The Court of Appeal has ordered that a professional indemnity insurer is liable to reimburse loans made to clients of a collapsed law firm to cover disbursements.

The lender, Impact Funding Solutions, claimed against insurer AIG after the liquidation of solicitors firm Barrington (formerly known as Lawyers at Work Ltd).

Impact provided the loans for disbursements incurred in deafness claims pursued by Barrington and brought proceedings against AIG after obtaining a judgment against the firm.

AIG initially defeated that claim in the High Court, after arguing that its liability to indemnify Barrington was excluded by the terms and conditions of its insurance contract, exempting any personal debt or debts supplied to the law firm itself.

Lord Justice Longmore (pictured) said the question on appeal was whether insurers are obliged to indemnify solicitors who are liable to reimburse loans made to clients to defray the disbursements made by those clients.

Longmore said the purpose of the exemption, found at clause 6.6 of the minimum terms and conditions of solicitors’ PII, was prevent insurers from being liable for the personal liabilities of a solicitor in respect of his practice – as opposed to liabilities arising from the solicitor’s professional obligations to clients. Thus, expenses such as a photocopier or an office lease would not be covered, said the judge.

But Longmore said that obligations arising out of loans made to cover disbursements in intended litigation were ‘essentially part and parcel’ of the obligations assumed by a solicitor in respect of his professional duties to the client.

It followed that any liabilities to Impact were not covered by the 6.6 exemption. The court heard Impact had already obtained a judgment against Barrington in the Mercantile Court in Manchester.

This was after the financer put before the court 146 cases showing how Barrington was in default of its obligations to claimants.

His Honour Judge Waksman concluded the claims had been abandoned because they were not adequately assessed at the outset, and the loans were used for ‘largely, if not entirely, improper purposes’.

Longmore gave judgement for Impact against AIG in the sum of £986,515 and ordered the insurer to pay £175,000 in costs.