In circumstances where an indemnity insurer was acting both in the insured’s interest and its own, regulation 6 of the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (the Regulations) did not apply and the liquidator of an insurance company was, by virtue of a claims control clause, entitled to terminate a solicitor’s firm’s retainer and instruct another firm.

The insurance company had been declared by the Financial Services Compensation Scheme (FSCS) to be in default and in 2015 a liquidator was appointed over it. The respondent had been the insurance company’s solicitors. In 2016, the liquidator took steps to terminate the respondent’s retainer and gave instructions for the files to be transferred to another firm. The liquidator disclaimed the insurance policies on the basis that claims that had already been made would be honoured. The FSCS was happy to rely on the liquidator’s judgment with regard to compensating eligible policyholders as quickly as possible. At the time, there were 1,300 outstanding claims in respect of motor policies underwritten by the insurance company, and millions of pounds were owed to policyholders.

The liquidator applied for delivery up of files and related material from the respondent. The issue for consideration by the court was whether the liquidator was entitled to transfer the case to another firm. The liquidator argued that he was entitled to transfer the retainer and the files pursuant to a claims control clause in the policies which said he had full discretion on the conduct of any claim. The respondent’s case was that the liquidator was not entitled to rely on the claims control clause as to do so would be in breach of the Regulations which gave the insured the right to choose a lawyer for himself in relation to litigation. Further, the respondent argued that even if the claims control clause was in principle capable of allowing the insurer to change solicitor, such power was by implication limited.

The court held that the claims control clause not only allowed the insurance company to choose solicitors at the outset, but also allowed it to change solicitors. The court considered that this was not uncommercial, on the basis that the insurer had to cover the cost of the legal bills and it therefore made sense that the insurer could choose the legal representative. The court considered that the rationale behind regulation 6 of the Regulations was to avoid conflicts of interest (i.e. where an individual making a claim was in conflict with another, and the same insurer was the liability insurer). Regulation 3 provided that the Regulations did not apply to anything done by a person providing civil liability cover for the purpose of representing the insured in proceedings which were at the same time done in the insurer’s own interest. This applied to the current situation: where the insurer was involved in litigation so as to limit its liabilities, there was no risk of a conflict of interest arising, and so the intention of the Regulations was not triggered. The court considered that the Regulations were not intended to apply where an indemnity insurer was acting both in the insured’s interest and in its own, and that if the Regulations did apply in such a situation it would cause wide-spread confusion among insurers.

The court found that the question of whether the clause was being exercised properly was a matter for the contractual counter-parties rather than the respondent. Both the liquidator and the insurance company had an interest in the handling of the claims, and whilst the FSCS had stepped in as indemnifier it was looking to the insurance company for recovery. The liquidator had an interest in the size of the claims submitted to the FSCS and how they were resolved. The FSCS was happy to rely on the liquidator’s judgment, including in respect of the appointment of solicitors. In circumstances where the liquidator had complained about the level of the respondent’s fees, the relationship between the liquidator and the respondent was impaired to the extent that they would not be able to work effectively together. The court considered that there was no reason to think that the power granted by the clause had been improperly exercised, that the liquidator had successfully terminated the respondent’s retainer and was entitled to instruct another firm. The application for delivery up of the files and other materials was allowed.