Lam v Federation Of Small Businesses

Promotional material describing payment of expenses up to a stated limit does not, without more, create a separate contractual promise by an organisation to provide an unqualified indemnity. Where the organisation arranges group legal-expenses insurance and supplies insurance documentation, the contractual benefit is ordinarily the insurance cover. The member’s claim is therefore against the insurers under the policy, subject to its terms, rather than against the organisation, unless the membership contract clearly provides otherwise.

Mr Lam joined the Federation after seeing promotional material referring to payment of legal and accountancy costs for an in-depth Inland Revenue investigation. During such an investigation he incurred expenses and claimed under the legal-protection scheme. The insurers rejected the major part of the claim, relying on policy exclusions, and Mr Lam sued the Federation for the expenses and exemplary damages.

The Recorder dismissed the claim, holding that the arrangements created insurance contracts between the insurers and the Federation and between the insurers and each member. An earlier order setting aside a strike-out did not determine the merits. The central issue before the Court of Appeal was whether the Federation had promised an unqualified indemnity or had merely arranged insurance cover.

Laws LJ delivered the judgment, with Sir Murray Stuart Smith agreeing. The appeal was dismissed with costs.

1. Effect of the earlier order. Judge Overend had heard an appeal from a strike-out order only. His order merely restored the claim for determination on its merits. Any concluded view he expressed about the substantive contractual issue went beyond the remit of that appeal and did not prevent the Recorder from deciding the case.
2. Construction of the membership arrangement. The promotional reference to payment of expenses was not inconsistent with the provision of insurance services. More importantly, the insurance documentation supplied on joining showed that the relevant benefit was insurance cover. A member could not reasonably infer an additional free-standing indemnity from the Federation, since that would make the insurance arrangement itself redundant.
3. Group insurance structure. The certificate identified the Federation as policyholder and each member as an assured. Applying the analysis in Swain v The Law Society 1982, Appeal Cases, 598, the arrangement could be understood as a contract under which the insurers provided insurance for members and a separate contract under which the insurers indemnified members in accordance with the policy. Mr Lam was entitled to claim against the insurers, subject to the merits of that claim.
4. Scope of decision. The Court did not decide whether the insurers were entitled to rely on either exclusion clause. The issue was only whether the Federation itself owed an unqualified obligation to reimburse the expenses. The European Convention arguments had no substance, and later correspondence about the scheme was irrelevant to the historical contract.

The Recorder was right to dismiss the claim. The appeal was dismissed with costs assessed at £4,500 including VAT.

1. Court of Appeal (Civil Division) Appeal dismissed with costs assessed at £4,500 including VAT: [2002] EWCA Civ 1457.
2. Torquay and Newton Abbot County Court Mr Recorder Moxon-Browne dismissed Mr Lam’s claim on 25 September 2001.
3. Earlier county court procedure District Judge Meredith struck out the claim. Judge Overend set aside that order and reinstated the claim, but the Court of Appeal held that this was only a procedural decision and not a determination of the merits.