Royal and Sun Alliance Insurance Limited & Ors v Tughans

Compulsory solicitors’ professional indemnity insurance may cover liability for damages including a fee earned under a retainer, even where the fee was procured by misrepresentation. The indemnity principle concerns actual loss, but an earned fee represents remuneration for services. A solicitor suffers loss if liability requires that fee to be paid away. The position is unchanged merely because the retainer is voidable, unless and until it is rescinded. Wide cover for any civil liability, the public-protection purpose of compulsory insurance and the composite nature of the policy support cover for innocent partners’ liabilities arising from another partner’s fraud. The court left open broader questions concerning restitutionary claims for unearned fees.

The appellants were insurers under a compulsory professional indemnity policy issued to individual partners of a Northern Irish solicitors’ firm. Brown Rudnick LLP claimed damages against the firm arising from alleged fraudulent misrepresentations connected with a transaction. The damages claimed included the fee paid to the firm.

An arbitrator declared that the policy responded to the claims, including the fee element. The High Court dismissed the insurers’ appeal on the point of law and granted permission for a further appeal: [2022] EWHC 2589 (Comm). The central issue was whether liability for damages including an earned fee constituted an insured loss where the fee had allegedly been procured by misrepresentation.

The court unanimously dismissed the appeal. Popplewell LJ delivered the judgment, with Andrews LJ and Falk LJ agreeing.

1. Jurisdiction. The insurers’ argument that the fee was not an entitlement in substance fell within the permission granted for the appeal under the Arbitration Act 1996. A question of law may be refined at the appeal stage if its substance remains the same and it remains within the spirit of the permission. The court applied the approach stated in Sharp v Viterra [2020] EWCA Civ 7.
2. Indemnity principle. The principle that indemnity insurance responds to actual loss, but not more than actual loss, is presumptive and subject to the policy wording. An ascertained liability is generally a loss without prior payment. The policy covered claims for any civil liability and drew no distinction between damages representing fees and other liabilities.
3. Earned fees. A fee earned under a retainer represents remuneration for services provided. If liability requires the fee to be paid away, the solicitor has provided services without remuneration and has suffered a loss. A defeasible contractual right remains a real contractual and beneficial entitlement unless and until the retainer is rescinded. Receipt or retention of the fee therefore does not create a windfall when the solicitor is separately liable for damages including the same amount.
4. Purpose and structure of the policy. The public-protection purpose of compulsory solicitors’ insurance, identified in Swain v The Law Society [1983] AC 598, supported that conclusion. The policy was composite. Under Arab Bank Plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262, the fraud of one assured did not by itself defeat the rights of innocent assureds. The court proceeded on the assumption that the dishonesty exception did not apply to the respondent partners.
5. Restitution and unpaid fees. The court expressed no concluded view on all restitutionary claims concerning unearned fees. It held, however, that the indemnity principle did not exclude cover merely because a claim concerning an earned fee was framed in restitution. Unpaid fees were different: without an ascertained civil liability, the policy did not provide first-party cover for the unpaid fee.

1. Court of Appeal (Civil Division): dismissed the insurers’ appeal on the point of law.
2. High Court of Justice, Commercial Court: Foxton J dismissed the insurers’ appeal under section 69 of the Arbitration Act 1996 and granted permission for a further appeal: [2022] EWHC 2589 (Comm).
3. Arbitration: the arbitrator upheld the coverage case and declared that the insurers were liable to indemnify the assureds in respect of the claims, including the fee element. Separate challenges under sections 67 and 68 of the Arbitration Act 1996 were dealt with by the High Court.