Liability of insurers for defence costs under professional indemnity policy

United Kingdom

The Claimants were a firm of accountants; the Defendants were their professional indemnity insurers.

The Claimants received a claim from a Mr Roscoe alleging breach of contract, negligence, fraudulent or negligent misrepresentation, conspiracy and breach of fiduciary duty as a result of the activities of one of the partners in the firm, a Mr Kaye. Mr Roscoe said he retained the Claimants as accountants to advise him as to his financial affairs and that, inter alia, Mr Kaye had advised him on a sale of shares to a company in which Mr Kaye was interested.

Mr Roscoe commenced proceedings against the Claimant firm. The Defendant insurers reserved their position. The Claimants therefore instructed their own solicitors and counsel to defend the claim. The substance of the defence was that Mr Kaye’s conduct did not involve the rendering of professional services in his capacity as a partner in the Claimants and that his business dealings with Mr Roscoe had been conducted in his personal capacity only.

The Defendant insurers continued to reserve their position but indicated that they did not consider that the claim should be admitted. The Claimants continued to press for confirmation that they would be indemnified under the policy. The correspondence culminated in a letter dated 5th June 1997 to the Claimants’ solicitors. That letter stated, in essence, (a) there would be no indemnity in respect of any damages payable to Mr Roscoe arising from private business dealings between Mr Roscoe and Mr Kaye, that is, any liability which had not been incurred in the conduct of any professional business carried on by the Claimants; (b) insurers were prepared to indemnify the Claimants for past and future costs, save for those attributable to the investigation and defence of the allegations made against Mr Kaye acting in his personal capacity. In that regard, the letter requested an apportionment of the costs incurred in defending the claim.

Subsequently, the Defendant insurers made a contribution to the Claimants’ defence costs of GBP 125,000 without prejudice to policy coverage and the apportionment of costs, and on the express basis that the insurers could seek recovery of the money if it transpired that the policy did not respond to Mr Roscoe’s claim.

Mr Roscoe’s action was dismissed at trial. The Judge held that Mr Kaye never gave advice as an accountant in respect of the relevant transactions.

In these proceedings, the Claimants claimed from the Defendant insurers a further sum of GBP 193,589 in respect of the additional costs of defending the claim; the Defendant insurers counterclaimed for the return of the GBP 125,000 which they had previously paid to fund the defence. The fundamental issue was whether the policy provided an indemnity in respect of the costs of successfully defending a claim and, if not, whether subsequent correspondence – in particular the letter of 5th June 1997 – gave rise to a right of indemnity against the Defendant insurers.

The principal clauses in the professional indemnity policy were as follows:

  • The insuring clause, which provided that underwriters agreed

“To indemnify the Assured against any claim or claims first made against the Assured during the period of insurance as shown in the Schedule in respect of any Civil liability whatsoever or whensoever arising (including liability for claimants’ costs) incurred in connection with the conduct of any Professional Business carried on by or on behalf of the Assured …” (our emphasis);

  • Special Condition 1, which provided as follows:

“Underwriters shall in addition indemnify the Assured in respect of all costs and expenses incurred with their written consent in the defence or settlement of any claim made against the Assured which falls to be dealt with under this certificate …”.

Held:

The Claimants succeeded.

On the key issue of entitlement to defence costs, the Court undertook a three stage analysis:

(a) The insuring clause

The use of the word “incurred” in the insuring clause meant that the clause applied to the actual liability of the insured, as distinct from the alleged liability of the insured. That construction was supported by numerous authorities, for example, MDIS Limited v Swinbank [1999] (Insurance & Reinsurance Bulletin Issue 37). Accordingly, the insuring clause insured against a breach of professional duty as ascertained by judgment, arbitration, or settlement which was the subject matter of a claim first made within the policy period.

As Mr Roscoe’s claim had been dismissed, the insured had no liability and the insuring clause was not engaged. It followed that, on that basis alone, the Defendant insurers would have had no liability for the defence costs.

(b) Special Condition 1

There was, however, no requirement of actual liability in Special Condition 1. The clause did not require that the costs must be incurred in defence of a successful claim against the insured, but merely that the claim was, in substance, one capable of falling within the scope of indemnity in the insuring clause. Thus, a claim against an insured firm and against a partner in his personal capacity relying on the same allegations of fact would be a claim within Special Condition 1 unless the claim against the firm was manifestly untenable.

Under Special Condition 1, the agreed control mechanism was the written consent of insurers. Once such consent had been given, insurers could not impose a pre-condition of actual liability in respect of the claim.

In reaching that conclusion, the Judge relied upon the fact that Special Condition 1 is concerned, not only with the costs of defending claims, but also with the costs and expense of settling such claims. Under the policy, the insured was not permitted to enter into a settlement without the insurers’ consent. The Judge held that it would be absurd if it was open for insurers to decline indemnity in respect of the costs of settling a claim on the ground that there had been no actual liability of the insured to the Claimant, when they had already consented to that settlement being entered into.

(c) Did the insurers give their consent?

The Judge then went on to consider whether insurers had, in fact, given their written consent to the incurring of defence costs pursuant to Special Condition 1. He made a number of findings:

  • There was no basis for any suggestion that the insurers were prepared to waive the requirement of written consent. The letter of 5th June 1997, did, however, amount to consent in respect of past and future defence costs, subject to quantification by means of apportionment. Accordingly, it was effective to make the Defendant insurers liable for defence costs under Special Condition 1.

  • The letter of 5th June 1997 also gave rise to an implied contract under which the insurers agreed to indemnify the insured in return for the insured agreeing not to take proceedings. The letter was written in order to deter the Claimants from commencing proceedings and the terms of the letter had been accepted by the Claimants. Thus, even if the insurers had not been under any obligation to indemnify costs under the terms of the policy, the letter of 5th June 1997 and the Claimants’ reply amounted to a binding agreement to extend the scope of the indemnity to include the defence costs. In addition, the Claimants were entitled to succeed on the basis that the insurers were estopped from denying that the letter of 5th June 1997 accurately reflected their indemnity obligations under the policy.

  • It was not an implied term of the policy that consent under Special Condition 1 would not be unreasonably withheld. It was not necessary to imply such a term to give business efficacy to the policy. Such an implied term would be inconsistent with the Q.C. clause in the policy, as insurers could otherwise be forced to give their consent and therefore to contest proceedings where a Q.C. had not advised that the proceedings should be contested.

The apportionment of defence costs

The apportionment exercise meant dividing those claims which related to the conduct of the Claimant firm from those which exclusively related to Mr Kaye in his personal capacity. If the work had a dual purpose then the indemnity extended to the dual purpose work and was not confined to work exclusively referable to the defence of the Claimant firm (New Zealand Products Limited v New Zealand Insurance Co [1997]). Accordingly, if it was impossible to identify any work which related exclusively to claims which were sustainable only against Mr Kaye in his personal capacity, the Claimants were entitled to an indemnity in respect of all such dual purpose work.

The insurers’ counterclaim

The counterclaim by the Defendant insurers was dismissed. As the letter of 5th June 1997 operated effectively to provide an indemnity under Special Condition 1, it was not open to insurers to alter their stance and subsequently make a payment of GBP 125,000 in respect of defence costs on the basis that they would seek recovery if the policy did not respond to the claim against the insured.

Note:

Difficult questions of policy liability arise where a professional may have been acting in his personal capacity, rather than as a partner in his firm. On a typical professional indemnity wording, if insurers decide not to fund the defence of the claim, they will not have any liability unless there is a finding by the Judge at trial that the professional was negligent in his capacity as a partner in the firm. The difficult question for insurers to assess is, on the facts of each case, the likelihood of this happening. Where there is real uncertainty as to the capacity in which the professional was acting, there may, in practical terms, be merit in insurers agreeing to pay defence costs and asserting control over the conduct of the litigation.

The decision confirms that insurers’ consent to the incurring of defence costs is not subject to any implied term that such consent shall not be unreasonably withheld. In the absence of such an express provision to this effect, insurers may consent or not, as they see fit. Indeed, the Judge was of the view that, even where an insured successfully defended a claim which would have fallen within the scope of the policy, insurers would not have any liability for defence costs if consent had not been given. In the Judge’s phrase, the giving of written consent represented a “control mechanism” for insurers.

CMS Cameron McKenna acted on behalf of the Defendant insurers (Thornton Springer V Nem Insurance Co & Others, QBD: Judgment 6th March 2000).

For further information on this articles, please contact the co-editors, Peter Maguire at [email protected] or on +44 (0) 20 7367 2893 or Jonathan Wright in Singapore at [email protected] or on +655 534 1711.