A professional indemnity (PI) insurer has been ordered to reimburse loans made to clients of a failed law firm by the Court of Appeal.  The case could have implications for the PI insurance market as the insurer in the case unsuccessfully relied on an exclusion in the solicitors’ PI Minimum Terms in its defence.

The lender, Impact Funding Solutions had advanced loans to clients of a law firm, Barrington, to cover the cost of disbursements made in no-win-no-fee work-related hearing loss cases.  The loans would be recovered from the defendants in successful cases. If the claims failed the loans would be repaid by After The Event (ATE) insurance or potentially written-off.

Impact had strict eligibility criteria for its loans which aimed to ensure that it only backed cases with a good chance of success.  It became apparent that Barrington had failed to properly assess the cases, many of which were abandoned, leaving Impact with a series of bad debts.

Impact obtained a judgment against Barrington in the Mercantile Court in Manchester for repayment of the loans, but Barrington went into liquidation before the debt could be settled.   Impact then brought a case against Barrington’s PI insurer, AIG for repayment of the loans.  It argued that Barrington had acted negligently in failing to properly assess the cases against its eligibility criteria.

AIG successfully defended the claim in the High Court.  It argued that an exclusion in the solicitors’ PI Minimum Terms applied meant the loans were not covered. The exclusion says 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.”  The High Court agreed that the loans had been used in the course of the firm’s practice and were excluded.

Impact took the case to the Court of Appeal, where it was successful.  The appeal judge, Lord Justice Longmore concluded that the exclusion did not apply as the loans were an incurred as part of Barrington’s professional duties to their clients – rather than being used in the course of the firm’s practice.  AIG was ordered to pay £986,515, plus £175,000 in costs.

The decision will be a worry to PI insurers as there is a risk that more finance or ancillary service providers will make claims against solicitors’ insurers when the solicitors’ obligations are not met,” said James Burgoyne, Director – Claims & Technical, Brunel Professional Risks.  “The case also shows just how careful solicitors need to be in assessing the strength of their case before incurring costs on behalf of the client.  The appeal judge held that solicitors will be liable to their clients for costs and disbursements needlessly incurred.

The case has been reported in the Law Society Gazette and by law firms RPC and Hill Dickinson.