Whether PI insurer obliged to indemnify solicitor who is liable to disbursements funder
A firm of solicitors arranged funding for disbursements incurred by its clients in order to bring their personal injury claims. When several of those claims were abandoned (because of limitation issues or because they were intrinsically unmeritorious), the funders sought recovery. Where the clients’ legal expenses or after the event insurers did not pay (because, for example, the policy had been avoided), the funders sought recovery instead from the solicitors. The issue in this case was whether the solicitors’ professional indemnity insurers were obliged to indemnify the solicitors in respect of their liability to the funders.
The answer to that issue turned on the interpretation of an exclusion in the professional indemnity insurance policy which excluded cover for any “(a) trading or personal debt of any insured, or (b) breach by any insured of the terms of any contract or arrangement for the supply to, or use by, any insured of goods or services in the course of the Insured Firm’s Practice”.
The Court of Appeal held that to determine whether the exclusion applied, it was necessary “to stand back from the detail and ask oneself what is the essential purpose” of this exclusion. It found that it was to prevent insurers being liable for a solicitor’s liabilities “in respect of those aspects of his practice which might affect him or her personally as opposed to liabilities arising from his professional obligations to his or her client”. So, for example, PI insurers would not cover liability incurred by a solicitor to the supplier of a photocopier or cleaning services. However, such personal obligations should be distinguished from obligations incurred in connection with the solicitor’s duty to his clients. The loans in question here, made to cover disbursements in intended litigation, “are essentially part and parcel of the obligations assumed by a solicitor in respect of his professional duties to his clients rather than obligations personal to the solicitor”. The position would only be different if it could be proven that the solicitors had been operating a scam of obtaining loans for personal purposes, without any intention of obtaining clients’ instructions. Hence the insurers were liable to indemnify the solicitor