Legal profession

Contingent liabilities – Damage – Legal costs insurance – Limitation periods – Professional negligence

AXA Insurance Ltd (formerly Winterthur Swiss Insurance Co) v Akther & Darby Solicitors and ors: CA (Civ Div) (Lady Justice Arden, Lords Justice Longmore, Lloyd): 12 November 2009

The appellant insurer (C) appealed against a decision ([2009] EWHC 635 (Comm), [2009] PNLR 25) that certain claims against the defendant solicitors (D) were statute-barred.

C was the assignee of an insurer (N) which provided after-the-event legal expenses insurance under a scheme run by a claims management company (M). M, as agent of N, entered into agreements with panel solicitors governing the role the solicitors would have in the handling of scheme claims. Part of the role performed by the panel solicitors was the vetting of claims which members of the public wished to pursue. Claims accepted under the scheme had to have prospects of success of at least 51%. In respect of claims accepted, M, acting on behalf of N, would issue a policy of insurance insuring the scheme claimant. N’s participation in the scheme proved financially disastrous. C claimed that D had been negligent in vetting claims and in the conduct of the litigation on the client’s behalf or in failing to notify N when the prospects of success fell below 50%.

The judge decided as a preliminary issue that time started to run for the vetting claims at the inception of the policies, so that claims in respect of policies which incepted more than six years before the issue of proceedings were statute-barred; in the case of conduct breaches, the claims were statute-barred where the relevant failure to notify occurred more than six years before the issue of proceedings or where, as a consequence of a breach of duty in failing to pursue a claim with due care and attention, there had been a material diminution in the prospects of success before that date. C contended that time only began to run in the case of both the vetting breaches and the conduct breaches at the time when the claim could have been made under the policy, and that N’s liability under the after-the-event insurance was no more than an unsecured contingent liability of N until that occurred.

Held: (Lloyd LJ dissenting) Damage for the purpose of the accrual of a cause of action in the tort of negligence would not be constituted by a mere contingent liability, but in the instant case N had acquired an insurance policy which would in due course generate claims which would exceed the premium: it was therefore a flawed transaction case and not a case of a purely contingent liability, Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (interest on damages) [1997] 1 WLR 1627 HL followed and Law Society v Sephton & Co [2006] UKHL 22, [2006] 2 AC 543 distinguished. The loss suffered by the insurers was contingent upon the claim, which was ex hypothesi likely to fail, actually failing.

But that did not make the case one of a mere contingent liability. There was measurable relevant loss additional to the incurring of purely contingent liabilities under the policies of insurance on the inception of the policies, in that any valuation of the policies at that time would have to take into account the assumed fact that there had been no proper vetting. It was correct to treat N as incurring loss and therefore as suffering damage for the purposes of the accrual of its causes of action in tort as soon as it issued the insurance. It was true that the insurers were not immediately financially worse off as a result of entering into the policies because they received the premiums up front and it would be a short time before they were, on balance, worse off, but that would be well before the underlying claim had failed, which was the time argued for by D. Accordingly, the judge was correct to conclude that in the case of the vetting breaches N’s causes of action against D accrued when the policies were issued. Similarly, where the panel solicitor had failed to notify N or had failed to progress the case as it should have done the damage occurred when the conduct breach took place.

Appeal dismissed.

Charles Hollander QC, Tim Lord QC, Colin West (instructed by Reed Smith) for the appellant; Sue Carr QC, Philip Jones QC, Ben Hubble QC, Helen Evans, Ruth Holtham (instructed by Bond Pearce and Reynolds Colman Bradley) for the respondents.