Impact Funding Solutions Ltd v AIG Europe Insurance Ltd (formerly known as Chartis Insurance (UK) Ltd)

JurisdictionEngland & Wales
JudgeLord Hodge,Lord Mance,Lord Sumption,Lord Toulson,Lord Carnwath
Judgment Date26 October 2016
Neutral Citation[2016] UKSC 57
Date26 October 2016
CourtSupreme Court
Impact Funding Solutions Limited
(Respondent)
and
AIG Europe Insurance Ltd (formerly known as Chartis Insurance (UK) Ltd)
(Appellant)

[2016] UKSC 57

before

Lord Mance

Lord Sumption

Lord Carnwath

Lord Toulson

Lord Hodge

THE SUPREME COURT

Michaelmas Term

On appeal from: [2015] EWCA Civ 31

Appellant

Mark Cannon QC Clare Dixon (Instructed by Mayer Brown International LLP)

Respondent

Timothy Dutton CBE QC Richard Chapman Pia Dutton (Instructed by Ozon Solicitors Limited)

Lord Hodge

(with whom Lord Mance, Lord Sumption and Lord Toulson agree)

1

This appeal is concerned with the interpretation of a solicitors' professional indemnity insurance policy ("the Policy") written by AIG Europe Ltd ("AIG"). It raises a legal question of general public importance both because it concerns a term of an insurance policy, which is, or is similar to, terms in all professional indemnity insurance policies for solicitors in England and Wales, and also because it is important to the business model by which many solicitors have funded litigation since state-funded legal aid for civil cases was significantly reduced.

2

As described more fully below, the respondent, Impact Funding Solutions Ltd ("Impact") entered into an arrangement with solicitors, Barrington Support Services Ltd ("Barrington"), by which Impact, by entering into loan agreements with Barrington's clients, provided funds to Barrington to hold on behalf of its clients and to use to make disbursements in the conduct of its clients' litigation in pursuit of damages for industrial deafness. Barrington failed to perform its professional duties towards its clients in the conduct of litigation, both through its failure adequately and timeously to investigate the merits of their claims and also through the misapplication of funds provided by Impact, and so breached its duty of care to them. Barrington thereby put itself in breach of a warranty in its contract with Impact that it would perform its professional duties towards its clients. Barrington's clients were not able to repay their loans. Impact sought to recover from Barrington the losses which it suffered on those loans by seeking damages for the breach of the warranty. In an admirable judgment dated 30 May 2013, His Honour Judge Waksman QC awarded Impact damages of £581,353.80, which represented the principal elements of the loans which would not have been made if Barrington had not breached its contract with Impact. On Barrington's insolvency, Impact seeks in this action to recover those losses from Barrington's professional indemnity insurers, AIG, under the Third Parties (Rights against Insurers) Act 1930.

3

In another impressive judgment dated 13 December 2013 His Honour Judge Waksman QC analysed the nature of the arrangements between Impact and Barrington and, construing the words of the Policy, held that Impact's claim against AIG for an indemnity failed. Impact appealed to the Court of Appeal. In a judgment dated 3 February 2015 the Court of Appeal, [2015] 4 All ER 319; [2016] Bus LR 91 allowed the appeal. The Court of Appeal, by standing back from the detail and asking itself what was the essential purpose of the exclusion clause in question, concluded that the loans which Impact gave to cover disbursements in intended litigation were inherently part of the solicitors' professional practice and that the liabilities which Barrington incurred under its warranties to Impact were liabilities professionally incurred which came within the cover of the Policy. AIG appeals to this court.

4

Impact supports the conclusion which the Court of Appeal reached. It refers to the wide terms of the cover (para 8 below) and submits that the subsequent exclusions (para 10 below) should be construed strictly. In particular, the fact that Barrington obtained a commercial benefit from its agreement with Impact did not mean that Impact was providing services to Barrington within the terms of the exclusion. I do not accept that this is the correct way to read the exclusion clause in this insurance contract and set out my reasons below.

Questions of construction
5

In determining the appeal, the court has, first, to construe the relevant terms of the Policy against its factual matrix and, secondly, to construe the relevant terms of the disbursements funding master agreement ("DFMA") between Impact and Barrington once again against its factual matrix.

6

This approach to construction is well established. The court looks to the meaning of the relevant words in their documentary, factual and commercial context: Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, para 21 per Lord Clarke of Stone-cum-Ebony; Arnold v Britton [2015] AC 1619, para 15 per Lord Neuberger of Abbotsbury. As I see no ambiguity in the way that the Policy defined its cover and as the exclusion clause reflected what The Law Society of England and Wales as the regulator of the solicitors' profession had authorised as a limitation of professional indemnity cover, I see no role in this case for the doctrine of interpretation contra proferentem. As Lindley LJ stated in Cornish v Accident Insurance Co Ltd (1889) 23 QBD 453, 456:

"… in a case of real doubt, the policy ought to be construed most strongly against the insurers; they frame the policy and insert the exceptions. But this principle ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty."

7

The extent of AIG's liability is a matter of contract and is ascertained by reading together the statement of cover and the exclusions in the Policy. An exclusion clause must be read in the context of the contract of insurance as a whole. It must be construed in a manner which is consistent with and not repugnant to the purpose of the insurance contract. There may be circumstances in which in order to achieve that end, the court may construe the exclusions in an insurance contract narrowly. The judgment of Carnwath LJ in Tektrol Ltd (formerly Atto Power Controls Ltd) v International Insurance Co of Hanover Ltd [2006] 1 All ER (Comm) 780, to which counsel for Impact referred, is an example of that approach. But the general doctrine, to which counsel also referred, that exemption clauses should be construed narrowly, has no application to the relevant exclusion in this Policy. An exemption clause, to which that doctrine applies, excludes or limits a legal liability which arises by operation of law, such as liability for negligence or liability in contract arising by implication of law: Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 850 per Lord Diplock. The relevant exclusion clause in this Policy is not of that nature. The extent of the cover in the Policy is therefore ascertained by construction of all its relevant terms without recourse to a doctrine relating to exemption clauses.

The insurance policy
8

AIG wrote the Policy for Barrington for the period from 1 October 2009 to 30 September 2010. The cover was stated in broad terms. It provided:

"The Insurer will pay on behalf of any Insured all Loss resulting from any Claim for any civil liability of the Insured which arises from the performance of or failure to perform Legal Services."

9

"Legal Services" were defined broadly to include "the provision of services in private practice as a solicitor or Registered European Lawyer …".

10

On p 6 of the Policy there is a clause which sets out what is excluded from cover. It provides so far as relevant:

"This policy shall not cover Loss in connection with any Claim or any loss:

arising out of, based upon, or attributable to any: (i) trading or personal debt incurred by an Insured, (ii) breach by any Insured of terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of providing Legal Services; and (iii) guarantee, indemnity or undertaking by any Insured in connection with the provision of finance, property, assistance or other benefit or advantage directly or indirectly to that Insured." (emphasis added)

11

Solicitors in England and Wales were required to take out and maintain professional indemnity insurance in accordance with the Solicitors' Indemnity Insurance Rules 2009 ("the 2009 Rules"), which were made by The Law Society in exercise of a statutory power under section 37 of the Solicitors Act 1974. There was thus a scheme of compulsory professional indemnity insurance which Parliament had authorised.

12

The Law Society in Appendix 1 of the 2009 Rules laid down the minimum terms and conditions of professional indemnity insurance for solicitors and registered European Lawyers in England and Wales ("the Minimum Terms"). The Minimum Terms defined the scope of cover, so far as relevant, in these terms:

"The insurance must indemnify each Insured against civil liability to the extent that it arises from Private Legal Practice in connection with the Insured Firm's Practice …"

13

Clause 6 provided:

"The insurance must not exclude or limit the liability of the Insurer except to the extent that any Claim or related Defence Costs arise from the matters set out in this clause 6.

6.6 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; or

(c) guarantee, indemnity or undertaking by any particular Insured in connection with the provision of finance, property, assistance or other benefit or advantage directly or indirectly to that insured."

14

The Policy provides that:

"In any dispute in connection with the terms, conditions, exclusion or limitations it is agreed and understood that the Minimum Terms and Conditions will take precedence over any...

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