28/07/2015
The Court of Appeal judgment in the case of Rathbone Brothers Plc and Michale Paul Egerton-Vernon v Novae Corporate Underwriting Company seems to hail a cautious return to commercial common sense concerning the issue of Subrogation.
The Principles of Co-Insurance in Construction Projects
The principle that one party to a joint or composite insurance policy cannot claim against another named member on that said policy has long been established by case law (see Petrofina (UK) Ltd v Magnaload and Mark Rowlands Ltd v Berni Inns).
However, the principle was left in some doubt after the decision in Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd, in which the court held that “an implied term cannot withstand express language to the contrary” and “.....there is nothing in the doctrine of subrogation to prevent an insurer suing in the name of the employer to recover the insurance proceeds which the insurer has paid in the absence of any express ouster of the right of subrogation, either generally or at least in cases where the joint names insurance is really a bundle of composite policies which insure each insured for his own respective interests”.
The Court of Appeal did distinguish all the above decisions on their facts, as in each of the cases discussing subrogation and co-insured parties, one of the co-insured was found to have caused the damage which required the insurance policy to be called upon. In this case, the first Appellant was not at fault in any way.
When it comes to deciding whether an insurer has the right of subrogation, commercial sense must prevail.
The overriding principle of the Court of Appeal's decision seems to be that when it comes to deciding whether an insurer has the right of subrogation, commercial sense must prevail. If allowing subrogation effectively denies the insured any benefit from the policy that they have paid premiums on and took out to protect their interests, then it may be implied that the insured does not have a right to subrogation, even if there is an express term granting this right within the contract itself.
It is important to note that the court stopped short of declaring this a rule. Beatson LJ firmly expressed in his judgment that if two commercial parties have chosen to deal with the issue of subrogation within a contract and decided not to exclude the right, then the courts should recognise this and proceed with caution when declaring that there is an implied waiver of the right to subrogate.
The Fact - Implied v Express Terms
The Rathbone Brothers case centred on the indemnities provided by employers to employees to cover their liability during the course of their work.
In July 2003 Rathbone Trust Company Jersey Ltd and Rathbone Brothers plc (the parent company) entered into an Instrument of Release and Indemnity (the Indemnity) with the second Appellant, under which they gave him an indemnity of £40 million in respect of the provision of services or the conducting of activities at the request of Rathbone Trust Company Jersey Ltd and Rathbone Brothers Plc. The Indemnity expressly stated that any activities or services conducted whilst acting as a trustee were covered.
In 2007 the second Appellant became a consultant to Rathbone Trust Company Jersey Ltd, and his contract provided that he would be covered by full professional indemnity insurance by Rathbone Brothers Plc. The policy taken out by Rathbone Brothers had a primary layer of £5 million cover with AIG and an excess lawyer of £45 million with Novae.
The insurance policy contained an express term relating to the insurer's right to subrogate which stated: “The insurer shall be subrogated to all insureds’ rights of recovery, contribution and indemnity before or after any payment under this policy…The insurer shall not exercise its rights of subrogation against an insured person in connection with a claim”.
Up until his retirement, the second Appellant acted as a trustee for the John Walker 1987 Settlement. The beneficiaries subsequently sued the second Appellant citing that he had breached his duty and were successful in their claim. The Appellants claimed on their own insurance policy to pay the damages owed. AIG accepted the claim. However, the Respondents did not.
The Respondents eventually accepted the claim and paid out the damages. However, they then sought to enforce their right of subrogation and step into the shoes of the second Appellant and recover their losses from Rathbone Brothers Plc.
In case you missed it.....the Respondent was seeking to recover its losses from the very company who had taken out the policy and paid the premiums.
In the English Commercial Court, Burton J held that the insurers could exercise their subrogation rights against Rathbone Brothers Plc, greatly extending the scope of subrogation and effectively wiping out any benefit to a company when taking out indemnity insurance to cover its employees and/or sub-contractors.
The Judgment of the Court of Appeal
On appeal, Elias LJ stated there are two ways of excluding the right of subrogation. They are:
1. An express waiver drafted into the insurance policy
2. If the policy expressly includes a right of subrogation, the underlying contract between the insured and the third party (here the Rathbone Indemnity) may be such as to 'denude' the right to subrogate of any substance
If the second scenario was applied to this particular case, then subrogation could not occur as the second Appellant would not have any rights against the first Appellant unless there were a shortfall when the insurance was paid out. If this was the case, the Rathbone Indemnity would cover any shortfall (as the primary insurance policy taken out with the Respondent would take care of a majority of the claim, after which the Indemnity would kick in). Therefore, the Respondent could not claim any greater rights than the second Appellant and so there would be nothing to be enforced.
According to Elias LJ, “This is not defeating the right to subrogation itself; rather it is leaving that right empty of any content in the particular case.”
Whilst Elias LJ accepted the express wording of the policy did not exclude the right to subrogation, he was prepared to imply such a right because that is what the parties must have intended when drafting the policy. If they did not intend to exclude the right to subrogate there would be little point in taking out the policy and paying the premiums in the first place, as the benefit sought by the insured would effectively be null and void.
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