Supreme Court upholds clause excluding professional indemnity cover for commercial arrangements

Out-Law News | 26 Oct 2016 | 4:16 pm | 2 min. read

Loans provided to the clients of a firm of solicitors by a third party funder were not 'legal services', and so were not covered by the terms of the firm's professional indemnity (PI) policy, the UK's highest court has ruled.

The judgment means that Impact Funding Solutions is not entitled to make a claim against the now insolvent firm's insurers, regardless of the fact that the firm failed to perform its professional duties towards its clients in the conduct of the underlying litigation. Impact's claim against Barrington, the firm, must instead be based on Barrington's breach of warranty in its contract with Impact, according to the court.

"Insurers will be delighted that the Supreme Court has taken the opportunity to confirm that the primary purpose of solicitors' minimum terms of compulsory insurance is to safeguard the general public and not professional practitioners, who are able to look after themselves," said insurance law expert Manoj Vaghela of Pinsent Masons, the law firm behind Out-Law.com.

"This ruling safeguards the general public, while allowing insurers flexibility to exclude cover for contractual arrangements that solicitors make with third party litigation funders," he said.

This is the first of two cases currently before the Supreme Court dealing with the interpretation of the minimum terms and conditions of the compulsory PI insurance which all solicitors in England and Wales are required to take out. The second, which deals with aggregation clauses, was heard by the Supreme Court this month and judgment is expected shortly.

Barrington was a firm of solicitors specialising in workplace injury claims, particularly industrial deafness. It entered into an arrangement with Impact through which Impact loaned money to Barrington's clients to cover the costs of their claims, with the idea being that the loans would be repaid once that claim was successful. However, Barrington failed to properly investigate and handle those claims, putting it in breach of its warranty to Impact that it would perform its professional duties towards its clients. The clients were never able to repay their loans.

Impact successfully pursued Barrington in the High Court for the losses it had suffered from those loans. As the firm is now insolvent, the losses are instead claimed from Barrington's PI insurer under the 1930 Third Parties (Rights Against Insurers) Act. In 2013, the High Court denied Impact's claim; but its ruling was overturned by the Court of Appeal in 2015 which held that the nature of the loans made them "inherently part of the solicitors' professional practice".

Solicitors in England and Wales are required to take out and maintain PI insurance which meets certain minimum standards. Solicitors in Scotland are subject to similar requirements under separate legislation. This insurance must as a minimum indemnify the firm against civil liability arising as a result of its private legal practice, but need not necessarily cover the firm's "trading or personal debt" or any breaches of contract with third parties. PI policies generally provide that these minimum terms will override those set out in the policy in the event of any dispute.

In his leading judgment, Lord Hodge concluded that the agreement between Impact and Barrington was a contract for the supply of services to Barrington. Those services - the loans - were provided "in the course of Barrington's provision of legal services". The minimum terms of solicitors' compulsory insurance explicitly permit the exclusion of liabilities of this nature from the scope of PI insurance, he said.

He added that there was "no basis for implying additional words into the exclusion in order to limit its scope".

"In my view, it cannot be said that the policy would lack commercial or practical coherence if a term restricting the scope of the exclusion were not implied," he said.

"In the present case it is fairly said that the breach of duty in the warranty on which Impact relies is a breach of duty by Barrington to its clients. But Impact's claim is not a claim which is derived from the clients' claims. … In short, Impact's cause of action under the [agreement with Barrington] is an independent cause of action. Excluding such a claim creates no incoherence in the policy, as it is the combination of the opening clause and the exclusions that delimits [the insurers'] contractual liability," he said.