Up until this decision the general view of the insurance market was that a claim for the loss of fees could not be recovered under a solicitors’ professional indemnity insurance policy.
We take a look at the Court’s findings and comment on just how far reaching this decision might be.
The facts
Briefly, they concern the sale of a portfolio of impaired loans from Ireland’s National Asset Management Agency (NAMA) to Cerberus Capital Management LP (Cerberus) for €1.6 billion. The parties involved were Mr Coulter (then managing partner at Tughans) and solicitors Brown Rudnick LLP (BR). Mr Coulter was at the forefront of arranging the portfolio sale whereas BR had good contacts with potential purchasers. Also involved was Mr Cushnahan, a member of NAMA’s Northern Ireland Advisory Committee. He worked closely with Mr Coulter on the transaction and shared an office at Tughans.
The engagement letter between Cerberus and BR contained various warranties and representations, specifically that no payments be made in breach of anti-corruption laws or to government officials. Cerberus also required BR to obtain written certification from Tughans signing up to the same obligations. The engagement letter between Cerberus and BR entitled BR to a success fee of £15million. BR agreed with Tughans that Tughans would be paid 50% of the success fee (the Tughans Fee) upon completion. The sale went ahead in 2014.
The transaction completed and the success fees were paid. Up until this point, the other partners of Tughans were unaware of Mr Coulter’s engagement on the transaction and no file had been opened. Mr Coulter had given Cerebus untrue assurances that Mr Cushnahan was not involved with the transaction. Cerebus were concerned because of his previous involvement with fraudulent transactions. On the facts, it can be assumed that Mr Coulter knew that Cerberus would have pulled out of the purchase had they known the true position.
It is alleged that Mr Coulter deliberately misled the Tughans partners when telling them that he had generated a fee of £1.5m on a confidential transaction. Instead of paying the Tughans Fee into Tughans’ accounts to represent income to the firm, he transferred £7.2m to an account in the name of one of his own companies registered in the Isle of Man.
Matters unravelled at this point.
Mr Coulter came clean and returned the transferred money to Tughans. They subsequently reported his conduct to the Law Society of Northern Ireland. Tughans then notified their insurer, Royal and Sun Alliance Insurance Ltd (RSA), of the events as a circumstance under their professional indemnity policy (the Policy).
The National Crime Agency launched criminal investigations into the transaction and criminal charges were brought against Mr Coulter and Mr Cushnahan – these trials have yet to take place.
In May 2019, Cerberus and BR reached a settlement which involved an assignment of Cerberus’ claim against Tughans to BR. BR subsequently issued proceedings against Tughans claiming damages for loss and damage caused by Mr Coulter’s fraudulent and/or negligent misrepresentations, breach of fiduciary duties and negligence. Damages included the fees and costs incurred by BR in dealing with the various criminal investigations referred to above. These proceedings are stayed pending the results of the criminal trials.
Tughans’ policy cover
Under the solicitors’ insurance policy, as governed in Northern Ireland by a compulsory Master Policy which is substantially similar to the SRA Minimum Terms and Conditions (MTC), the insuring clause (the Insuring Clause) provides that:
"The Insurers will indemnify the Insured in respect of claims or alleged claims made against the Insured…..in respect of any civil liability (including liability for claimant's costs and expenses) incurred in connection with the Practice…provided that no indemnity will be given (a) to any individual committing or condoning any dishonest fraudulent criminal or malicious act….."
RSA notified Tughans of its decision to decline cover on the basis that:
- Their involvement in the transaction did not meet the Policy requirement that they were "in respect of any civil liability ... incurred in connection with the Practice carried on by or on behalf of the Solicitor", and
- by retaining the success fee, Tughans had not suffered a loss such as would give rise to a right of indemnity in respect of the Tughans Fee under an indemnity policy.
Tughans brought arbitration proceedings against RSA. In September 2021, the arbitrator made his Final Award and declared that:
- the claims against Tughans arose 'in connection with the Practice carried on by or on behalf of the Solicitor', and
- subject to the application of any other terms and conditions of the Policy, RSA were liable to indemnify Tughans in respect of claims brought against it and costs incurred in defence of those claims.
The arbitrator further determined that there was no legal basis for stripping the Tughans Fee from these declarations.
RSA appealed the second declaration on a point of law. The High Court found in Tughans’ favour but permitted RSA’s request to appeal in relation to indemnity for loss of fees.
The Court of Appeal
The Court of Appeal summarised RSA’s argument as follows:
“Because the fee was procured by misrepresentation, Tughans had no right to retain it; and if it was obliged to return it, as part of a damages claim, it had not lost something to which as a matter of substance it was entitled, just as much as if the contract were avoided and it was obliged to return it or its value in a restitutionary claim… Tughans had not suffered a loss in the amount of the fee, and cover for that element of a damages claim would violate the indemnity principle.”
The Court rejected RSA’s argument, finding that the indemnity principle did not assist RSA in this case for several reasons:
- Tughans’ entitlement to the success fee
A solicitor who has completed contractually agreed work has earned, and is therefore entitled to, fees charged for that work. If the amount of the fee is to be paid to discharge a claim, the solicitor has provided services without remuneration and can therefore be said to have suffered a loss.
The Court dismissed RSA’s argument that a firm was not entitled to the fees in circumstances where a retainer was procured by misrepresentation and is therefore voidable (but, in this case, has not been voided). Tughans provided services. If it is liable to pay damages to BR for an amount which included their Fee, it will suffer a loss.
- The regulatory and public interest functions of compulsory professional indemnity cover for solicitors
The Insuring Clause is expressed in very wide terms and does not draw any distinction between liability for fees and other forms of liability. The Court emphasised that this is consistent with both the public interest and the commercial and regulatory function of compulsory professional indemnity insurance for solicitors.
Professional indemnity insurance (PII) is intended to protect partners and employees from their own negligent mistakes and the mistakes of their fellow partners and employees, and the fraud of others, and enables solicitors to compensate clients for any liabilities arising from mistakes. Excluding cover for this element of a claim may mean that partners are unable to meet the claim from their own resources, which would leave clients unprotected in circumstances where fees have been paid.
- The composite nature of PII
RSA’s reliance on the indemnity principle overlooked the composite nature of PII – claims made under the Policy are made by individual insureds. The implication of RSA’s argument treated liability for fees as irrecoverable, which left individual partners uninsured for liabilities in respect of fees they have not received. The Court emphasised that this was contrary to the protection intended by compulsory PII cover.
RSA argued that the indemnity principle precluded cover for liability for fees framed as a restitutionary claim. Since the underlying claim here was not framed as such the Court did not provide a finding. However, it indicated that the above principles may apply to such claims.
Comments
This decision is a complete turnaround from the previously assumed position that a claim for loss of fees could not be recovered under a professional indemnity insurance policy.
Whilst the facts of this case are specific, the Court’s decision more widely supports the proposition that solicitors’ fees are recoverable if they have been paid, the contract remains in existence (ie, has not been rescinded) and the client’s claim includes a claim for damages referable to the fees. Fees are not recoverable if they are unpaid or the contract with the client has been rescinded.
RSA made much of the fact that the Tughans Fee was procured by misrepresentations. The Court’s position was that any alleged misrepresentations were not relevant to the question of whether fees were earned by Tughans. This was because the firm was entitled to fees under a valid retainer, and it had spent resources on the transaction. Had the other partners been a party to and/or condoned Mr Coulter’s actions, then this would not be within the scope of cover because the Insuring Clause excludes cover to any individual who commits or condones any dishonest fraudulent criminal or malicious act.
When determining the scope of cover, the starting point for insurers remains the interpretation and wording of the insuring clause. For those insuring the legal profession in England & Wales and Northern Ireland, this is likely to be widely framed because of the current wording of the MTC. Seeking to withhold cover in those circumstances may well run contrary to the regulatory and public interest functions of PII. Where PII policies are not bound by MTC (which will include excess layer PII policies for solicitors), insurers may wish to review whether loss of fees claims can be expressly excluded.
As for claims framed as restitutionary, the Court’s comments were made obiter and thus are not binding. Nonetheless, insurers should progress with caution where fees have been paid and a contract remains in existence.
It remains to be seen whether an appeal will be brought to the Supreme Court.