Rathbone Brothers PLC & Michael Egerton-Vernon v Novae Underwriting Ltd [2014] EWCA Civ 1464

In December 2013, we reported on the outcome of Mr Justice Burton's first instance decision which can be read here.

Background

The original proceedings were brought by Rathbone and Mr Egerton-Vernon. Mr Egerton-Vernon was the subject of proceedings in Jersey in respect of alleged breaches of his obligations as trustee and wanted to establish cover by Novae.

Mr Egerton-Vernon had for many years acted as a personal trustee, originally in his capacity as a partner of a firm that had transferred its business to a company of which he was a shareholder. In turn, that company had been acquired by Rathbone. In March 2000, Mr Egerton-Vernon became an employee of Rathbone. However, he ceased to work full time in June 2007 and became a consultant.

It was a term of his employment contract that Rathbone was to provide Mr Egerton-Vernon with an indemnity limited to £40,000,000 (the Indemnity).  Rathbone also arranged professional indemnity cover to Mr Egerton-Vernon for "work done and services provided to specified clients for which Rathbone receives appropriate fees", the first layer of which was £5,000,000 with AIG and the excess layer (limited to £45,000,000) with Novae. AIG had accepted cover (subject to a reservation of rights in light of these proceedings) but Novae had denied cover.

Mr Justice Burton had 3 issues to determine at trial:

  1. Was the claim against Mr Egerton-Vernon covered by the Novae policy (the Policy);
  2. Due to an "excess" clause in the Policy, was Mr Egerton-Vernon required to first exhaust all other remedies, in particular the Indemnity, before claiming under the Policy; and
  3. Did Novae have a right of subrogation or contribution against Rathbone in the event that a payment was made under the Policy.

In respect of the first issue, Burton, J found that when acting as a personal trustee, Mr Egerton-Vernon was acting on behalf of Rathbone and therefore fell within the terms of the policy which defined  the "Insured" as a "a paid employee...working under the direct control or supervision of an insured company".

As to the excess position, the Judge held that the clause was not intended to address indemnification from sources other than insurance. Mr Egerton-Vernon was therefore not obliged to proceed under the Indemnity first.

In respect of the final issue, in the event of a payment to Mr Egerton-Vernon under the Policy, Novae could exercise a right of subrogation against Rathbone.

The Appeal

Novae appealed Burton, J's decision that Mr Egerton-Vernon was entitled to recover under the Policy and that the excess clause could not be relied upon. Rathbone appealed the finding that Insurers have an effective right of subrogation against them.

Lord Justice Elias, handing down the leading Judgment, dismissed Novae's appeal and allowed that of Rathbone.

Coverage

Elias, LJ rejected Novae's argument that Mr Egerton-Vernon could not be considered to be a paid employee when acting as a personal trustee and/or as a consultant. Elias, LJ said that the provision of trustee services was a core part of Rathbone's business and there could be no doubt that Insurers were undertaking to cover liabilities arising from the provision of those services. He also found that when Mr Egerton-Vernon became a consultant, there had been no material change in his relationship with Rathbone save for some benefits and he ought, therefore, to be considered to be an employee.

Excess

Elias, LJ upheld Burton, J's decision on the basis that if Insurers can take advantage of an indemnity given by one co-insured to another it would significantly undermine the protection afforded by the Policy.

Subrogation

Rathbone and Mr Egerton-Vernon sought to argue that there had been an implied waiver of the right of subrogation in the Policy and that, in any event the terms of the Indemnity intended to treat the Policy as the primary indemnity.

Elias, LJ considered there to be 2 routes to subrogation; the first based on an implied exclusion of the right to subrogation in the context of the insurance itself and the second based on the terms of the underlying contract which, in this case, was the Indemnity between Rathbone and Mr Egerton-Vernon.

In respect of the first route, Elias, LJ considered that the court should imply a term that Novae would not seek to be subrogated to Mr Egerton-Vernon's rights against Rathbone under the Indemnity. However, in doing so, he sounded a note of caution as he said it is not for a court to decide how risks ought to be apportioned between Insurers and Insureds.

As to the second route, Elias, LJ considered whether the Indemnity precluded a right of subrogation. He said that the relevant question was whether Mr Egerton-Vernon would have understood that his claim under the Indemnity had been exhausted once his liability had been fully met under the Policy. He found that it was and that there was no right to which Novae could be subrogated.

Both Lord Justice Beaton and Lady Justice Sharp agreed with Elias, LJ's conclusion.  However, Beatson, LJ did not agree that in the circumstances of the case, the Policy could be regarded as having excluded Novae's right to subrogation.

Comment

The main issue arising out of this judgment is in respect of the right of subrogation. While the court was willing to accept that the terms of the Indemnity prevented a right of subrogation, there was some disagreement as to when a waiver ought to be implied in the policy.

While Elias, LJ accepted that caution should be taken when implying words in a commercial contract, Beatson, LJ went further and took the view that when commercial parties have addressed the right of subrogation and provided it for it in a commercial way, but had not chosen to exclude a right of subrogation, a court should be slow to do so.