Do solicitors’ professional indemnity policies cover claims for return of fees?
Whilst primarily a challenge to an arbitration award, the recently decided case of Royal & Sun Alliance Insurance Ltd v Tughans  EWHC 2589 (Comm) is of interest to solicitors, and those who arrange insurance for them, because it provides greater clarity on the circumstances in which claims for the recovery of fees would fall to be covered under standard solicitors’ professional indemnity policies.
The facts of the case are unusual and complex. In a nutshell, RSA provided professional indemnity cover for Tughans, a firm of solicitors in Northern Ireland. A US private equity fund agreed to pay its US lawyers a substantial success fee if its purchase of a book of loans completed. The US lawyers, in turn, agreed to pay half of that success fee to Tughans for work undertaken by its managing partner to facilitate the transaction. For Tughans to receive its share of the success fee, engagement letters required Tughans to, amongst other things, provide representations and warranties to the effect that applicable anti-corruption laws would be complied with by Tughans.
The transaction completed and the success fee was paid to Tughans. However, Tughans were exposed to claims from both the US private equity fund and the US lawyers acting for it after Tughans’ managing partner allegedly diverted a significant part of the success fee to an account set up by him in alleged breach of the anti-corruption laws referred to above. Upon Tughans’ discovery of the relevant payment, the relevant monies were returned to Tughans.
Tughans presented a claim under its PI policy in respect of the claims advanced by the US fund and its US lawyers, but RSA refused cover on the basis that any alleged liability was not incurred in connection with Tughans’ business of practicing as solicitors and that, in any event, Tughans would suffer no loss if it was required to return a success fee that had been obtained through fraudulent misrepresentation, because it was never legally entitled to that fee (in other words, the claim would be restitutionary in nature, and not one capable of falling within the scope of an indemnity policy).
Mr Justice Foxton confirmed the ordinary position to be that, where a solicitor had accrued a contractual right to a fee, an award of damages in the amount of that fee would constitute a loss for the purposes of a PI policy. However, absent clear wording in the PI policy, the solicitor having to return a sum of money to which it was never legally entitled was not an indemnifiable loss under a PI policy.
Accordingly, if reimbursement of fees paid to solicitors under a retainer is claimed as damages, that liability would fall to be covered (subject to a PI policy’s other terms), whereas if reimbursement of fees is sought by way of a restitutionary claim (e.g. unjust enrichment) it would not fall to be covered.
Mr Justice Foxton found that Tughans had acquired a contractual right to the success fee by the terms of its engagement and that contract had not been rescinded notwithstanding the breaches alleged against Tughans. The contractual right to be paid the success fee therefore subsisted and the work that had been performed in respect of the transaction was consistent with that for which the fee was to be paid. Tughans therefore had a contractual right to the success fee and would suffer a loss if it was required to pay an amount in damages referrable to that fee.
Interestingly, Mr Justice Foxton rejected RSA’s argument that no indemnifiable loss could arise because Tughans had no legal right to a success fee obtained by an alleged fraudulent misrepresentation. In his view, where the provision of representations and/or warranties was a pre-condition to the payment of a fee, the contractual entitlement to receive that fee was not affected if it turned out that the representations made were not true or the warranties were breached. The contractual requirement was solely that the representations and/or warranties be provided and the paying party simply acquired a right to remedies in respect of the alleged misrepresentations and/or breaches.
This decision likely means that we will see well-advised claimants weighting claims towards the recovery of fees paid as damages with a view to triggering the available PI cover, with any potential restitutionary claims being made secondary to those damages claims (particularly where a solicitor’s ability to meet any such liability themselves is in doubt, such that the claimant’s real goal is procuring an insurance recovery).