When a trustee is sued for breach of trust and claims against his professional indemnity insurers, questions often arise as to the extent to which the trustee must first pursue any other rights of indemnity (for example against trust assets) before claiming under the insurance. Although the case concerned an individual trustee’s rights of indemnity against his employer and its parent company (as distinct from rights against trust assets), the decision of the English Commercial Court in Rathbone Brothers Plc & Anor v Novae Corporate Underwriting & Ors  EWHC 3457 (Comm) is nevertheless insightful in determining the circumstances in which a trustee is required to seek indemnity from other sources before tapping professional indemnity insurance and the extent to which insurers may pursue rights of subrogation in the name of the trustee.
The Rathbone case concerned a Jersey domiciled trust. Proceedings were brought in Jersey against an individual trustee (PEV) and others alleging breaches of trust. PEV sought an indemnity under an insurance policy procured by the parent company (Rathbone) of PEV’s employer (RTCJ). The insurers contended that PEV was required first to pursue his rights under contractual indemnities extended to him by Rathbone (the named policyholder but not an insured) and RTCJ (a co-insured under the policy). The insurers also argued that they were entitled to exercise their rights of subrogation in respect of any claim payment to PEV by pursuing claims against Rathbone and RTCJ under the indemnities.
The indemnity issue turned on the interpretation of an “excess clause” in the policy, which provided that the policy “applies excess over insurance and indemnification from any other source”. The insurers contended that the Rathbone and RTCJ indemnities were an “other source” and therefore their indemnity obligation only kicked in once those indemnities had been exhausted. Although RTCJ was also an insured under the policy, it was not able to recover a contractual indemnity obligation under the policy and therefore would have had to bear any indemnity loss uninsured.
However, based on his interpretation of the particular policy wording, the judge ruled that “other source” meant any source other than the policyholder or any co-insured and therefore rejected the insurers’ argument that its indemnity obligation applied excess of the contractual indemnities from Rathbone and RTCJ.
The insurers fared better on their subrogation argument. Although the judge held that the insurers would be prevented from pursuing a subrogated claim under the indemnity extended by RTCJ (as RTCJ was a co-insured and was subject to a claim for the same loss), no such protection would be afforded to Rathbone. Although Rathbone was the policyholder and had procured the policy, as it was not an insured it therefore would not be insulated from a subrogation claim by insurers.
In light of this decision, trustee insureds would be wise to review their contractual indemnity obligations and how they interact with liability insurance cover. For insurers of trustees, this decision is consistent with the view that indemnity insurance generally applies excess of any indemnities against trust assets and that, if insurers pay first, they are generally entitled to subrogate against trust assets by pursuing the trustees’ rights of indemnity against the trust. Of course, the insured and insurer are always at liberty to legislate in the policy for an alternative approach.