The Court of Appeal has handed down its decision in Impact Funding Solutions Limited -v- Barrington Support Services Limited which will be of interest to insurers involved in the solicitors’ indemnity market and claimant solicitors. The decision addresses the question of whether a solicitor’s professional indemnity insurer has a liability to settle outstanding disbursement loans generally.
The appeal was brought by Impact Funding Solutions Limited (Impact), a finance company which funded disbursements incurred by claimants for the purpose of advancing their claims. If the claims were successful, the cost of the loans would be recoverable from the defendant. If the claims failed, then the costs would be recoverable from the claimant’s litigation insurance, if available. If such insurance was not available, or if the insurers had avoided cover for some reason, Impact would seek recovery from the claimants’ solicitors rather than the claimants themselves.
A firm of solicitors, Barrington Support Services Ltd (Barrington) were instructed on behalf of claimants pursuing claims for work-related hearing loss.
The claimants entered into a conditional fee agreement (CFA) with Barrington, and a loan agreement for their disbursements with Impact.
In breach of their duty, both under the CFA and the loan agreement, Barrington failed to properly assess the merits of the claims. The claims were subsequently abandoned. The monies drawn from Impact under the loan agreement had not been used for genuine disbursements, but had instead been used to pay referral fees. Unsurprisingly, the litigation insurance that Barrington had arranged refused to indemnify.
Impact pursued Barrington for recovery of the loans and successfully obtained judgement in the sum of £581,353.80. However, Barrington went into liquidation before the judgement debt could be settled.
Impact then brought proceedings against Barrington’s professional indemnity insurers, AIG, pursuant to the Third Parties (Rights Against Insurers) Act 1930 (the Act). The Act entitled AIG to rely on any defence available to it had the claim been pursued by its insured, Barrington.
AIG contended that they were entitled to rely on clause 6(6) of the Minimum Terms required by the Solicitors Indemnity Insurance Rules to exclude its liability to indemnify Barrington. Clause 6 (6) of the Minimum Terms provides that an insurer may exclude liability for any Breach by an 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.
At first instance, the court agreed with AIG, on the basis that Impact was providing a service to Barrington and, by failing to repay the loan, Barrington was in breach of contract for the service.
The Court of Appeal
Lord Justice Longmore said that it was important to first ‘stand back from the details and ask oneself what is the essential purpose of the exclusion clause 6(6) of the Minimum Terms’. He thought that the main purpose of the clause was to prevent solicitors from seeking indemnity from insurers for personal liabilities. He gave three examples of solicitors’ liabilities to demonstrate the point: liabilities incurred pursuant to a photocopier agreement, to a cleaning contract and pursuant to a lease or mortgage. No one would reasonably expect a professional indemnity insurer to pay out if the insured solicitor fell behind with the rent, as Longmore LJ put it, ‘these obligations are to be distinguished from the obligations which are incurred in connection with the solicitor’s duty to his clients which are intended to be covered [by clause 6(6) of the Minimum Terms]’.
The Court of Appeal held that Impact’s loans were ‘part and parcel of the obligations assumed by a solicitor in respect of his professional duties to his client rather than obligations personal to the solicitor’. A solicitor has a duty to properly assess the prospects of success of a client’s proposed claim and should not advise a client to incur disbursements if the claim is unlikely to be successful.
Longmore LJ concluded that the liability was incurred as part of Barrington’s professional advice, was not a debt or trading liability. As such, Clause 6(6) did not apply. The appeal was allowed and AIG was ordered to pay the debt outstanding to Impact.
On the one hand, the Court of Appeal’s decision is a blow to professional indemnity insurers operating in the solicitors’ market. This is because there is potential for litigation funders that operated in a similar way to Impact, to embark upon proceedings against solicitors for unpaid loans. On the other hand, the judgment provides useful clarification on what is a debt or trading liability and confirms that such liabilities are excluded from the terms of insurance.
The claim also serves as a useful reminder to solicitors acting for claimants in any type of litigation. A solicitor has a duty to thoroughly consider a client’s proposed claim and to assess and advise upon the advantages and disadvantages of pursuing a case, before committing a client to potentially lengthy and expensive court proceedings. As Longmore LJ explained, ‘a solicitor, who negligently advises his client that a claim is likely to succeed and causes a client to incur disbursements which should not have been incurred, will be liable to the client for disbursements needlessly incurred’. The same principle will, of course, apply to all of the costs incurred by the client and not only disbursements.