Litigation annual review 2002: Professional indemnity

Employees liability

Employees will constantly be vulnerable to claims brought directly against them for advice given on behalf of their employers, after the House of Lords Appeal Committee refused Leave to Appeal in the case of Merritt v Babb.

The Court of Appeal ruled last year that employees are personally liable for professional advice when it considered the case. The Lords subsequently refused leave to appeal and professionals in all walks of life, including accountants, surveyors, independent financial advisers, architects and engineers, could now face potentially ruinous claims. Other individuals who offer specialist advice on behalf of their employers may be similarly exposed.

The appeal - which was supported by the Royal Institution of Chartered Surveyors (RICS) - was brought by a Mr John Babb, a member of the RICS. Following the insolvency of his former employer, Mr Babb found himself personally liable for a mort-gage valuation which he carried out more than seven years earlier.

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.

Key issues

The key issue in Merritt v Babb was whether, and in what circumstances, an employee who provides professional or other specialist advice on behalf of his employer, assumes a personal duty of care to the recipient of that advice or whether he is doing no more than simply performing his contractual duties to his employer.

Factual background

Mr Babb was employed by Clove Walker Associates (CWA), who was instructed to prepare a mortgage valuation by the Claimant's lender Bradford & Bindley (B& B) in 1992. This was carried out by Mr Babb using B& B's standard valuation form. B& B sent the valuation report to the Claimant, stating only that it had been prepared on behalf of B& B by an "Independent Valuer". In 1993 Mr

Babb left the firm. In 1994 CIA’s Trustee in bankruptcy cancelled the firm's professional indemnity policy and a claim was subsequently pursued against Mr Babb in 1997.

Court of Appeal decision

It was submitted on behalf of Mr Babb that the law had developed since the 1990 House of Lords decision in Harris v Wyre Forest District Council and that it had been authoritatively restated by the House of Lords in Williams v Natural Life Health Foods Ltd (1998). Lord Steyn held in that case that the touchstone of liability was an assumption of responsibility such as "to create a special relationship with the director or employee", together with "reasonable reliance" by the Claimant on that assumption of responsibility by the individual who performed the services or provided the advice. In Merrett, it was argued that there was no factual basis to support such a finding.

Whilst those submissions were accepted by the Senior Judge, Aldour L. J., the appeal was rejected by a two to one majority. It was held that a professional qualified person giving advice may owe a duty of care to the effective recipient of his advice, in addition to the duty owed to his employer. In circumstances where Mr Babb, as a professional man, realised that the purchaser would rely upon him to exercise proper skill and judgement, and signed the original report in his personal capacity, he assumed personal responsibility for it (notwithstanding the fact that the Claimant had never met Mr Babb and the report which the Claimant received did not bear his name).

Implications

The basic principle is that an employee pro-voiding advice or services may owe a personal duty to the recipient of that advice in addition to the duty he owes his employers. The ruling will impact upon all sectors and professions where employees give specialist advice to claims on behalf of their employers.

Other professionals at risk include accountants, insurance brokers, architects, engineers, actuaries, IT consultants, solicitors, advertising agents and IFA's. Professional employees will be particularly vulnerable where their firm and company:

· is insolvent or 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 under the policy.

· is unable to obtain an indemnity from its professional indemnity insurers as a result of coverage dispute.

Individual employees have no control over any of these matters. Professionals in small firms or companies are at the greatest risk.

Those risks have also been exacerbated by Court of Appeal decisions in Brocklesby v Armitage & Guest (9 July 1999) and Cave v Robinson Jarvis & Rolf (20 February 2001), the practical effect of which has been substantially to extend the limitation period in a large number of professional negligence cases.

Employees working for companies are likely to face a greater exposure than those employed by professional partnerships, where the individual partners (particularly in larger firms), are likely to represent a more attractive target. This position is, however, likely to change over the next few years as Limited Liability Partnerships become more commonplace following the Limited Liability Partnership Act 2000. The DTI expect a significant proportion of the several hundred thousand UK partnerships to apply for LLP status over a period in time and this may, in turn, re-focus attention of Claimants on the position of individual employees who provided the advice or services in question.

Protective measures

The remuneration which employees receive is not commensurate with the risk of attracting a potentially ruinous personal liability, and such an exposure is unlikely to have ever been contemplated by them. History shows that those who suffer losses will explore all available avenues to recover those losses from advisers. Corporate failures are now at their highest level for six years and this only serves to heighten the vulnerability of such individuals.

A number of steps can be taken by an employee.

· Check that you are covered under the policy as an "assured". Professional Indemnity policies are now commonly underwritten as composite policies of insurance, that is, they comprise multiple contracts of insurance with each "assured" under the policy (including past, present and future partners, directors and employees).

· Employees could seek an indemnity and "hold harmless" from their firm or company in respect of any liabilities arising from acts or omissions by them during the course of their employment.

· Employers could also seek to agree in their retainer letters and contracts of engagement that the only duties owed to clients (or to any relevant third par-ties) are owed solely by the firm or company, and that there will be no assumption of personal responsibility by an employee. Such an exclusion will be subject to the reasonableness test of the Unfair Contract Terms Act 1977.

Seek specialist advice.

The other articles contained in the Litigation Review 2002 may be found on by clicking on ‘your latest information’ on our website www.law-now.com. Alternatively, to access a PDF of the complete review please click here.

For further information on this article please contact the author Peter Maguire by telephone on +44(0)20 7367 2893 or by e-mail at [email protected].

For further information on this review in general, please contact Tim Hardy on +44 (0) 20 7367 2533 or by e-mail at [email protected].