Insurance for fees claims: RSA & Ors v Tughans

Introduction

This Court of Appeal decision, in which our firm represented the successful respondents, considered the scope of a professional indemnity policy written on a full “civil liability” basis.  Will such a policy respond to a claim against a firm (in this case, a firm of Solicitors) for damages referable to its fee, for which the firm had performed the contractually agreed work, but where the fee was only paid by the client following a misrepresentation by the firm?

That was the issue in Royal and Sun Alliance Insurance Limited & Ors v Tughans (a firm) [2023] EWCA Civ 999 (31 August 2023), although it is important to stress that the Court of Appeal hearing, like the Commercial Court before it, proceeded on the assumption that there had in fact been a misrepresentation.  Whether that was or was not the case remains to be determined in the underlying proceedings against the Solicitors.

The underling facts of the case were complex, but the appellant Insurers’ argument was summarised by the Court of Appeal as follows:

“Because the fee was procured by misrepresentation, Tughans had no right to retain it; and if it was obliged to return it, as part of a damages claim, it had not lost something to which as a matter of substance it was entitled, just as much as if the contract were avoided and it was obliged to return it or its value in a restitutionary claim…  Tughans had not suffered a loss in the amount of the fee, and cover for that element of a damages claim would violate the indemnity principle.”

That argument failed at first instance before Foxton J, and failed again in the Court of Appeal.

The indemnity principle

At the heart of Insurers’ argument was reliance on the indemnity principle, the principle that a policy of indemnity insurance (as distinct from contingency insurance) will only indemnify an insured’s actual loss, and no more than that.  The Court of Appeal held that Insurers’ reliance on the indemnity principle here was misplaced, for a number of reasons.

First, a professional who has done the contractually agreed work, and has earned the contractually agreed fee, does suffer a loss if he is ordered to return the fee because the retainer had been procured by a misrepresentation.

Secondly, the Insurers’ argument was inconsistent with the public interest in there being compulsory PI cover for certain professionals, so that, if a firm and its partners were not good for the money, a client would be unprotected where its damages claim included the fee which it had paid.

Thirdly, the implication of the Insurers’ argument would leave uninsured those partners, and potentially also those employees, who had no involvement with the misrepresentation and/or who had not benefited in any way from the fee.

Restitutionary claims

In RSA v Tughans, the underlying claim was one for damages, albeit damages calculated by reference to the fee which the client had paid.  The Insurers argued that, since a claim framed in restitution would certainly not (they said) be covered, the same must be true of an analogous damages claim.

The Court of Appeal was unpersuaded.  First, a damages claim is different from a restitutionary one.  In any case, the Court of Appeal held that not only would a professional indemnity policy cover a restitutionary claim in respect of a fee which had been earned, it might in some circumstances also cover a fee which had not been earned.  Thus, said Popplewell LJ, if a professional “… receives money on account of fees, and an employee steals them from the client account, or negligently transfers them to a third party, before the work is done to earn the fee, a claim by the client for the money, advanced as a restitutionary claim, would seem to me to give rise to a liability which constitutes a loss; and would, moreover, appear to fall squarely within the intended scope of PII cover, and be a necessary part of cover if the PII policy is to fulfil the public protection function of a compulsory insurance scheme”.

Conclusion

This is a very welcome decision for professional firms facing claims which extend to the fees which they have received and where previously PI insurers would have inevitably asserted that their policy would not cover such a claim.

Jonathan Corman is a partner at Fenchurch Law