Professional negligence: can insurers make a recovery from an insured's employee?

That employers sue employees for breach of employment contracts is not unusual. Indeed, it might be expected where an employee breaches a confidentiality provision or a restrictive covenant. The employee of course also impliedly owes a duty to the employer to exercise reasonable care in performing his duties. It is therefore surprising that employees are not pursued by employers (and their insurers) just as readily for loss suffered as a result of an employee's negligence.

The recent case of Pemberton Greenish LLP v Jane Margaret Henry [2017]^[1] highlights circumstances in which an employee may find himself liable for the consequences of his actions, and serves as a reminder to insurers that a subrogated claim against an insured's employee may be an option worth considering.

The Pemberton decision

The Pemberton case arose from the defendant’s conduct of a property transaction whilst engaged as a consultant solicitor at Pemberton Greenish LLP (Pemberton). The transaction turned out to be fraudulent. When the fraud was discovered, the defendant realised that the client had not signed a written authority to complete. Fearing that she would be held responsible for completing without written authority, the defendant forged the client’s signature. 

Following a police investigation, the defendant accepted a caution in respect of production of a false written authorisation. The Solicitor’s Disciplinary Tribunal found, inter alia, that collective failures on the defendant’s part amounted to a breach of the Money Laundering Regulations 2007 (the Regulations). It also found that the defendant had been dishonest in respect of the forged written authority, and she was struck off the Roll of Solicitors. 

The defrauded lender pursued a claim against Pemberton based on the alleged breaches of the Regulations. That claim was covered by Pemberton’s professional indemnity policy and settled by payment of damages.

Pemberton’s insurers then brought a subrogated claim against the defendant to recover their loss. Insurers had a right of subrogation but the professional indemnity policy also provided that insurers would only exercise the same against an employee where the claim arose from a dishonest, fraudulent, intentional, criminal or malicious act or omission of the employee. 

The issue in Pemberton was whether insurers could establish that its losses were caused as a result of the defendant’s dishonest acts or omissions. The court found that the defendant’s breaches of the Regulations were negligent, but no more. Consequently, as the dishonest forgery of the written authority took place after the fraud had been perpetrated, it could not be said that insurers' losses were caused by the defendant’s dishonesty. Insurers were therefore unable to recover subrogated damages from the defendant.

Comment

Whilst an unsuccessful outcome for insurers, the issues raised in Pemberton reflect what has long been the position.

Whilst in principle there may be a right for employers (and therefore their insurers) to pursue employees for damages arising from the employee's negligence^[2], in practice this rarely occurs. 

The general approach by employers and their insurers follows the rationale in the Court of Appeal decision in Morris v Ford Motor Co Ltd [1973]^[3]. In that case the court held that, where an employee’s negligence is covered by insurance, it would be inequitable for the employer to seek recovery from the employee. Further, in the circumstances of that case, it was found to be ‘unacceptable and unrealistic’ to allow a subrogated claim to be brought against the employee, with the court commenting that there should be an implied term in the insurance policy that the right of subrogation against employees should be excluded.

This approach tends to be reflected in policy wordings issued by the market. However, as is clear in Pemberton, insurers do reserve the right to seek recovery from insured employees in particular circumstances and it is this right of recovery which is often under-used in practice.

There are of course wider implications for insurers in considering the merits of a subrogated recovery against employees to include:

• Commerciality - The cost effectiveness of pursuing a claim against an employee balanced against the likelihood of a recovery may render a recovery action unattractive, unless the damages sought are substantive and/or the employee has deep pockets
   
• Insureds' sensitivities – Insureds will be conscious of the potential for reputational damage if they or their insurers are seen to pursue employees. Many employers promote a ‘no blame culture’ and attracting and retaining talented employees in circumstances where they feel vulnerable may prove to be a challenge. In addition, the benefits of discovering employee errors early are manifold and pursuing employees when things go wrong is likely to result in mistakes being 'brushed under the carpet'.

Nevertheless, there are clearly circumstances when both insured and insurers would and should be prepared to pursue a recovery claim against an employee.