AXA Insurance Ltd v Akther & Darby Solicitors & Ors (Rev 1)

For limitation purposes, actual damage in professional negligence is fact-specific. Where the professional’s duty is to ensure that a transaction has particular features, damage may occur when the claimant enters a flawed transaction, even if further loss depends on a future contingency and the claimant would not have entered the transaction with proper advice.

A purely contingent liability, standing alone, is not actual damage until the contingency occurs. However, exposure to a greater risk than the claimant was entitled to expect may itself constitute actual damage. In claims concerning the negligent conduct of litigation, the cause of action accrues when the breach materially diminishes the prospects of success.

The claimant, suing as assignee of National Insurance and Guarantee Corporation, brought proceedings against panel solicitors involved in an after-the-event legal expenses insurance scheme. It alleged that the solicitors negligently accepted claims with insufficient prospects or value, and later failed to conduct accepted claims properly.

The proceedings raised preliminary limitation issues under the Limitation Act 1980. The central questions were when damage occurred in tort, and whether claims relating to policies issued or conduct occurring before 17 June 2002 were time-barred.

1. Vetting breaches. The claimants’ duty was assumed to include taking reasonable care to ensure that only claims with at least a 51% prospect of success and sufficient value were accepted. That was a duty to ensure that the insurance transactions had particular features. When a policy was issued for a claim with less than the required prospects, the insurer entered a flawed transaction and was exposed to a greater risk than it was entitled to expect. Actual damage therefore occurred on inception of the policy.
2. The fact that the insurer might not have paid out until the underlying claim failed did not make the loss purely contingent. The insurer had not received what it ought to have received for the premium. The distinction between a flawed transaction and a transaction creating only a contingent liability was factual and depended on the scope of the duty and the applicable measure of loss.
3. The decisions in Law Society v Sephton and [2006] 2 AC 543 did not require a different conclusion. They established that a purely contingent liability standing alone was not actual damage, but did not prevent damage arising immediately where the claimant acquired a transaction with defective or less valuable characteristics.
4. Conduct breaches. A failure to notify that prospects had fallen below 50% caused damage when it exposed the insurer to a greater risk than intended. Where negligent conduct materially diminished the prospects of success of an accepted claim, the cause of action accrued when that material diminution occurred, rather than only when the claim later failed or indemnity was paid.
5. The alternative argument based on diminution in the value of the insurer’s business, underwriting capacity or capital was rejected. Such matters fell outside the scope of the assumed duty and, standing alone, were arguably purely contingent.
6. Claims concerning policies incepted before 17 June 2002 were time-barred. The same applied to conduct claims where the failure to notify occurred, or where a material diminution in prospects occurred, before that date.