UK: English High Court Considers the Impact of a Consultancy Agreement on the Policy of Insurance and the Right to Subrogation

    In Rathbone Brothers Plc & Mr Michael Paul Egerton- Vernon v Novae Corporate Underwriting & Ors [2013] EWHC 3457 (Comm), Rathbone Brothers Plc (Rathbone) and Mr Michael Paul Egerton-Vernon (PEV) brought proceedings in the English High Court to recover under the excess layer of a professional indemnity insurance policy held with Novae Corporate Underwriting & Ors (Novae).

    From 2001 to 2007 PEV was an employee of Rathbone Trust Company Jersey Limited (RTCJ), owned by Rathbone, a corporate group which dealt with the management of family trusts. Under the contract of employment, RTCJ and Rathbone entered into an Instrument of Release and Indemnity with PEV, limited to £40 million per event, to indemnify PEV for claims arising out of his services as a trustee (the Indemnity).

    From 2007, after ceasing to be an employee of RTCJ, PEV became a consultant under a separate consultancy agreement with RTCJ. Rathbone separately took out a professional indemnity insurance policy (the Policy) with International Group Inc (AIG) and Novae limited to £45 million with AIG taking the first £5 million.  The Policy covered RTCJ and was extended to PEV through his consultancy agreement to insure PEV against claims brought against him when acting for RTCJ.

    From 1987 to 2009, PEV was a trustee of trusts and settlements established by the late Mr Jack Walker. In separate proceedings, PEV faced allegations of breach of his trustee obligations from 1999 onwards. It was reported that RTCJ  was to be brought into these separate proceedings as being vicariously liable for PEV. It was a result of these separate proceedings that Rathbone and PEV claimed under the Policy with Novae.

    AIG as primary insurer accepted cover but Novae disputed the claim. The issues before the court related to; (1) whether PEV, when acting as a consultant, was an insured person under the Policy, (2) whether PEV must first recover under the Indemnity as a result of an excess clause in the Policy and (3) whether Novae had a right of subrogation or contribution against RTCJ and Rathbone.

    Mr Justice Burton held that PEV acted on behalf of and under the control and supervision of RTCJ. He further held that PEV’s remuneration agreement, whereby he received 50% of the fee charged to the trust client, meant PEV was in fact a paid employee. As such PEV was covered by the Policy.

    Burton J held that the excess clause which required PEV to recover from “insurance and indemnification available from any other source” did not require PEV to recover under the Indemnity before claiming under the Policy as this would be to defeat the cover for which Rathbone, as policyholder, had paid and to which he was entitled.

    Burton J held that with respect to RTCJ, the right of subrogation was excluded where RTCJ was to be pursued for the same loss as PEV in separate proceedings as being vicariously liable for PEV.  With respect to Rathbone, Burton J held that PEV, when signing the consultancy agreement, to which Rathbone was not a party, was not agreeing to discount the Indemnity with Rathbone or to only look to the Policy with Novae as a source of indemnity. Burton J therefore granted Novae the right to subrogation against Rathbone but upheld the principle that the right only arises after payment has been made by the insurer.

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