A judgment became public yesterday which concerns the operation of the trading debts exclusion in a solicitors’ indemnity policy and also the scope of cover afforded by such policies more generally.

The case – Sutherland Professional Funding Limited -v- Bakewells [2011] EWHC 2658 (QB) - concerned a personal injury firm which had an agreement with a funder (Sutherland) pursuant to which Bakewells could draw down disbursement and ATE insurance funding for its claimant personal injury clients. Bakewells operated a “scheme” for clients (as many personal injury firms do) which included a CFA and ATE funding.

Bakewells picked a number of cases to run which were unsuccessful. For reasons not explained in the judgment (although it is assumed because Bakewells were negligent in their selection and management of cases under the scheme), the ATE insurers refused to indemnify the unsuccessful personal injury claimant. This meant that Bakewells owed substantial sums to Sutherland under the loan agreement (sums which Bakewells had not recovered either from the personal injury defendant or from ATE insurers). Sutherlands sued Bakewells for payment of its contractual liability under the loan agreement, and Bakewells in turn sought an indemnity under its PI policy.

Two preliminary issues were tried (1) whether the claim for indemnity under the PI policy arose from Private Legal Practice and (2) whether the trading debts exclusion applied.

Unsurprisingly (at least to me) the Court found for insurers on both points.

On the first point, the Court found (in essence) that the loan agreement was largely for the benefit of the firm and that the claim by Sutherland was by an entity to which the solicitor owed no professional (as opposed to contractual) duty. As such, the liability did not arise from Private Legal Practice.

Also of interest in relation to this first issue was the Court’s analysis of the phrase ‘arising from’. Consistent with prior authority, the Court found that it meant the “dominant, effective or operative” cause of the liability. Here, the dominant cause of the liability of Bakewells was their failure to pay the debt due under the loan agreement rather than any antecedent (assumed) negligent conduct in running the personal injury cases.

On the second point – the trading debts exclusion – the Court was firmly of the view that a liability to the firm’s funder was a trading debt, just as much as the firm’s liability for rent or the wages of its staff. The Court commented that the “practice of law is a business as well as a profession” and, as such, non professional liabilities will often be incurred which are irrecoverable under PI insurance.

RPC are acting in a couple of cases at present where similar issues arise. This case – the first to my knowledge on the trading debt exclusion – helpfully endorses the position that insurers have historically adopted with regard to the operation of the trading debts exclusion in particular.