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Subrogation in insurance law:
a mystery wrapped in an
enigma? Are we any clearer since the Court of Appeal decisions in Rathbone v
Novae and Gard Marine v China National Chartering?
THE MYSTERIES OF
SUBROGATION
Dominic Kendrick QC
Why have subrogation?
• It prevents double indemnity or double recovery.
• It is a means of passing liability down to the party which ought, in justice, to pay.
3
When should insurance be taken into account to free a wrongdoer from liability?
•The traditional test is ‘who should pay first’ (and who should pay last)- insurers, or the wrongdoer? Caledonia v BT [2002] 1 LLR 553
•Is the insurance ‘a thing apart’ from the wrongdoer? Parry v. Cleaver [1970] AC 1, 14
4
Suppose the ‘wrongdoer’ paid the premium.
•If the wrongdoer paid the premium to obtain the benefit of the cover, it is not a thing apart. Mark Rowlands v Berni Inns [1986] 1 QB 211
•If the premium was paid for another reason, it should be ignored. Yasin [1979] 2 LLLR 45
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The position of co-assureds
• Project Insurance such as Contractors All Risks (CAR). (Many cases from National Oilwell [1993] 2 LLR 582 onwards)
• A family group
• A corporate group (such as Rathbones)
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What do we mean by ‘excluding the rights of subrogation’?
• If the issue is whether insurers agreed to forego rights of subrogation, look at the policy for an implied or express waiver.
• If the issue is whether the rights of subrogation have anything to bite upon, look at the underlying relationship between the subrogated claimant and
the target, notably their contract, if there is one.
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Why did insurers lose in Rathbones?
•As a matter of policy, insurers should pay first, not Rathbones PLC.
•Rathbones PLC paid the premium to transfer risk to insurers: i.e. to obtain the benefit of the policy.
•There was an implied exclusion.
•The dicta of Rix LJ in Tyco [2008] LRIR 617 does not apply to all forms of insurance.
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Gard v Sinochart and Daiichi [2015] EWCA Civ 16 •A ship was demise chartered from her Owners by a related company for 10 years. Hull insurance was the subject of a detailed code in this charter.
•The ship was subchartered to Sinochart and then to Daiichi.
•If there were breach by Charterers of their obligation to send the ship to a safe port, this caused the ship to become a total loss.
•The demise Charterers claimed they were liable to Head Owners for the loss of the ship, and could pass this liability down the chain.
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Charterers were under no liability for loss of the ship (so far!). Insurers, not demise Charterers should ‘pay first’ because:
• On true construction of the contract, the parties had chosen an insurance funded solution for the loss of the ship.
• Demise Charterers had taken out the insurance, and paid the premium, for their benefit, and the hull cover was not a thing apart.
• There was an implied exclusion of subrogation in the charterparty.
Consider the realities. These were co-assureds in the same group who had bought one insurance for group protection
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THE RATHBONES LITIGATION
Mark Pring
Head of Insurance
The Rathbones scenario
(former)
Jersey
Subsidiary
B
Subsidiary
A
PLC
3P A
3P B
Provision of
trustees
Availability of civil liability
cover?
?
Provision
of directors
Liability cover and contractual indemnities – the Rathbones
litigation
► Background: the Jack Walker 1987 Trust and the Jersey litigation
► (Discretionary) beneficiaries sued the trustees
► Scheduled for October 2015 trial in Jersey, but settled
► The (former) Rathbones trustee (PEV)
► Solicitor / professional trustee
► Services provided to trusts
► Contractual indemnity with Rathbones subsidiary (RTCJ) and parent (Plc)
► Benefit of insurance?
Liability cover and contractual indemnities – the Rathbones
litigation (2)
► The English litigation
► PEV notified “circumstances” - and subsequently a claim - under Rathbones’ 2008
group civil liability cover (primary and excess)
► July 2012 Claim Form issued against excess layer insurers
► November 2013 judgment of Mr Justice Burton (Rathbone Brothers Plc v Novae [2013]
EWHC 3457)
► June 2014 appeal hearing
► November 2014 Court of Appeal judgment (Rathbone Brothers Plc & Another v Novae
Corporate Underwriting & Ors [2014] EWCA Civ 1464), despite “global” settlement
Liability cover and contractual indemnities – the Rathbones
litigation (3)
► Issues
► (1) Coverage: is PEV an Insured Person?
► Definition of “paid employee” (note consultancy period)
► “working under the direct control and supervision of [RTCJ]”
► “employed by [RTCJ] in the performance of professional services”
► (2) The impact of the “insurance … applies excess over insurance and
indemnification available from any other source” provision (clause 5.14)?
► (3) Do the defendant insurers have rights of subrogation against Plc / RTCJ?
Subrogation – the Rathbones litigation
► Clause 5.13: “the insurer shall not exercise its rights of subrogation against an
insured person in connection with a claim unless the insurer has established that
Exclusion 4.9, Established Misdeeds, applies to that claim and that insured person”
► Decision of Mr Justice Burton
► Supported Rathbones / PEV on the (1) coverage and (2) ‘other insurance’ issues
► But on subrogation:
– “the Defendants will be entitled to seek to exercise their rights of contribution in
respect of any claim paid to PEV against [Plc], but not against RTCJ”
► With one limitation on insurers’ subrogation argument:
– “I am not prepared to conclude that the right to subrogation exists and can be
enforced prior to payment by the insurer”
Subrogation – the Rathbones litigation (2)
► Decision of the Court of Appeal
► Agreed with Mr Justice Burton on the (1) coverage and (2) ‘other insurance’ issues
► Disagreement as to the basis for their decision on Rathbones’ appeal of the (3) subrogation issue, but all three judges agreed that the insurers could not bring subrogated claims against Plc under the contractual indemnity
► Two independent obstacles to the subrogated claim (Elias and Sharp LLJ)?
► (1) Implied term in policy (despite express subrogation clause) - If the Indemnity was treated as the “primary” source of protection for PEV, it would seriously undermine the purpose of the insurance and would deny Rathbones the very benefit which the insurance was intended to confer; it was "pure happenstance" that the contractual indemnity was in place at all
► (2) Implied term in contractual indemnity - It constituted supplemental protection, applying only if the insurance was exhausted; payment under the insurance therefore operated to discharge the equivalent liability under the indemnity
Subrogation – the Rathbones litigation (3)
► Relevance to group covers (contractual indemnities)?
► Provision of directors and trustees to third party entities
► Relevant contractual indemnities – review of status as against any relevant
insurance
► Relevant insurance – review of subrogation provisions
BILA would like to thank
Lord Justice Aikens, Dominic
Kendrick QC & Mark Pring
