The Supreme Court has reversed (by a 4:1 majority) the Court of Appeal decision in Impact Funding Solutions Ltd v AIG Europe Insurance Ltd on the application of a “Trade Debts” exclusion in a solicitors’ professional indemnity policy. AIG’s policy has been held to exclude cover for its (insolvent) insured solicitors firm’s liability to Impact Funding Solutions Ltd (Impact) under an arrangement whereby Impact funded disbursements incurred on behalf of the firm’s clients in industrial deafness claims.
The Supreme Court was asked to consider the true construction of the “Trade Debts” exclusion in AIG’s policy, which was in substantially the same form as that contained in the Law Society’s 2009 Minimum Terms and Conditions (MTCs). A similar exclusion remains in the MTCs.
Impact entered into an arrangement with the insured firm, including two direct funding contracts between Impact and the firm in 2007 and 2008. Under the arrangement, the firm accepted instructions by clients via a claims management system, entered into CFAs with the clients and obtained ATE insurance on the clients’ behalf. Whereupon, Impact entered into loan agreements with those clients. Funds under those loans were paid directly to the firm by Impact to hold in its client account and to use to pay disbursements in conducting the claims.
The contracts between Impact and the firm included an undertaking by both parties that:
“it shall comply with all applicable laws, regulations and codes of practice… and each party indemnifies the other against all loss, damages, claims, costs and expenses … which the other party may suffer or incur as a result of any breach by it of this undertaking”
The firm further warranted that it would provide its services to the clients in accordance with the CFAs and undertook to pay Impact all sums due by the clients if the clients breached their loan agreements or if they were unenforceable as a result of an act or omission of the firm.
In May 2013, Impact was awarded damages of approximately £580,000 against the solicitors firm for the breach. It was held that the firm had failed to perform its duties to its clients; the firm failed to adequately and timeously investigate the merits of their claims and misapplied funds loaned by Impact. Such actions constituted a breach of the firm’s contract with Impact.
The firm went into insolvency and Impact brought a claim against AIG, the firm’s professional indemnity insurer, for an indemnity for those damages under the Third Parties (Rights against Insurers) Act 1930. In December 2013, it was held that Impact’s claim against AIG failed. This was on the basis that it fell within the Trade Debt exclusion that provided, amongst other things, that the policy shall not cover loss in connection with any claim or loss:
“….arising out of, based upon, or attributable to any: … (ii) 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; …”
In February 2015, the Court of Appeal allowed Impact’s appeal and gave judgment against AIG.
Supreme Court Judgment
The recent Supreme Court judgment, whilst also giving general guidance on construction of policy terms, allowed AIG’s appeal.
The terms of the policy, including the Trade Debts exclusion, had to be construed against its factual matrix and in the context of the contract of insurance as a whole, including the recognised principal purpose of the regulator’s MTCs; to safeguard the lay public. It was recognised that, as well as protecting firms’ clients, solicitors’ professional indemnity insurance also protected third parties to whom solicitors are held to have owed a duty of care and third parties to which the firm has given undertakings. The Supreme Court ultimately found that Impact did not, however, fall into any of those categories.
Specifically, the Court had to decide whether the loss arose out of, was based upon, or attributable to a breach by the firm of a term of a contract or arrangement for the supply of services to it in the course of its provision of legal services. If it was, the Trade Debt exclusion would exclude cover for Impact’s claim.
It was held that Impact’s loans to the firm’s clients, whilst being the provision of financial services to those clients, was also a service that Impact provided to the firm. The reasons being that: (i) the firm contracted with Impact as a principal and not as agent for its clients; (ii) the firm obtained a benefit from the funding of disbursements (the alternatives being either that the clients funded the disbursements, but they may not have the funds to do so, or the firm funded them and took the risk of not being able to recover them); (iii) the loans were part of the wider arrangement by which the firm could take up the clients’ claims and earn fees; and (iv) the firm paid Impact an administration fee for the “service”.
It was held that the arrangement between Impact and the firm was a contract for the supply of services to the firm in the course of the firm’s provision of legal services, such that the Trade Debts exclusion did defeat Impact’s claim against AIG. The point was made that Impact’s claim for breach of the firm’s contract with it was a free standing claim and not a claim derived from the clients’ claims against the firm. This was notwithstanding the fact that both types of claim would rely on the firm’s breach of duties to its clients. Excluding such a claim (i.e. an independent claim to any claim a client might have) did not create any incoherence in the policy, rather it was consistent with the principal purpose of the MTCs.
The Supreme Court confirmed that the policy had to be read as a whole and it was the combination of the broadly drafted insuring clause and the exclusions that led to AIG not being held liable. The insuring clause read:
“The Insurer will pay on behalf of any Insured all Loss resulting from any Claim for any civil liability of the Insured which arises from the performance of or failure to perform Legal Services”
The combination of the insuring clause and exclusions was seen as an attempt to identify the types of liability against which solicitors are not required by law to be covered by way of professional indemnity insurance.
Of general and wider note, Impact’s argument that a term expressed as an exception means that it should be approached with a pre-disposition to construe it narrowly, was rejected.