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Supreme Court finds solicitor’s liability to litigation funder excluded under professional indemnity policy

The Supreme Court handed down a judgment last week which held that an insurer, AIG, was not liable in its capacity as a professional indemnity (PI) insurer of the law firm, Barrington, for its contractual liability to a litigation funder, Impact Funding Solutions (Impact). This reversed the earlier Court of Appeal judgment which had allowed Impact’s appeal against the judgment of the High Court.

Background

Barrington acted on numerous claims for claimants pursuing damages for industrial deafness. Impact entered into a funding agreement with Barrington. The purpose was to provide loans to Barrington’s clients so as to meet disbursements in litigation to be funded through conditional fee agreements (CFAs). In breach of its duties to its clients, and in breach of the funding agreement with Impact, Barrington failed to exercise proper care:

  • In investigating the merits of the claims.
  • Through the misapplication of funds provided by Impact.

Barrington’s clients were not able to repay their loans and Impact sought recovery from Barrington under the funding agreement. Impact was successful in a separate action against Barrington and, on Barrington’s insolvency, sought to recover the sum it had been awarded from AIG, under the Third Parties (Rights against Insurers) Act 1930.

The issue in the appeal was whether an exclusion in Barrington’s PI policy for “loss arising out of, based upon, or attributable to any… breach by any Insured of terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of providing Legal Services” applied to the losses claimed by Impact. The exclusion replicated substantially the minimum terms of cover which Barrington was required to maintain under the Solicitors’ Indemnity Insurance Rules 2009.

Supreme Court judgment

Impact argued successfully before the Court of Appeal that the funding agreement with Barrington was for the purpose of providing loans to Barrington’s clients and that Barrington’s duties under the agreement were part and parcel of a solicitor’s professional duties to the client. The Supreme Court came to a different conclusion (by a majority of four to one).

The Supreme Court held that the boundaries of AIG’s liability fell to be ascertained by construing the broad statement of cover and the broad exclusions in the context of the regulatory background. The general doctrine, that exclusion clauses should be construed narrowly, had no application to the exclusion in Barrington’s PI policy.

The Supreme Court found that the funding agreement and resulting loans to Barrington’s clients were a service which Impact provided to Barrington; therefore the funding agreement was a contract for the supply of services to Barrington. The Supreme Court also saw no basis for implying additional words into the exclusion to limit its scope.

The exclusion therefore applied to defeat Impact’s claim against AIG. That conclusion accorded with the essential purpose of the Solicitors’ Indemnity Insurance Rules 2009 to safeguard the public that makes use of the services of solicitors. The judgment obtained by Impact fell aptly within the description of a “trading” liability, which the minimum terms were not intended to cover.

Practical implications

The judgment is of general importance to the proper approach to the interpretation of PI insurance, and in particular the exclusion of trading liabilities, which is a standard form of wording in solicitors’ PI policies.

While the judgment is likely to be welcomed by PI insurers, litigation funders and others providing services to law firms in the conduct of litigation should take note. The minimum terms of cover, which law firms are required to maintain, are intended to safeguard the lay public that makes use of solicitors’ services; they are not intended to cover trading liabilities that solicitors may incur as a result of a breach of a commercial agreement.

Herbert Smith Freehills Anthony Dempster

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