Employees will constantly be vulnerable to claims brought directly
against them for advice given on behalf of their employers, after
the House of Lords appeals Committee refused Leave to Appeal in the
case of Merrett v Babb.
In a landmark test case earlier this year the Court
of Appeal held that, following the insolvency of his former
employer, Mr Babb was personally liable for a mortgage valuation
carried out over seven years earlier.
Babb appealed with the support of the Royal
Institution of Chartered Surveyors, but after today's Lords
decision, all professionals and employees who provide specialist
advice on behalf of their employers could face the alarming spectre
of uninsured personal liability.
The Court of Appeal's ruling will impact upon all
sectors and professions where employees give specialist advice to
clients on behalf of their employers. Professionals potentially at
risk include accountants, actuaries, insurance brokers, architects,
engineers, IT consultants, solicitors, advertising agents and
Employees will be particularly vulnerable if their
firm or company:
- is insolvent
- has otherwise ceased trading and has no run-off cover
- is under-insured and cannot meet the full claim
- is unable to pay the excess due under the policy
- is unable to obtain indemnity from their professional indemnity
insurers as a result of a coverage dispute.
The risks have been exacerbated by recent Court of
Appeal decisions on limitation, the effect of which has been to
give claimants many more years in which to commence
The Court of Appeal emphasised that prudent
employees - whether professional, or otherwise - would wish to
ensure that their employers' insurance covered them personally and
that such employees may need to take steps to obtain personal
insurance if that cover did not continue after their employment
Whilst the Court of Appeal's observations are
highly germane, such insurance cover is not, as a practical matter,
presently available to former employees.
The refusal to allow the appeal to proceed has far
reaching and alarming implications for all professionals and
employees who provide specific advice on behalf of their employer.
History shows that, when losses are suffered, many clients will
explore all available avenues in seeking to recover those losses
from their advisers. Corporate failures are now at their highest
level for 6 years and this, coupled with the highly unsatisfactory
state of the law on limitation, only serves to heighten the
vulnerability of such individuals. The remuneration which employees
receive is not commensurate with the risk of attracting a
potentially ruining personal liability and such an exposure is
unlikely to have ever been contemplated by them.
In response to the issues raised by this case, we
are offering various packages of advice, depending upon clients'
individual requirements. The issues addressed will include:
- the implications of Merrett -v- Babb for individual directors,
consultants and employees
- the factual and legal matters which are of particular relevance
to individual professions and industry sectors
- the practical steps which can be taken to try and protect the
position of individuals who are potentially exposed
- draft specimen "hold harmless" clauses for employees, together
with clauses for inclusion in letters of engagement between
firms/companies and their clients.
For further details please contact Peter Maguire at
firstname.lastname@example.org or on 020 7367 2893 or Martin Davis at
email@example.com or on 020 7367 2888. Peter acted for Mr
Babb and the RICS and is a partner in our insurance and reinsurance