Claims hassle – even when the insurer has paid up there may still be a lot of work for the policyholder. We consider the complexities of subrogation
Insurance claims do not always end when the insurer pays up. Mark Pring and Lindsey Clegg of Addleshaw Goddard LLP consider some of the legal complications that arise when they assert their subrogation rights..
Insurers often then seek to assert their "subrogation" rights and step into the shoes of the insured, in order to try to recoup their outlay from third parties potentially liable for the loss.
This is common, for instance, in the context of construction projects. Contractors and subcontractors may be covered under an umbrella insurance. A third party may sue a main contractor, who is then indemnified by the insurer. Unless the construction contract or the insurance policy are suitably drafted, the insurer will be able to step into the main contractor's shoes – using its name if necessary in any legal proceedings - and pursue the subcontractor by way of subrogation.
A recent judgment, in the context of indemnities provided to employees, appears to extend the scope of subrogation well beyond its "normal" sphere of operation, with potentially alarming consequences[1].
During the 2000s, the Rathbones group, through a Jersey-based trust company subsidiary (RTCJL), provided (among other services) professional trustees to third party client trusts. In the normal course, such trustees assume independent "fiduciary" duties to the beneficiaries of the trusts (including in relation to investment decisions reached), but the scale of such trusts – the range of their investments and so on - require trust companies to provide significant support to the trustees; indeed, the legal and regulatory regimes operating in jurisdictions such as Jersey insist on such support.
The trustee in this case (PEV) had been provided with an express indemnity from both his employer, RTCJL (which was sold to the Hawksford group in October 2008), and its parent, Rathbone Brothers Plc (Plc).
Plc purchased annual civil liability insurance for the Rathbones group. Trust-related activities, including the provision of trustees, were declared in its renewal submission. In July 2008, a notification of "circumstances" that might lead to a claim was made 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 and commenced Jersey court proceedings in 2012.
The insurers denied cover to PEV on a number of grounds – some of which were subsequently dropped. As a result, Plc (as policyholder) and PEV were forced to commence declaratory proceedings against the excess layer insurers in the English Commercial Court. In his November 2013 judgment, Burton J held (1) that PEV was an "insured person" for the purpose of the civil liability policy and (2) that the policy's "other insurance and indemnification" provision did not require PEV to pursue Plc and/or RTCJL first under the contractual indemnity before claiming on the policy.
Although the latter finding appeared to recognise that an "internal" indemnity arrangement between insureds was secondary to the insurance, Burton J also held that, after indemnifying PEV, the insurers could then exercise subrogation rights against Plc under the indemnity - despite the fact that it was the policyholder, had paid the premium and was not in any way at fault.
The judge considered that Plc could have protected itself against a subrogation claim in only three ways:
- By express waiver, whereby the policy excluded subrogation rights by an express term.
- By implied policy waiver, by which the subrogation "target" is insured in respect of precisely the same loss (which the judge found was the case with RTCJL, but not Plc).
- By contract waiver, basedon the proper construction of the contract between the insured (PEV) and the subrogation target (Plc) - in this case, the contractual indemnity. How does the contract seek to allocate risk between the parties? Is it intended to be the primary recourse for the insured, or does it contemplate that the insurance will be the primary recourse?
Burton J's judgment is being appealed on a number of legal grounds, centred on both the construction of the subrogation provision andthe fact that his conclusion on subrogation flouts the commercial purpose of the policy and the contractual indemnity.
Many financial institutions and professional services businesses provide to third party clients key personnel such as PEV, as trustees or directors. Those individuals assume responsibilities, and face the risk of claims brought against them personally, but are clearly carrying out such activities at their employer's instigation. It is entirely normal for employers to seek to include such activities in their group insurances and, separately, to provide such employees with an additional degree of comfort in the form of a contractual indemnity. Burton J’s decision however imposes the ultimate financial burden on such employers even if they have taken out insurance, contrary to the evident purpose such arrangements.
The appeal is scheduled for the end of June 2014. Watch this space!
[1] Rathbone Brothers Plc & Another v Novae Corporate Underwriting & Ors [2013] EWHC 3457
Mark Pring - Addleshaw Goddard LLP
Lindsey Clegg - Addleshaw Goddard LLP