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Court of Appeal clarifies scope of indemnity principle

06 September 2023
Issue: 8039 / Categories: Legal News , Profession , Insurance / reinsurance , Legal services
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Professional indemnity insurance (PII) covers the loss of a fee paid to solicitors following a misrepresentation, the Court of Appeal has held.

The case, Royal & Sun Alliance Insurance Ltd and others v Tughans [2023] EWCA Civ 999, concerned the extent to which PII for solicitors provides cover for liabilities which include the firm's fees. The facts of the case are complex.

The insurer relied on the indemnity principle, contending that it was only required to pay for actual loss. It argued that, as Tughans had no right to keep a fee procured by misrepresentation, there was no loss and therefore no need for it to pay out.

Dismissing the insurers’ appeal, however, Lord Justice Popplewell said: ‘If a solicitor has done what is necessary as a matter of contract to accrue a right to a fee, an award of damages in the amount of the fee payable will ordinarily constitute a loss for the purposes of a professional indemnity policy… the fee in this case was one which Tughans had contractually earned, and, when paid, was a sum which belonged in law and equity to Tughans’.

He said the indemnity principle argument failed for four reasons: the fee had been earned; the argument ran contrary to the public interest purpose of compulsory PII cover; the argument was inconsistent with the function of PII cover, to protect partners and employees and clients from the effects of fraud and negligence; and it ignored the ‘composite nature of the policy and the fact that the claims are made under it by individual assureds’.

Jonathan Corman, partner at Fenchurch Law, which represented Tughans, said: ‘This is a very welcome decision for professional firms facing claims which extend to the fees which they have received and where hitherto [professional indemnity] insurers would have asserted that the policy would not cover such a claim.’

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