the Insurance. However, Burton J also held that, after indemnifying PEV, the insurers could then exercise subrogation rights against Rathbones under the Indemnity - despite the fact that Rathbones was the policyholder, had paid the premium and was not in any way at fault (i.e. was not responsible for PEV's losses).

This latter point was subject to much discussion, with a number of commentators considering that it was counter-intuitive. In our original article, we noted that the decision would potentially affect many financial institutions and professional services businesses.

Rathbones appealed the subrogation decision (and Excess appealed against all other decisions). The Court of Appeal's judgment was handed down in November 2014, despite the fact that the insurance dispute had been settled, because the appeal judgesrecognised the significance of the subrogation point. Although there was a disagreement between the judges as to the basis for their decision, they all agreed that the insurers could not bring subrogated claims against Rathbones under the Indemnity.

They found that if the Indemnity was treated as the primary source of protection for PEV, it would seriously undermine the purpose of the Insurance and would deny Rathbones the very benefit which the Insurance was intended to confer; it was "pure happenstance"[3] that the Indemnity was in place at all.

Lessons learnt

Thankfully, in the end it was a victory for commonsense. There are nevertheless important lessons for policyholders to learn.

First, policyholders, particularly under group covers, should consider the automatic operation of the subrogation principle and, where applicable, review any express subrogation provisions carefully to ensure they are comfortable with the scope of subrogation rights.

Second, policyholders should strive to remove any uncertainty by making appropriate amendments to contractual indemnities provided to trustees, etc - for instance, including a provision to the effect that any indemnities are secondary to the insurance.

Mark Pring - Addleshaw Goddard LLP

Lindsey Clegg - Addleshaw Goddard LLP