Axa Insurance Ltd v Akther & Darby Solicitors & Ors

A contingent liability does not itself constitute damage for the accrual of a negligence claim. Time begins to run only when the claimant sustains measurable loss additional to that liability.

An insurer sustains such loss upon entering a negligently vetted policy where the premium and risk form an indivisible transaction and the policy carries liabilities greater than they should have been. The principle applies even where competent advice would have prevented the transaction altogether. A later uncertainty about whether payment will be required affects quantification, rather than accrual. A negligent failure to notify or conduct an insured claim likewise causes damage when it exposes the insurer to greater liabilities.

NI issued after-the-event insurance policies for claims vetted and conducted by panel solicitors. Axa, as assignee of NI’s rights, alleged that the solicitors negligently accepted unsuitable claims and failed to notify deteriorating prospects or conduct claims competently. Policies issued more than six years before proceedings represented claims of about £19 million.

Flaux J determined a preliminary limitation issue in favour of the solicitors: [2009] EWHC 635 (Comm). He held that vetting claims accrued when the policies incepted and conduct claims when the relevant deterioration or management failure occurred. The central issue on appeal was when damage is suffered under section 2 of the Limitation Act 1980 where negligence exposes an insurer to contingent liabilities.

1. Appeal dismissed by a majority. Arden and Longmore LJJ held that NI suffered damage when each negligently vetted after-the-event policy was issued. Damage from a relevant conduct breach arose when that breach exposed NI to larger liabilities. No order was required on the respondents’ notice.

2. Per Arden LJ, Law Society v Sephton [2006] UKHL 22 establishes that a purely contingent liability does not itself constitute damage. The governing inquiry is whether the claimant has sustained measurable loss additional to the contingent liability. Such additional loss is not confined to diminution of a particular asset or to the acquisition of a deficient package of contractual rights.

3. The insurance transaction had to be considered as an indivisible whole. Premium and risk were intertwined. The premiums facilitated reserves against claims, while negligent vetting produced matching liabilities greater than they should have been. The resulting policies and NI’s associated rights were therefore less valuable at inception. This was measurable loss beyond the mere assumption of a contingent liability.

4. That conclusion applied even if damages were assessed on a “no transaction” basis. The relevant comparison was between NI’s financial position after issuing the policies and its position had they not been issued. The more burdensome liabilities were capable of valuation at inception. Uncertainty about whether or how much NI would ultimately pay concerned quantification and did not postpone accrual.

5. Longmore LJ agreed. Entry into a flawed transaction will usually constitute damage whether competent advice would have produced a better transaction or no transaction. On the assumed facts, valuation of each policy at inception had to reflect the absence of proper vetting.

6. Lloyd LJ dissented. He considered Sephton binding authority that NI’s detriment remained purely contingent until an actual liability to pay arose. In his view, neither the premium nor any particular asset was diminished independently of that contingent liability. He would have allowed the appeal and held that time began only when NI first became actually liable under the relevant policy.

1. Court of Appeal (Civil Division): By a majority, dismissed Axa’s appeal from the preliminary limitation ruling and made no order on the respondents’ notice: [2009] EWCA Civ 1166.

2. High Court, Commercial Court: Flaux J held that vetting claims accrued when the relevant policies incepted and that conduct claims accrued when the relevant breach caused the insurer’s exposure to increase: [2009] EWHC 635 (Comm).