Merrett -v- Babb - Employees are personally liable for professional advice

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 IFAs.

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 proceedings.

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 ended.

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 [email protected] or on 020 7367 2893 or Martin Davis at [email protected] or on 020 7367 2888. Peter acted for Mr Babb and the RICS and is a partner in our insurance and reinsurance group.