UK & Europe
Court of Appeal decides whether there was double insurance and whether there was an implied waiver of subrogation
The claimant was a consultant in a company ("R") within a group carrying out trust business. R (as well as the parent company of the group) entered into indemnity agreements with him, in respect of his provision of any services to R. PI insurance was also taken out by the parent company (R and the claimant being co-insureds), and the excess layer insurers are the defendants to this action. At first instance, Burton J held that the claimant was an insured person under the PI excess policy and that there was no double insurance here (arising from either the indemnity or a separate D&O policy). The judge did, however, hold that the excess insurers had a right of subrogation against the parent company. The Court of Appeal has now allowed the appeal from that decision, holding as follows:
(1) The judge had been correct to hold that the claimant was an "insured person" under the terms of the PI excess policy.
(2) A clause in the policy stated that: "Insurance provided by this policy applies excess over insurance and indemnification available from any other source" (emphasis added). Burton J had held that this clause did not apply to indemnification from a policyholder or co-insured. The Court of Appeal agreed (and also confirmed that the heading of the clause ("Other insurance") "cannot be used to cut back on the clear language used in the clause"). Although there is no general rule that indemnities from one co-insured to another should not be included, clear wording had been used here to require that the non-insured indemnification come from some external source (ie a source independent from R or the parent company).
(3) The Court of Appeal also agreed that there was no cover for the loss in question under the D&O policy. Nor could it be said that the D&O policy covered defence costs (which would amount to "other insurance"): "Liability policies will not habitually give a free-standing coverage for defence costs even where the liability itself is not insured, and in my view there would need to be very clear provision in the policy to that effect in order for the argument to succeed". In support of this view, the judge cited the decision in Astra Zeneca Insurance Co v XL Insurance  where Christopher Clarke LJ observed that, in respect of non-marine liability insurance at least, the right to recover defence costs must, absent clear wording to the contrary, depend on some free-standing entitlement under the policy. That was a claim where no liability could be established but precisely the same principle was said to apply where no liability is covered.
Accordingly, this was not a case involving double insurance.
(4) However, the Court of Appeal did allow the appeal in relation to subrogation, holding that the insurers had no right of subrogation against R or the parent company. It noted that a right of subrogation can be excluded by a waiver in the policy itself or by the terms of an underlying contract between the insured and a third party. In some contexts, "it may be obvious that subrogation should be denied but the precise reason may be difficult to formulate". In this case, both routes were pursued by the claimant and parent company:
(i) Waiver of subrogation under the policy. A clause in the policy provided that "The insurer shall not exercise its rights of subrogation against any insured person" (emphasis added). The Court of Appeal agreed with the judge that the plain meaning of this clause was that there had been a waiver only in relation to an insured person and that there was no exemption for an insured company. However, it is possible to imply a term into a waiver of subrogation clause (and it was said that Rix LJ in Tyco Fire v Rolls-Royce Motor Cars had not intended to suggest that there was any general rule of law that there could not be such an implied term).
Here, construing the policy in its commercial setting, it was held (by a majority of 2:1) that the court should imply a term that the insurers would not seek to be subrogated to the claimant's rights against the parent company under the indemnity: "I am satisfied that it could not have been the intention of the parties that the insurers should be able to enforce rights of indemnity against a co-insured where the co-insured was indemnifying the very same risk as the insurers. I believe that implying the term is simply making express what the parties must have intended". This was because the insurance, and not the indemnity, was intended to be the primary source of protection for the claimant (see further below) and the very purpose of the insurance was to cover the parent company and those it insured against third party claims.
However, Beatson LJ dissented, saying 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". He also noted that recent caselaw has focused attention on a construction of the underlying contract and said that there was no need to imply a waiver into the policy here because the position in the underlying contract was clear.
(ii) Waiver of subrogation because of the terms of the underlying contract (i.e. the indemnity). It was held that a term should be implied into the indemnity that the insurance would be the primary liability, notwithstanding that there was no express term to that effect. This was not just because the parent company had paid the premium for the policy, "it is the fact that [the parent company] is not at fault and that the subrogated right relates to an indemnity which is providing the same protection as the insurance itself". The claimant would, it was held, have naturally understood that his claim under the indemnity had been exhausted once his liability had been fully met under the policy. Accordingly, there was no right to which the insurers could be subrogated.
(5) One further point considered by Elias LJ (although he did not have to decide it, given the conclusion on subrogation), was whether it is possible to oust by agreement the requirement that subrogation arises only after payment by the insurer has been made. Elias J agreed with Burton J that such an ouster is not possible.
COMMENT: Although this case follows the recent trend of looking to the underlying contract between the co-insureds, the majority here was prepared to also go further and suggest an implied term in the policy itself. It seems that a strong rationale for adopting that line here was the fact that (unlike in Tyco), the co-insured in this case had not caused the loss which fell to be covered under the policy, but was otherwise to be faced with a subrogated claim solely because it had provided the indemnity (in other words, in the absence of the indemnity, the insurers would not have been able to subrogate against it at all, since the insurers can have no better rights than the co-insured itself). The same principles influenced the Court of Appeal when deciding that the insurance was intended to be the primary liability here. Again, the key issue was whether the subrogated action was to be against the tortfeasor or not, although it was recognised that each case will turn on the exact nature of the contractual arrangements between the parties. Certainly, a mantra that "insurance is a last resort" will not work in every situation.