Professional indemnity (PI) insurers will welcome the recent Supreme Court (the Court) decision in Impact Funding Solutions Limited v AIG Europe Insurance Ltd,1 which considers the interpretation of the “debts and trading liabilities” exclusion in the SRA Minimum Terms and Conditions of Professional Indemnity Insurance (Minimum Terms).
The Minimum Terms regulate PI insurance required to be taken out by all solicitors. Clause 6 of the Minimum Terms provides that the insurance must not exclude or limit the liability of the PI insurer except in very specific circumstances, one of which is debts and trading liabilities. These are essentially where a solicitors’ firm enters into a contract for the supply of goods or services in relation to its business. This exclusion exists because the primary purpose of the Minimum Terms is to protect clients of solicitors, not to protect the business of the solicitors’ firm itself.
This case concerned a solicitors’ firm called Barrington Support Services Ltd (Barrington), who represented clients in various industrial deafness claims. AIG provided PI insurance to Barrington. In order to manage its cash flow, Barrington entered into agreements (the Agreements) in 2007 and 2008 with Impact Funding Solutions Ltd (Impact). The Agreements provided that Impact would enter into loan agreements with Barrington’s clients in order to provide Barrington with the funds necessary to pay disbursements in the conduct of its clients’ litigation and “after the event” insurance premia. A market for funders such as Impact has arisen recently because of the significant reduction in state-funded legal aid for civil cases.
Barrington negligently breached its professional duties to its clients by failing to investigate the merits of its clients’ claims and misapplying the funds advanced by Impact. In doing so Barrington had also breached the terms of the Agreements. Consequently, Barrington failed to recover significant sums from their clients’ opponents in the various claims. Impact pursued Barrington for the outstanding sums and obtained a judgment for just over £580,000.
As a result of Barrington’s subsequent insolvency, Impact brought a claim against AIG, as Barrington’s PI insurers, under the Third Parties’ (Rights Against Insurers) Act 1930.2 Barrington’s policy with AIG contained a so-called “debts and trading liabilities” exclusion for any claim or loss “arising out of, based upon, or attributable to any: (i) trading or personal debt incurred by an Insured, (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”. This provision was broadly in line with Clause 6 of the 2009 version of the Minimum Terms.3 The Court had to decide whether the Agreements fell within the exclusion, in which case AIG would have no liability to Impact. At first instance, AIG successfully argued that the Agreements fell within the exclusion but this was overruled in the Court of Appeal.
Upon appeal by AIG, by a majority of four to one,4 the Supreme Court ruled in AIG’s favour and concluded that the Agreements fell within the exclusion. The Court stated that the exclusion had to be construed against its factual matrix and in the context of the whole insurance contract. The exclusion also had to be construed in a manner consistent with the principal purpose of the Minimum Terms, which is to protect the lay public and also third parties such as Impact. In this case, however, the Court ruled that Impact did not fall within any category which would grant it special protection. Although Impact’s loans were ultimately made to Barrington’s clients rather than Barrington itself, the Court ruled that the Agreements were nevertheless a service that Impact provided to Barrington. This was because:
- Barrington contracted as principal, not as agent for its clients.
- Barrington derived a benefit from the funding of disbursements because without the Agreements, Barrington may have funded the disbursements themselves at their own risk if their clients could not afford to pay them.
- The Agreements were part of a wider arrangement by which Barrington was able to take up claims which its clients could not otherwise afford, which allowed Barrington to earn fees.
- Barrington paid an administration fee and undertook repayment obligations under the Agreements.
The Supreme Court stated that exclusions should not always be construed narrowly. Instead, the exclusion had to be read in the context of the contract as a whole and with regard to its purpose. The doctrine that exemption clauses should be construed narrowly had no application in this case. The Court reiterated that a term would be implied into a contract only if it were necessary to give the contract business efficacy or was so obvious that it went without saying. The Court considered the exclusion and held that there was no basis for limiting its scope.
This decision is highly relevant for all PI insurers and provides much needed clarification on the interpretation of the debts and trading liabilities exclusion clause in the Minimum Terms. It is clear that liabilities to non-clients arising from a business model such as in this case involving funders, can be validly excluded from the Minimum Terms. The decision may also have a wider impact not only on solicitors’ PI insurance, but on all PI insurance which contains similar wordings. The effect of the judgment is that litigation funders will find that any claims against solicitors will be treated as uninsured losses.