Refunds of Fees and Solicitors’ PI Insurance

Summary

The Court of Appeal judgment in RSA and Others v Tughans (a firm) deals with the extent to which a professional indemnity insurance policy, subject to mandatory solicitors' professional indemnity terms in Northern Ireland, provides cover for claims relating to a return of fees paid to an insured law firm. In this case, the fee was a "success fee" of £7.5m payable on completion of a large transaction.

In short, the Court concluded that this was covered under the applicable PI insurance.

Background

The insureds (the partners of Tughans) brought a declaratory action against insurers for confirmation of cover under their PI insurance policy relating to an underlying set of claims that have not yet been adjudicated. As such, the coverage dispute proceeded on the basis of assumed facts, some of which have not been established. The following factual summary is taken from those assumed facts. Civil and criminal proceedings are pending in Northern Ireland.

The underlying matter concerns the purchase by a commercial entity of a book of loans (the "NI Loan Book") from a government entity in the Republic of Ireland which had been assisted by the Northern Ireland Advisory Committee (NIAC).

Potential purchasers of the NI Loan Book instructed Brown Rudnick LLP (BR), which in turn retained Tughans as local legal counsel in Northern Ireland to advise. A Mr Coulter, the partner at Tughans with conduct of the matter, had a close relationship with a former member of the NIAC, Mr Frank Cushnahan. Criminal charges have been brought against both Mr Coulter and Mr Cushnahan.

BR's retainer on the transaction included the right to a fee of £15 million upon successful completion of the purchase transaction. It also contained representations and warranties that BR would not promise or make any payments directly or indirectly to anyone in breach of applicable anti-corruption laws. In turn, BR agreed with Mr Coulter that 50% of its transaction fees would be shared with Tughans. Tughans reiterated the representations and warranties made to the ultimate client by BR in its own retainer letter with BR.

It appears that Mr Coulter did not inform his fellow partners of the transaction nor the true amount of the success fee, and they were not involved in the matter. The majority of the success fee was initially paid into an account in the name of one of his own companies (via a Tughan's account). However, he subsequently came clean to his partners, and of the £7.5m success fee, £4m remains in the firm's accounts (after settlement of VAT and income tax).

The PI insurance policy in question provides indemnity in respect of claims or alleged claims "in respect of any civil liability (including liability for claimant's costs and expenses) incurred in connection with the Practice...provided that no indemnity will be given (a) to any individual committing or condoning any dishonest fraudulent criminal or malicious act..."

The insureds succeeded in arbitration against insurers and on appeal to the High Court. Insurers appealed to the Court of Appeal.

The Decision

The Court concluded that if the firm was obliged to return the fee to BR by virtue of the underlying liability claims, that refund could be recovered under the PI insurance policy. This was because the recovery would arise from a claim made against the Insured in respect of a civil liability. It fell within the PI insurance policy's wide insuring clause, and the Tughans partners (the firm itself is not an insured) will have suffered a loss since their firm had performed the service to which the fee relates.

Insurers' argued that if BR establishes liability against Tughans, it will follow that Tughans never became entitled to the fee, and so can suffer no loss in having to return it. This was rejected. Notably, claims were made against Tughans in tort for negligent or fraudulent misrepresentation, and for contractual and tortious breach of duty, but there was ultimately no claim for rescission of the retainer, nor in restitution.

Comment

The following factors were considered highly relevant by the Court in reaching its decision.

• As no attempt was made to rescind the retainer, it was not being said that the fees should never have been paid. Work had been done and the fees had, to that extent, been "earned". Further, the claim was not framed as a restitutionary one, but in any event insurers' premise that the indemnity principle prevents restitutionary claims from being covered in principle was considered incorrect.

• The insuring clause in solicitors' PI insurance mandatory wordings (both in Northern Ireland and in England and Wales) is very broad. The Court does not want to narrow cover without a clear basis for doing so.

• PI insurance policies are composite insurance policies made up of a bundle of contracts insuring various individual insureds. In this case, the "firm" is an old fashioned partnership, rather than an LLP, with no separate legal personality. Mr Coulter's partners were innocent of any fraudulent or deliberate wrongdoing but were potentially liable to the client.

• The broad public policy aim of minimum standards in PI policies for certain professions is to provide customer protection rather than just indemnity protection for the professional firms and the individuals themselves. Mandatory minimum terms maximise the chance of clients being able to recover where there are breaches of duty, given the risk that a professional firm may not itself have assets to meet these liabilities. If the broad (mandatory) cover offered by a PI insurance policy did not respond in this type of case there is the risk of the client not being able to recover the full amount of the fee, especially in the event of the insolvency of the liable firm.

This decision may seem surprising when considered in the context of traditional claims cover under PI insurance policy, particularly insofar as this relates to a return of money received and retained by the firm rather than a liability to pay damages beyond the monies to be refunded.

Non-payment of a fee due but unpaid to the firm would not be covered under a PI insurance policy. However, on this basis, a fee that was in fact paid and then has to be returned by the firm pursuant to a legal liability is (at least in some circumstances) covered. This is even though the net effect is largely the same, subject perhaps to any onwards liabilities of the firm caused by receipt of the cash. This point was forcefully made by insurers, but rejected by the Court.

The archetypal claim under a PI insurance policy is one made in relation to claims against an insured professional for damages arising out of a breach of duty, the purpose of which is to put the claimant back in the position in which it would have been had the duty not been breached. Here, in contrast, the claim relates to pre-contractual or contractual misrepresentation. The primary remedy for pre-contractual misrepresentation is rescission of the contract. A secondary remedy is damages in lieu of rescission, or affirmation of the contract alongside a clam for breach of contract if the representation is set out in the contract. The latter claim falls more neatly into a PI insurance policy than the first two.

In any event, this decision , as with other recent decisions, makes it very clear that the courts remain of the view that the breadth of the policy wording is the starting point to determine cover, rather than more abstract legal theories about how policies should operate. The Court assumed a successful claim for damages in the amount of the fee paid to Tughans. That is the scenario that triggers cover. It remains to be seen whether the findings in the underlying matter will in fact match the assumed facts adopted for the purposes of the declaratory action.

The issues are ripe for debate before the Supreme Court. In the meantime, though, insurers may want to review the scope of cover and exclusion clauses in their PI insurance policies, and assess whether claims of this nature can be excluded. This might be through existing or amended trading debt or fee related exclusions, exclusions of contractually assumed liabilities or of restitutionary claims (although the claim in this case was not framed as a restitutionary one).  Of course, where parties are bound by minimum terms, there is only limited scope to vary the scope and terms of cover. It should be noted that the minimum terms in the RSA v Tughans case are those in Northern Ireland not those relevant to firms practicing in England and Wales. Nonetheless, insurers will no doubt want to monitor any future attempts to frame claims for repayment of fees paid as insured under PI insurance policies.