Which takes priority - liability insurance or an employer’s indemnity?

The perplexing question posed in the title to this article was recently considered by the Court of Appeal in the context of a professional trustee, in Rathbone Brothers v Novae Corporate Underwriting.

The facts

Rathbone operates a trust business. As is common in such a business, Rathbone provided personal and corporate trustees to several trusts and employed PEV as a consultant for that purpose. Rathbone provided PEV with an indemnity in respect of any liability arising from his role as trustee (the Indemnity) and also took out professional indemnity (PI) insurance with Novae. A claim was subsequently brought in Jersey against trustees of a trust, including PEV, by the beneficiaries for alleged poor investment decisions. In response, Rathbone sought an indemnity from Novae, who disputed liability on various grounds.

The decision of the Court of Appeal

On appeal, the court decided:

1. To reject Novae’s argument that PEV was not covered by its PI policy because he was a consultant, not a paid employee working under the direct control and supervision of an insured company (as defined in the policy). In doing so, the court approved the decision at first instance that PEV, although required to exercise his own judgment and take personal responsibility for his actions while acting as a trustee, was under the control and supervision of Rathbone.
2. That Novae was aware that the provision of trustee services was a major part of Rathbone’s business and as such, the concept of “control or supervision” should be construed accordingly.
3. To reject Novae’s argument that its PI policy, which stated that “Insurance provided by this policy applies excess over insurance and indemnification available from any other source”, entitled it to refuse to pay out until PEV had exhausted his claim under the Indemnity.
4. That it would significantly undermine and frustrate the protection provided by the PI policy if Novae could take advantage of the Indemnity, which was given by one co-insured to another.
5. It would require very clear language to require the Indemnity to be the primary source of cover ahead of the PI policy for which Rathbone had paid a significant premium.
6. To reject Novae’s alternative argument that there was a right of subrogation which entitled it to step into PEV’s shoes and take advantage of the Indemnity. In doing so and notwithstanding the clear policy wording regarding subrogation rights and the fact that the Indemnity was silent on the issue, the court approved Rathbone’s contention that there was a waiver of the right of subrogation in the policy and/or on the proper interpretation of the Indemnity it was plain that the parties intended the PI policy to be the primary indemnity.
7. To imply a term into the PI policy that Novae would not seek to be subrogated to PEV’s rights against Rathbone under the Indemnity. It did this on the basis that it could not have been the intention of the parties that Novae should be able to enforce the rights of the Indemnity against Rathbone where Rathbone was indemnifying the very same risk as Novae, as this would seriously undermine the purpose of the PI policy.
8. To also imply a term into the Indemnity to the effect that it was intended to provide supplemental protection only once the claim under the PI policy was exhausted.

Comment

On its face the decision in this case is surprising, as the Court of Appeal appeared to go to some length to imply terms into seemingly unambiguous contracts. This was notwithstanding the reference in the judgment to the fact that where experienced commercial parties have addressed an issue in contractual documents, the court should be slow to interfere.

The decision seems to reflect how keen the court was to avoid insurers relying on a fortuitously provided indemnity to escape liability for a claim that the court considered was originally intended to be within the scope of cover.

The decision serves as a useful reminder to PI insurers to ensure that before you provide cover on standard wording, you give due consideration to whether that wording adequately covers the complexities involved in the provision of trust services.