If an insured party is in financial difficulty (but not subject to insolvency proceedings, who benefits from professional indemnity insurance policies and what is its true purpose?
The Court of Appeal decision in Desai v Wood tackled this issue head-on, with the outcome offering stark lessons for professionals and their clients.
This case explored the complexities and implications under a professional indemnity insurance (PII) policy of these issues when the policy is discharged by payment to a financially distressed insured party but before formal insolvency proceedings commenced (and therefore outside the scope of the Insurers (Rights of Third Parties) Act 2010).
Having represented the Liquidators Paul Wood and Neil Vinnicombe of Begbies Traynor Group, since being appointed to a small interior design business, Boscolo Ltd, and throughout the long-running dispute, Mark Cullingford, Thrings’ Head of Restructuring and Insolvency, briefly reflects on the key issues and lessons from the case.
Background:
- Boscolo faced longstanding claims for negligence by the owners of a flat in London. The owners claimed damages of over £750,000 on the grounds that Boscolo's alleged negligence in advising on listed building consent led to extra costs, and the loss of a potential sale. The claims were disputed
- Boscolo held PII insurance with Royal Sun Alliance (RSA). Before liability was determined or agreed and shortly before proceedings were issued, RSA discharged themselves from any possible indemnity liability and liability to pay ‘Defence Costs’ of the insured by paying the limit of liability (£250,000) to Boscolo.
- Upon discovery of this payment, the claimants asserted Boscolo was unable to use the sum paid to it for any purposes except payment to them. The issued proceedings for damages and proprietary claims over the funds, also making claims against RSA.
- Boscolo had by then ceased to trade and entered voluntary liquidation holding what was left of the fund.
Legal and practical issues for the liquidators:
- The liquidators faced complex issues when appointed, including the claims that the remaining funds from the insurer’s payment were held on trust and should be paid to the claimants (Desai and Shah) and not used by the company for any purposes. Those funds were the only known assets of Boscolo.
- The liquidators ultimately sought directions from the Insolvency and Companies Court to use the funds for reasonable costs to investigate the claims and to resolve who was entitled to the fund under section 112 of the Insolvency Act 1986.
Court decisions:
- The court firstly permitted part of the funds to be used for the costs of the application for directions.
- At the final hearing before HHJ Matthews in the High Court in 2024, he ruled that the funds were the sole property of the company and available to the liquidators and that claims that the contract and agreement to maintain PII insurance did not create any direct or proprietary rights in the policy or funds and no implied terms were necessary or would create such rights. Claims for proprietary interests arising from claims of unjust enrichment and unconscionable conduct were also dismissed.
- The Court of Appeal granted permission to appeal based on reformulated claims for an implied terms but ultimately dismissed the appeal that was advanced. Those revised grounds were, briefly, that the so-called ‘Paramount Purpose’ of PII insurance (and express contract terms to maintain such insurance) was to ensure, for the benefit of the injured client, the company’s ability to meet the risk of liability that was insured and an implied term was necessary to fulfil that Paramount Purpose and that term should establish a proprietary right over the insurance so that any sums paid in respect of that policy would, whenever the insured company believed that it could not meet that purpose from its other resources, be thereafter held in trust solely to meet the Paramount Purpose.
- The Court of Appeal confirming that the primary and direct purpose of PII insurance is to benefit the insured, and any benefit to clients is only an indirect benefit and it was not necessary to imply a term to protect such an indirect benefit as claimed and further that any such implied term faced insurmountable difficulties in also establishing a proprietary right over the fund.
Practical matters and commercial importance:
For insolvency practitioners
- The case affirms the utility and powers of the court when seeking an order for directions under s.112 including its power to grant interim relief as to the use of a disputed fund for the costs of the dispute over ownership of that fund and the availability of a summary process to determine such claims rather than a full Part 7 or Part 8 claim.
For a professional business and their clients
- The case highlights the benefits of PII Insurance as a form of working capital that accrue to the insured by providing funds to the insured for unexpected events that could derail a business in how such a policy provides for access to Defence Costs for specialist legal advice as well as an indemnity for proven liability, preventing financial disruption (whether the business is solvent or not).
- It also highlights for them, the importance of understanding insurance policies, limits, and conditions, especially for businesses prone to claims and also the need to manage contract risk.
- It leads to a conclusion that there is a need for a business to consider what are adequate and appropriate insurances to manage financial risks and the role of insurance in enabling a business to survive substantial claims.
- It identifies where the Insurers (Rights of Third Parties) Act 2010 does not provide an answer to issues where an insured party is financially unstable or insolvent and the need for a policy to remain in existence at the formal date of the insolvency of an insured defendant for rights to accrue and transfer to a client/claimant under that Act.
Recommendations for businesses
- Regularly review insurance policies to understand exclusions, excesses, and caps on indemnity and risks. Plan to obtain run off cover also
- Manage by appropriate contract terms, the contractual risks that may not be insured and be transparent with clients about contract terms and insurance limitations.
- Consider special project insurance for high-value or sensitive instructions
- Always seek specialist legal advice if substantial uninsured disputes arise on the policy and its terms or if insolvency becomes a possibility.
Thrings’ Restructuring and Insolvency lawyers are highly experienced in advising insolvency practitioners and also successfully advising business owners facing financial difficulties, helping them to take a strategic and tailored approach to the challenges they face that secures the best future of the business.
Whether you are a company specifically affected, a management team, stakeholder, creditor or insolvency practitioner, the team is well placed to support you at a time when you need it most. To find out more, please get in contact.