​Door Closed on Professional Liability Claim

Written by Darren Thompson

The High Court in England has recently ruled in favour of an insurer in granting summary judgment in a claim brought under Third Party (Rights Against Insurers) Act 2010.

The Background

The Claimant, Doorway Capital Ltd (DCL), is a company which provides law firms with capital in England.

Pursuant to a contract with DCL, Seth Lovis & Co Solicitors Limited (SL) were a recipient of such capital, in return for which SL agreed to provide DCL with funds owed to it by clients and other parties (mainly outstanding legal fees).

SL subsequently went into administration, leaving what was alleged to be around £1.7m outstanding to DCL (purportedly being held on trust by SL). In an attempt to recover the funds, DCL issued proceedings against SL’s professional indemnity insurers, AIG, with the intention of relying upon the provisions of the Third Party (Rights Against Insurers) Act 2010.

Purpose of the Third Party (Rights Against Insurers Act) 2010.

As a reminder, the purpose of Act is to ensure that, where an insured entity incurs an insured liability to a third party and subsequently becomes insolvent, any insurance money is paid to the third party (thereby protecting the third party from the insolvency process).

Where applicable, the Act transfers some of the insolvent insured's rights under the insurance policy to the third party and allows the third party to bring proceedings directly against the insurer.

The key question to be answered in this case was whether SL’s payment default to DCL would be considered an insured liability, or whether the contractual relationship was beyond the scope of SL’s professional liability policy, rendering the Act inapplicable.

The Parties’ Position

SL’s professional indemnity insurers, AIG, argued that the policy did not cover SL’s agreement with DCL and applied for summary judgment at an early stage on the basis that DCL’s claim had no reasonable prospects of success. AIG argued that all obligations owed to DCL arose further to the funding agreement and thus SL were not providing any professional service to DCL. As such, the professional liability policy was not triggered.

DCL argued that they were a ‘quasi-client’ of SL insofar as SL were tasked with collecting outstanding funds on DCL’s behalf which they subsequently held in trust, and as such they were acting in the course of ‘Private Legal Practice’, as defined under the policy.

Decision

The court agreed with AIG in finding that DCL’s contractual relationship did not fall within the professional liability policy as SL were not acting in the course of private legal practice in entering into their agreement with DCL. Summary judgment was therefore granted in AIG’s favour on the basis that DCL’s claim had no reasonable prospects of success.

Furthermore, although the first finding was sufficient to defeat the claim, the court also commented that an exclusion clause within the policy would also have defeated the claim. Said clause provided that insurers would not be required to indemnify SL in relation to any liability assumed by the insured’s use of goods or services (as opposed to the provision of such goods or services). The judge commented that SL’s liability to DCL was therefore not the type of liability which solicitors' professional liability insurance was designed to indemnify against.

Comment

Reported cases involving the Third Party (Rights Against Insurers) Act 2010 have been relatively rare since its implementation and so this decision serves as a useful reminder of its principles.Given the present market conditions, professional indemnity insurers will also be pleased to note that the court was not persuaded to expand the scope of cover beyond that which the indemnity policy intended to protect against.

This decision can also be viewed as something of a warning to solicitors (and indeed other professions) to ensure agreements that are entered into with third parties provide no ambiguities which could open the door to their professional liability policy. Consideration should therefore be given to ensuring that there is sufficient contractual daylight between those services provided to clients, and other commercial arrangements entered into with third parties.

If you would like further information on the issues discussed in this article, please contact Darren Thompson or another member of the Defence Insurance Litigation team.

About the author

Darren Thompson

Associate

Darren Thompson is an Associate in the Professional Negligence team at Carson McDowell. Darren specialises in advising insurers and their insured entities in the defence of claims typically arising against architects, accountants, solicitors, brokers, surveyors, engineers and other construction professionals.

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