Insurers who seek to investigate the affairs of an intervened firm when considering their indemnity obligations have been told by the High Court that they do not have unfettered rights to search through that firm’s records. So ruled Peter Smith J in the recent case of Quinn Direct Insurance Limited v Law Society of England and Wales.

The facts

Quinn provided primary layer professional indemnity insurance to a two partner firm, South Bank Solicitors. Mr O and Mr I were the partners in that firm. Mr O specialised in conveyancing and Mr I in immigration matters.

During the policy year various claims were made against the firm and in particular against Mr O that he had dishonestly and improperly paid money out of the firm’s client account. The partners claimed under their policy.

Quinn declined cover for Mr O in respect of cases where he sought an indemnity and also sought to decline cover to Mr I in respect of a number of cases where he had become aware of improper dealings by his partner. Unless Quinn could show that Mr I was implicated in this dishonest conduct, it faced the prospect of having to indemnify him.

In October 2007 the Law Society intervened and took possession of all files and documents of the firm. Following intervention, Quinn made a request to access all documents held by the Law Society as part of its coverage investigations. The Law Society objected to this blanket request on the basis that it had a duty to preserve client confidentiality and privilege. The Law Society had already provided Quinn with files in cases where Mr I had signed authorities and access would not prejudice the interests of the firm’s former clients. Quinn made a Part 8 application against the Law Society seeking an order that the Law Society give it access to all documents it had taken on intervention.

Quinn’s case

  • Quinn’s principal case was that a primary insurer, as part of the statutory regime under which solicitors practise, is entitled to access documents in the same manner as the Law Society is on an intervention.
  • The second basis for Quinn’s application was that it was entitled to access documents pursuant to the contract for insurance. More particularly it relied on the notice and claims procedure clause in the policy.
  • Quinn also argued that the documents it sought would be available on disclosure so it could make an application under CPR 31.17 (non-party disclosure) for the documents.

The issues

Insurer part of statutory regime?

Peter Smith J did not accept this argument. The Law Society is entitled to access all documents in its role as the supervisory body of solicitors and to ensure compliance with the Solicitors Act 1974. In his view there was not a “sufficient linkage” between the clear regulatory role of the Law Society to that of insurers so as to confer on the insurers an unfettered right to access solicitor’s documents. The judge concluded that the purpose of Quinn’s application was not to exercise any supervisory role in the conduct of the firm, but simply a fishing exercise to gather evidence in order to refuse indemnity to Mr I.

Contract of insurance

The Law Society was not a party to the insurance contract between Quinn and the firm. It was not therefore bound by the policy clauses.

Disclosure

For CPR 31.17 to apply there had to be an existing action. In other words Quinn would have to allege fraud against Mr I to find a platform for disclosure against him as a defendant and the Law Society as a third party. In any event CPR 31.17 does not allow a party to override confidentiality or privilege.

Peter Smith J dismissed Quinn’s application.

The implications

Quinn sought an order in the widest possible terms and Peter Smith J was unimpressed by its factual premise for the application which was “predicated by a false assumption of dishonesty of every partner in a small firm”. The dominant purpose of Quinn’s application was to enable a “Micawber-like” search in the hope that something would turn up to show dishonesty on Mr I’s part.

The case confirms that mere suspicion alone (as was the case with Quinn in respect of Mr I) is not enough to waive confidentially or privilege. Qualifying insurers do not benefit from the same rights as the Law Society and there must be a claim rather than a mere circumstance to benefit from the implied waiver of privilege to gain access to documents.

In the current climate with further mortgage frauds coming to light and Law Society interventions increasing, insurers can expect such circumstances to be commonplace. Although it seems this judgment gives insureds further reason to resist disclosure, the Law Society in Quinn acknowledged that, provided no other obstacles such as privilege and confidentiality exist, it is sympathetic to requests for disclosure that are pertinent to a claim.

It is regrettable that the judge did not consider whether there were any circumstances in which an insurer could request disclosure as part of its coverage investigations where a circumstance, as opposed to a claim, had been reported. The current position is that coverage investigations (not just in cases involving intervened firms) must be focussed and as specific as possible to identify whether a claim of dishonesty arises.

Quinn may also have implications for insurer requests in cases involving other regulatory bodies such as ACCA and the FSA, especially in circumstances involving fraud and dishonesty of insureds who may now see Quinn as a reason to avoid assisting insurers with their investigations.