Where an underwriter has paid an indemnity under an insurance policy, it becomes entitled to pursue an action in the name of the insured to enforce the insured’s rights and remedies against a third party. This principle is known as ‘subrogation’. In the case of composite insurance, however, the position can be rather more complicated, as illustrated by the Commercial Court’s decision in Rathbone Brothers Plc & Anor v Novae Corporate Underwriting & Ors  Lloyd’s Rep IR 203.
The second claimant, a Jersey solicitor, was a partner in NH&P and subsequently a director and shareholder in its successor firm, NHTC, which carried out trust business. In March 2000 NHTC was acquired by Rathbone Brothers and the second claimant became an employee of NHTC. NHTC subsequently changed its name to Rathbone Trust Company Jersey Ltd (RTCJ).
In July 2003 RTCJ and Rathbone Brothers entered into an Instrument of Release and Indemnity (the Indemnity) with the second claimant, 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 RTCJ and Rathbone Brothers. The Indemnity expressly included his acting as a trustee.
In June 2007 the second claimant ceased to work full time and instead became a consultant to RTCJ. The Consultancy Agreement provided that RTCJ would provide him with professional indemnity insurance. The cover taken out by Rathbone Brothers was a claims made policy with a primary layer of £5 million with AIG and an excess lawyer of £45 million with Novae. The policy gave cover for Rathbone Brothers and RTCJ themselves, as well as various employees and other individuals. It included a subrogation clause in the following terms: “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”.
The insurance claim
The second claimant was for many years a personal trustee of a settlement known as the Jack Walker 1987 Settlement. Following his retirement as a trustee, proceedings were brought against him in Jersey by the beneficiaries of the trust, alleging breach of duty. It was also claimed that RTCJ was vicariously liable. The second claimant, RTCJ and Rathbone Brothers sought cover from the insurers for the 2008-9 year. AIG accepted that the claim was covered but Novae and the other excess layer insurers did not. The claimants sued the excess layer insurers to establish their right to cover in respect of both liability and defence costs.
Mr Justice Burton held that, on a proper construction of the policy, the claim was covered. However, he then had to consider whether the insurers had a right of subrogation against Rathbone Brothers or RTCJ.
Rathbone Brothers sought to argue that its position as a co-insured meant that the right of subrogation was excluded. Burton J noted that it was clear from earlier authorities that there are circumstances in which the right of subrogation can be excluded as between co-insureds, namely by reference to:
- The policy itself (policy waiver); and
- The underlying contract(s) between the co-insureds (if any) (contract waiver).
Rathbone Brothers argued that the right of subrogation on behalf of a co-insured against (in particular) a policyholder who has paid the premium (like Rathbone Brothers in this case), in respect of the risk covered, should be excluded where the insurance was taken out for the benefit of the party against whom the subrogated claim was being sought to be brought. Burton J was satisfied that, if such a principle were to be derived, it could be derived only by reference to considerations of policy waiver or contract waiver.
There was no dispute that if the co-insured against whom subrogation is sought is insured in respect of the same loss, there is policy waiver. Burton J noted that, although not yet pleaded, a claim against RTCJ was to be brought in the Jersey proceedings and that claim would plainly be in respect of the same loss which he had found to be covered by the policy in respect of the second claimant. Therefore a subrogated claim against RTCJ was barred as a result of policy waiver.
Where did that leave Rathbone Brothers, which was not a potential defendant in the Jersey proceedings? Burton J turned to contract waiver. He held that the insurers were entitled to be subrogated because Rathbone Brothers’ liability under the Indemnity was not covered under the insurance policy and there was no relevant exclusion of subrogation.
Under English law, an insurer will usually be unable to exercise rights of subrogation in the name of one co-insured against another co-insured. In this case, however, even though Rathbone Brothers was a co-insured, the insurers were held to be entitled, once they had indemnified the second claimant, to bring subrogated proceedings for recovery of that indemnity against Rathbone Brothers. This might be thought rather harsh on Rathbone Brothers – it seems doubtful that either they or the second claimant intended that, as between them, there would be a right to bring a subrogated claim. The lesson is clear: if it is intended to remove all rights of subrogation against co-insureds, this should be expressed unambiguously in the policy.