Wednesday, 10 June 2015

Co-Insurance: When is an Insurer Entitled to Subrogate

June 10, 2015. 

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 more complicated, as illustrated by the Court of Appeal’s decision in Rathbone Brothers Plc & Anor v Novae Corporate Underwriting Limited [2014] EWCA Civ 1464.


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 layer 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.

At first instance 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. He held that they did because Rathbone Brothers’ liability under the Indemnity was not covered under the insurance policy and there was no relevant exclusion of subrogation. Click here to read our article on the first instance decision.
The Court of Appeal has now unanimously allowed the appeal from that decision, although the judges differed as to the reasons why the insurers had no subrogation rights.


Lords Justice Elias and Sharp considered that there were two separate obstacles to subrogation.
First, notwithstanding the express subrogation clause in the policy, they held that the insurance policy contained an implied term that the insurers would not seek to be subrogated to the second claimant’s rights under the Indemnity. The parties could not have intended subrogation to apply to that contractual right because that would “seriously undermine the purpose of the policy”. It would deny Rathbone Brothers the very benefit which the policy was intended to confer if the Indemnity was treated as the primary source of protection for the second claimant. It was “pure happenstance” that the Indemnity was in place.

Second, there was an implied term in the Indemnity to the effect that it was intended to provide supplemental protection only once the claim against the insurers had been exhausted. The Indemnity was the secondary source of indemnity, whereas the insurance policy was the primary source of indemnity. At first instance Burton J held that there can never be a subrogated claim brought against a policyholder who has paid the premium in respect of coverage for a loss for which the policyholder was not insured. Elias LLJ, giving the leading judgment, disagreed with this, stating that it was not the mere fact that Rathbone Brothers had paid the premium which justified treating the insurance as the primary source of indemnity. It was the fact that Rathbone Brothers was not at fault and that the subrogated right related to an indemnity which was providing the same protection as the insurance itself. Therefore, even if there was a right of subrogation in principle which was not waived by the policy itself, that right had no substance in the circumstances of this case. There was no right to which the insurers could be subrogated.

Lord Justice Beatson agreed with the second point but disagreed that it was possible to imply a term into the policy excluding rights of subrogation against Rathbone Brothers. He stated that although there is no rule of law that only an express exclusion of subrogation in a policy will suffice, this “should be the position in practice in all but an exceptional case”. 


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. The first instance decision in this case, therefore, might have been thought rather harsh on Rathbone Brothers. On the facts of this case the Court of Appeal was prepared to imply a term excluding subrogation rights. It should not, however, be presumed that the Courts will be ready to do this in every case. The lesson remains: if it is intended to remove all rights of subrogation against co-insureds, this should be expressed unambiguously in the policy.



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