The Court of Appeal recently considered whether professional indemnity insurers are obliged to indemnify solicitors who are liable to reimburse loans made to their clients to settle disbursements incurred by those clients.

Impact Funding Solutions Ltd (Impact) provided loans to claimants covering the costs of disbursements (e.g. for expert reports) in respect of industrial deafness claims brought by the claimants’ solicitors, Barrington Support Services Ltd (Barrington). The claimants also entered into a conditional fee agreement (CFA) with Barrington.

Under a Disbursements Funding Master Agreement (DFMA), Barrington undertook to pay to Impact all sums payable by the claimants under the loans from either damages received or, if the claim was lost, under any relevant insurance policy in place. In breach of the DFMA and its CFAs with its clients, Barrington failed to properly assess the merits of a large number of claims made which led to their abandonment. Further, Barrington had used the loans provided by Impact to pay referral fees rather than for genuine disbursements incurred by the claimants.

Impact successfully sued Barrington for recovery of the loans and obtained judgment in the sum of £581,353.80, although Barrington went into liquidation before the judgment debt was settled.

At first instance, Impact brought a claim against Barrington’s professional indemnity insurers, under the Third Parties (Rights Against Insurers) Act 1990. Barrington was insured in accordance with the Minimum Terms and Conditions required by the Solicitors’ Indemnity Insurance Rules. The insurer relied on clause 6.6(b) of those terms which excluded liability for “Any...breach by any insured of the terms of any contract or arrangement for the supply to, or use by, any insured of any goods or services in the course of the Insured Firm’s Practice...”.

His Honour Judge Waksman QC agreed with the insurer and held that Impact was providing a service to Barrington and that Barrington’s liability arose from the breach of the DFMA for the service it provided. Impact appealed.

The Court of Appeal allowed the appeal. In the leading judgment, Lord Justice Longmore said that the purpose of clause 6.6(b) of the Minimum Terms and Conditions was to exclude personal liabilities of a solicitor as opposed to liabilities arising from his professional obligations to his or her clients. So a solicitor would not be covered for personal liabilities incurred, say, to a photocopier supplier, or obligations under a lease or mortgage. However, obligations arising out of loans made to cover disbursements for intended litigation “are essentially part and parcel of the obligations assumed by a solicitor in respect of his duties to his client rather than obligations personal to the solicitor”. Therefore clause 6.6(b) of the Minimum Terms and Conditions did not apply.

The insurer was ordered to pay Barrington’s outstanding debt to Impact.

The case will be of significant interest to solicitors’ professional indemnity insurers whose clients use litigation funders that operate in a similar manner to Impact, and who may potentially face similar claims for unpaid loans. The case also provides clarity on what debts or liabilities are considered personal to the solicitor which would be excluded from the Minimum Terms and Conditions.