Paul David Wood & Anor v Dilip Desai & Anor

Professional indemnity insurance proceeds paid to an insured company belong beneficially to the company unless the policy, the underlying contract, an express trust or the circumstances establish a proprietary interest for the client. An obligation to obtain insurance does not, without more, earmark the policy or its proceeds for a particular client. A payment made by an insurer to buy out possible future liability before the insured’s liability is established is not necessarily the traceable product of an indemnity obligation.

A claim in unjust enrichment requires careful legal analysis. The familiar four questions are signposts, not themselves legal tests. Insolvency does not justify converting a personal claim into a proprietary claim merely to obtain priority over general creditors.

The joint liquidators of Boscolo Ltd applied under section 112 of the Insolvency Act 1986 for directions concerning approximately £246,000 remaining from a £250,000 payment made by Royal & Sun Alliance Ltd to the company. The payment was made under a professional indemnity policy after the respondents alleged professional negligence, but before their liability claim had been established.

The respondents claimed that their contract with the company required insurance proceeds to be held for them, or that a constructive trust or proprietary unjust-enrichment remedy arose. The central issues were whether they had any proprietary interest in the payment and what directions, if any, should be given to the liquidators.

1. Application determined in the liquidators’ favour. The insurance payment belonged beneficially to the company. It was therefore subject to the ordinary insolvency framework, and no further directions to the liquidators were required.
2. A professional indemnity policy may in principle be held for a client’s benefit as an agency, express trust or constructive trust arrangement. However, the contract here did not require insurance, or its proceeds, to be held for the respondents. The policy was a general claims-made policy, already in existence before the contract, and the contractual insurance obligation was not expressed to benefit particular clients. The term sought by the respondents was neither so obvious as to go without saying nor necessary to give the contract business efficacy.
3. The payment was made under the insurer’s contractual right to discharge possible future indemnity and costs liabilities before the company’s liability to the respondents had been established. It was not necessarily the traceable exchange product of an accrued indemnity right. The reasoning in Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105 and Hood’s Trustees [1928] Ch 793 supported the conclusion that, absent a specific agreement or trust, insurance money paid to the insured formed part of the insured’s estate. The statutory intervention made by the Third Party (Rights Against Insurers) Act 1930, now replaced prospectively by the Third Party (Rights Against Insurers) Act 2010, did not apply.
4. The constructive-trust claim failed. The payment was not made by mistake, fraud, theft or breach of trust, and the money had not come into the wrong hands. The respondents’ unjust-enrichment claim also failed: the company was not shown to have been enriched, any enrichment was not at the respondents’ expense, and the consequences of the insurer’s commercial contract were not unjust.
5. Even if an unjust-enrichment claim had existed, the remedy would have been personal, not proprietary. Property and trust principles should not be displaced merely to secure insolvency priority. The court noted that, if a trust had been found, liquidators’ legal costs could have been paid from the trust fund, but that issue did not arise.