Business Interruption Insurance after the FCA test case: Corbin & King Limited & Ors v AXA Insurance UK Plc  EWHC 409 (Comm)
In Corbin & King v AXA, Mrs Justice Cockerill found policyholders were…
In Doorway Capital Limited v American International Group UK Limited, Mr Justice Butcher held that liability for a breach of trust arising from an agreement between a solicitors’ practice and its provider of commercial funding was not covered by a policy complying with the SRA’s Minimum Terms and Conditions. The insured solicitors’ liability did not arise from “Private Legal Practice” and would, in any event, have been excluded by the Debts and Trading Liabilities Exclusion.
The decision is considered by Miles Harris of 4 New Square.
Clare Dixon QC of 4 New Square was instructed to represent AIG.
THE FACTS AND THE POLICY
The Claimant (“DCL”) brought its claim as statutory assignee of rights pursuant to the Third Parties (Rights Against Insurers) Act 2010 against the Defendant (“AIG”). AIG had provided a professional indemnity insurance policy for the year commencing 1 October 2018 (“the Policy”) to Seth Lovis & Co Solicitors Ltd (“SL”), a company that had carried on a legal practice until it entered administration on 11 March 2019.
The Policy was written on terms that complied with the SRA’s Minimum Terms and Conditions for Professional Indemnity Insurance:
“The Insurer [i.e. AIG] will indemnify an Insured against civil liability to the extent that it arises from Private Legal Practice in connection with the Insured Firm’s Practice…“
“the provision of services in private Practice as a solicitor … including, without limitation:
“The Insurer will have no liability to indemnify an Insured in respect of, or in any way relating to, any Claim, Circumstances … or related Defence Costs arising out of, based upon or attributable to, or related in any way to any of the following exclusions.
….The Insurer will have no liability to indemnify an Insured in relation to any:
DCL was a business that provided capital to law firms. It provided capital to SL pursuant to a Receivables Funding Agreement (“RFA”). Under the RFA:
DCL alleged that: (1) it was a ‘quasi-client’ of SL, (2) as a result of DCL having appointed SL as its agent to collect receivables SL owed DCL various fiduciary duties, (3) between late 2017 and late 2018, SL received in aggregate just over £2.079m in Remittances, but (4) had only transferred £394,000 of the Remittances into the Nominated Account, and therefore (5) in breach of trust and/or fiduciary duty, SL had failed to transfer around £1.685m into the Nominated Account. For the purposes of its summary judgment application only, AIG admitted (3) to (5). It was DCL’s case that in these circumstances, AIG was liable to pay it the sums for which SL was liable. In particular, it argued that SL’s liability for breach of trust/breach of fiduciary duty arose from Private Legal Practice because:
AIG applied for summary judgment on the basis that SL’s obligations to DCL had resulted entirely from the RFA; the relevant obligations in relation to the Remittances had arisen from the RFA; DCL had not been a quasi-client of SL (if anything SL was the client and it was referred to as such in the RFA); while SL had been acting as a trustee, it had not been providing “a professional service” or performing “a role in conjunction with a Practice”; and SL’s liability did not arise from the conduct of litigation. In the alternative, AIG contended that liability under the Policy was excluded by the Debts and Trading Liabilities Exclusion.
The decision of Butcher J
Butcher J granted AIG’s application.
First, he held that it was insufficient for DCL to show that SL had incurred a liability to DCL as a result of simply acting as a trustee. For AIG to be liable to provide an indemnity in respect of SL’s liability, it had to have been “acting as a…trustee” as part of the “provision of services in private Practice as a solicitor”. He rejected DCL’s argument that the words of subclause c) of the insuring provision were not qualified by the opening words of the definition of “Private Legal Practice”. He considered that the opening words – “provision of services in private Practice as a solicitor” – constituted the essential definition of “Private legal Practice” and that what followed were “instances of what is included within the concept of ‘services in private Practice as a solicitor’ but are not intended to define as constituted Private Legal Practice matters which are not provided by way of such services.”
Secondly, the Judge held that SL’s liability as trustee did not arise from the provision of services in private practice by SL. It was not providing services as a trustee to a client, or in connection with services provided to a client. DCL was not SL’s client and it was holding monies on trust for DCL as part of a mechanism to secure repayment of amounts which, pursuant to a commercial agreement, DCL advanced to SL for the purposes or its business. Butcher J approved the proposition advanced in the Cannon & McGurk: Professional Indemnity Insurance (2nd Ed), 9.69 (on the basis of the Ontario decision of Cassells Brock & Blackwell LP v LawPro (2006) 80 OR (3d) 570 and 2007 ONCA 122) that the use of a solicitor’s client account as a vehicle for the receipt and distribution of money does not, without more involve the solicitor providing a service as a solicitor. The judge also held that DCL was not a quasi client (a concept derived from the judgment of Lord Toulson in Impact Funding Solutions Ltd v Barrington Services Limited  AC 73, at ). The concept of quasi-client, the judge commented, referred to “the category of exceptional cases in which a solicitor, acting in a professional capacity, and who fails to take reasonable care in doing what (s)he was engaged to do in that capacity, may be liable to someone who has not retained the solicitor, but who is foreseeably affected by the ill performance of what the solicitor was engaged to do. It is a category intended to be of persons who fall just short of being clients of the solicitor’s professional services.”
Thirdly, the judge rejected DCL’s alternative argument that SL’s liability to DCL arose from the conduct of litigation. Once Remittances had been received, what was done to them was after and not part of any litigation in which SL may have acted. Similarly, what SL did with the Remittances was not ancillary to the litigation. While the money might not have been received but for the proceedings in which SL acted, the holding of sums of after receipt was not for the purpose of prosecuting any proceedings.
Finally, applying Impact Funding Solutions Ltd v Barrington Services Limited (supra), Butcher J held that even if SL’s liability to DCL fell within the words of the insuring clause, the Debts and Trading Liabilities Exclusion was effective to exclude AIG’s liability to indemnify SL. There could be no real doubt that the RFA was a “contract or agreement for the supply to, or use by, the Insured of goods or services in the course of the Insured Firm’s Practice”. The RFA provided a service, namely a facility to provide working capital, for the purposes of SL’s practice. As with the arrangement considered in Impact Funding, the relevant liability which SL was under as trustee or fiduciary was in reality a part of a commercial bargain struck between SL and DCL, which was not the type of liability which solicitors’ professional liability insurance was principally designed to indemnify against, and was, in Lord Toulson’s words in Impact Funding (at ), a “trading liability”.
The decision of Butcher J is unsurprising and clearly right. The arguments maintained by DCL were not only inconsistent with the clear words used in both the definition of “Private Legal Practice” and the Debts and Trading Liabilities Exclusion but ran contrary to the clear purpose of compulsory professional indemnity insurance for solicitors, namely to ensure that the public is protected from the possibility of loss caused by persons carrying out the work of a solicitor, not to act as a secondary source of recovery for commercial counterparties. Nevertheless, the case provides further useful guidance as to when liability may be said to arise from “Private Legal Practice” and when someone can be characterised as a quasi-client.
Finally, it is fitting to note that the decision approved the views given in Cannon & McGurk, so soon after the passing of its lead author Mark Cannon QC, the former head of 4 New Square Chambers who did so much to promote insurance work in chambers and was an enthusiastic contributor to this blog. We owe Mark much and miss him a great deal.
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