When will a solicitor’s professional liability policy respond to a loss which comprises the solicitor’s own fees?

The Court of Appeal decides, in Royal and Sun Alliance Insurance Limited & Ors v Tughans (a firm) [31.08.23] that a solicitor insured’s professional liability policy provided an indemnity in respect of a claim for return of fees.

Our case summary on the first instance decision before the Commercial Court can be found here.

Background

The partners of Tughans, a firm of solicitors in Northern Ireland, sought a declaration confirming that they were entitled to an indemnity under their PI (professional indemnity) policy in respect of a claim for repayment of a fee paid to one of their partners. The dispute proceeded on assumed facts.

In summary:

• The facts arise from the sale of a portfolio of loans by a government entity in the Republic of Ireland which had been assisted by the Northern Ireland Advisory Committee (NIAC).
• Potential purchasers, an American private equity fund, appointed Brown Rudnick LLP (BR), who then retained Tughans as local legal counsel. Mr Coulter, the partner at Tughans with conduct of the matter, had a close relationship with a former member of the NIAC, Mr Cushnahan (criminal charges have since been brought against both concerning the transactions).
• BR's retainer included entitlement to a £15 million fee payable on completion of the transaction. It also contained representations and warranties that BR would not promise or make any payments to any third party in breach of applicable anti-corruption laws. In turn, BR agreed with Mr Coulter that 50% of its success fee would be shared with Tughans.
• It was alleged that, contrary to the mirror warranties given by Tughans as a condition precedent to the contract, Mr Coulter had always intended to divert part of the success fee to Mr Cushnahan. Upon completion, Tughans received its share of the success fee; £7.5 million plus VAT.
• Mr Coulter did not inform his fellow partners of the transaction, the retainer or the success fee. The majority of the success fee was initially paid into an account in the name of one of his own companies (via one of Tughans’ accounts). However, he later shared the information with his partners and of the £7.5 million success fee received, £4 million remains in Tughans’ accounts.
• The transaction was subsequently investigated and a claim for fraudulent misrepresentation was brought by BR against Tughans. Damages sought included the success fee paid to Tughans, plus costs incurred by BR in dealing with various civil and criminal investigations.

Tughans’ PI policy, issued by RSA, provides indemnity for claims or alleged claims:

Tughans sought a declaration that RSA was obliged to indemnify the partners in respect of any liability to refund the success fee.

The previous decisions

Tughans succeeded in arbitration against RSA and on appeal to the High Court, with both forums concluding that:

• If Tughans was obliged to return the fee to BR by virtue of the underlying liability claims, that refund could be recovered under the PI policy.
• This was because the recovery would arise from a claim made against Tughans in respect of a civil liability.
• It fell, therefore, within the scope of the insuring clause, and Tughans’ partners (interestingly, the firm itself was not an insured) would have suffered a loss since their firm had performed the service to which the fee related.

RSA took the argument to the Court of Appeal.

The Court of Appeal

RSA’s argument, which failed at first instance, was, in essence, that:

• Because the fee was procured by misrepresentation, Tughans had no right to retain it.
• If Tughans was obliged to return the fee, as part of a damages claim, it had not lost something to which it was entitled.
• This was equally applicable to a restitutionary claim, for example, for repayment of a fee if the contract was avoided or there had been a total failure of consideration by the solicitor.
• In both instances, Tughans had not suffered a loss, as it was never entitled to the fee in the first place, and cover for this sort of claim would violate the ‘indemnity principle’ – that a policy of indemnity insurance would only indemnify an insured’s actual loss.

Refusing the appeal, the Court of Appeal rejected the argument based on reliance on the indemnity principle, on the grounds that:

• Firstly, a professional who has done the contractually agreed work, and has earned the contractually agreed fee, does suffer a loss if ordered to return the fee notwithstanding that the retainer had been procured by a misrepresentation.
• As to the matters of policy:
  • There is considerable public interest in there being compulsory professional liability cover for certain professionals, so that, if a firm is not good for the money, a client will nevertheless enjoy the protection of the policy to the full extent of his loss, including the wasted fees paid to the firm.
  • If successful, RSA’s position would leave other Tughans’ partners (and potentially employees), who had no involvement in the underlying acts or omissions and who had not benefitted from the fee, exposed to a liability for which indemnity cover was not available.

The Court of Appeal also made some interesting comments about restitutionary claims and the potential for these to be covered even in respect of a claim for a fee which had not been earned. The court indicated that if, for example, a solicitor “…receives money on account of fees, and an employee steals them from the client account, or negligently transfers them to a third party, before the work is done to earn the fee, a claim by the client for the money, advanced as a restitutionary claim, would seem to me to give rise to a liability which constitutes a loss; and would, moreover, appear to fall squarely within the intended scope of PII cover, and be a necessary part of cover if the PII policy is to fulfil the public protection function of a compulsory insurance scheme”.

Comment

Whilst it was previously believed that no claims for an indemnity in respect of a solicitor’s own fees can attach to a professional liability policy where the essence of the claim is that the solicitor was never legally entitled to the fees, the Court of Appeal’s comments cast severe doubt over this.

Whilst the minimum terms in play here are those in Northern Ireland, there is no reason to suspect that there would have been a different outcome had the Court of Appeal applied the solicitors’ minimum terms prevailing in England and Wales. Professional liability insurers (especially those who insure solicitors in England and Wales) can probably expect claimants seeking a return of fees to frame their claims with an eye towards this decision.

This is an unwelcome development for professional liability insurers. The judgment will however now provide a degree of certainty that was previously missing; and the decision is probably the right one on public policy grounds. The purpose of the minimum terms is to ensure that compensation is available to a client for loss suffered due to a solicitor’s negligent act or omission. Where that loss includes fees paid to the solicitor for which the client derived little or no value, the provision of cover for those fees fulfils the public policy and regulatory aims of solicitors’ professional liability insurance.

The decision in Tughans would benefit from oversight by the Supreme Court. In the meantime, insurers who are not bound by minimum terms may want to revisit the scope of cover and exclusion clauses in their PI insurance policies. Those who are bound by minimum terms, however, will have limited, if any, scope to vary terms of cover. There will also now be very few circumstances in which they can legitimately decline an indemnity in respect of any claim against the insured professional for reimbursement of fees.

Related item: Professions and Financial Lines Brief: latest decisions December 2022