Impact Funding Solutions Limited v AIG Europe Insurance Limited (also known as Impact Funding Solutions Limited v Barrington Support Services Limited)  UKSC 57 Date:26 October 2016
Impact Funding Solutions Limited involved a claim under the Third Parties (Rights Against Insurers) Act 1930 by litigation funders who had obtained a judgment against a firm of solicitors in liquidation. The Supreme Court addressed the scope of the trade debts exclusion in a solicitors’ professional indemnity policy, allowing an appeal from the Court of Appeal. The Supreme Court’s decision is considered by Stephen Innes of 4 New Square.
A number of claimants sought to bring industrial deafness claims and instructed solicitors Barrington Support Services Limited (“Barrington”) pursuant to CFAs. In order to pay for disbursements such as expert reports, loans were provided to the claimants by Impact Funding Solutions Limited (“Impact Funding”). ATE insurance policies indemnified the claimants for any disbursements made.
The relationship between Impact Funding and Barrington was governed by a Disbursements Funding Master Agreement (“the DFMA”). Under the DFMA Barrington indemnified Impact against any liabilities or losses incurred by Impact arising out of:
(a) any breach of its undertaking to comply with all applicable laws regulations and codes of practice from time to time in force; and
(b) any negligence or breach of contract by Barrington in its services to the claimants.
Numerous deafness claims were abandoned as statute barred or unmeritorious. ATE insurers declined to reimburse Impact’s loans for disbursements.
Impact brought a claim against Barrington relating to 146 cases in which Barrington was said to be in default of its obligations under the DFMA by failing to undertake proper merits assessments and by using loans for improper purposes not authorised by the DFMA. Impact obtained judgment against Barrington.
Impact Funding then brought a claim in respect of that judgement under the Third Parties (Rights Against Insurers) Act 1930 against Barrington’s insurers, AIG Insurance UK Limited (“AIG”).
AIG relied upon the clause in its policy, reflecting the Solicitors Minimum Terms, excluding liability in respect of any:
“(a) trading or personal debt of any insured, or
(b) breach by any 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 HHJ Waksman QC held that AIG was entitled to rely on part (b) of this clause because Impact Funding was providing a service to Barrington in making the loans to cover the disbursements and thus enabling Barrington to enter into the potentially profitable CFAs. Barrington’s liability to repay the disbursements arose from its breach of the contract pursuant to which this service was provided – the DFMA.
The Court of Appeal (Longmore, Patten & Glouster LJJ) had allowed Impact’s appeal. Longmore LJ, in the leading judgment, started from the premise that the essential point of the exclusion clause in the policy was to prevent insurers from being liable for the liabilities of a solicitor in respect of aspects of his practice which affect him personally as opposed to liabilities arising from his professional obligations to his clients. He concluded that the solicitor’s obligations arising out of loans made to cover disbursements in litigation were part and parcel of the obligations assumed by a solicitor in respect of his professional duties to his client; those obligations were inherently part of his professional practice and were assumed as an essential part of his duty to advise his client, and a solicitor who negligently advised his client that a claim was likely to succeed and caused the client to incur disbursements needlessly, would be liable to the client for those disbursements.
THE SUPREME COURT’S DECISION
The Supreme Court allowed AIG’s appeal. In the majority, leading speeches, with which Lord Mance and Lord Sumption agreed, were given by Lord Hodge and Lord Toulson. A dissenting speech was given by Lord Carnwath.
Lord Hodge held that as the exclusion clause in AIG’s policy did not exclude or limit a liability arising by operation of law, such as liability for negligence or liability in contract arising by implication of law, the general doctrine that exemption clauses should be read narrowly had no application here.
The policy was to be construed in the context of the regulatory background, which approving Thomas J in Kumar v AGF Insurance Ltd  WLR 1747, 1752 A-C aimed to make sure that protection was provided to the clients of solicitors, although the policy would also protect third parties to whom solicitors have been held to owe duties of care in their performance of legal services, and third parties to whom solicitors have given undertakings in the course of acting for their clients.
The first question was whether the claim or loss arises out of, is based upon, or is attributable to a breach by Barrington of a term of a contract or arrangement for the supply of services to it – in which case prima facie cover is excluded.
The loans which Impact provided to Barrington’s clients under the DFMA were a service provided by Impact to Barrington for four reasons:
(i) Barrington contracted as principal with Impact and not as agent for Barrington’s clients;
(ii) Barrington clearly obtained a benefit from the funding of its disbursements and ATE premiums, which it would have had to fund itself if the clients could not afford to pay them;
(iii) this was not an incidental or collateral benefit derived from a service provided to Barrington’s clients, but was part of a wider arrangement by which the solicitors were able to earn fees and success fees (if successful) by taking up claims which the clients could not otherwise fund;
(iv) it was a service for which, under the DFMA, Barrington paid the administration fee and undertook various obligations.
There was no basis for applying additional words into the exclusion clause to limit its scope. It could not be said that the policy would otherwise lack commercial or practical coherence. Although the breach of warranty on which Impact relied against Barrington was also a breach by Barrington of its duty to its clients, Impact’s claim was not a claim derived from the clients’ claims but was based on an independent cause of action, so excluding liability under the AIG policy for such a claim was consistent with the purpose of the policy suggested by the context.
Lord Toulson similarly emphasised the regulatory background to solicitors’ insurance. He also placed importance on the fact that the policy described itself as a professional liability policy. The professional liabilities of solicitors were commonly understood to be liabilities which they may incur to clients as a result of their professional retainer, to third parties through undertakings given in connection with acting for their clients, and exceptionally to “quasi-clients” such as disappointed beneficiaries under a will. The minimum terms could have been drafted to define in positive terms the scope of liability for which cover was required, but instead it had combined a broader insuring clause with a list of exclusions, which should be recognised as an attempt to identify the types of liability against which solicitors were not required by law to be covered by way of professional indemnity insurance.
Lord Carnwath gave a dissenting speech in which he held that the exclusion clause in AIG’s policy should be construed more narrowly. In part (b) of the clause, the composite phrase “goods or services” implied that the services would be supplied to or used by the solicitors’ practice in a way comparable to that in which goods are supplied or used. It was not enough that they were of benefit to the firm: the benefits to the firm of enabling it to take on cases and earn fees were incidental, and were not the essential purpose of the contract.
The Court of Appeal’s decision had been received with some surprise in the market, so the Supreme Court’s decision will be particularly welcome for insurers. Solicitors will no doubt feel under fire once more, particularly when the speeches remind them that their insurance is primarily for their clients’ rather than their own protection and that as businesses they can be expected to look after themselves. Solicitors signing up to any kind of funding or other arrangement will need to consider very carefully what liabilities they are taking on and whether these would be covered by their insurance.
The wider significance of the decision lies in Lord Toulson’s analysis of exclusion clauses, which need not be construed narrowly when they can be shown to be no more than part of the means of delineating the scope of cover, rather than a means of removing, through a subsidiary provision, part of the benefit which it appears to have been the purpose of the contract to provide. That distinction will be rather easier to draw where the purpose of the contract can be readily deduced, such as from the regulatory context. It is likely to be more controversial where the contract – whether of insurance or not – simply represents the results of the parties’ commercial negotiations as to the allocation of risk, benefits and burdens between them.