Indemnity insurers must cover the cost of disbursement loans taken out by clients if law firms default, the Court of Appeal has ruled.
Overturning a High Court ruling, Lord Justice Longmore said: “Disbursements should not be incurred in litigation which is unlikely to succeed.
“A solicitor, who negligently advises his client that a claim is likely to succeed and causes a client to incur disbursements which should not have been incurred, will be liable to the client for disbursements needlessly incurred.
“It should make no difference, from the point of view of a professional indemnity insurer, that the disbursement has been incurred before such advice is given or without such advice having been given at all.”
The court heard in Impact Funding Solutions v Barrington Support Services  EWCA Civ 31 that Impact funded disbursements for industrial deafness claims.
Longmore LJ said that if claimants lost cases and their disbursements might be covered by legal expenses or after-the-event insurance, but if those insurers avoided liability, Impact would seek to recover their loans from the solicitors.
He said the solicitors in the case were Barrington Support Services, now in liquidation but successfully sued by Impact for over £580,000. Impact then brought proceedings against Barrington’s indemnity insurers, AIG Europe, under the Third Parties (Rights Against Insurers) Act 1930.
Longmore LJ said AIG accepted that Barrington’s liability to pay the loans fell “in principle” within the cover provided under the minimum terms and conditions.
However, AIG argued, and the High Court agreed, that it could rely on an “exclusions” clause on the grounds that Barrington had breached its contract with Impact by not paying it back.
Longmore LJ said Barrington made “little attempt to assess the merits of the claims which it proposed to conduct on behalf of its clients”, breaching not only its duty to its clients but its disbursement funding agreement with Impact.
However, the judge said that to assess the rival arguments, a judge had to “stand back from the detail” and ask what the “essential purpose” of the exclusion clause was.
In this case, he said the “essential purpose” of the clause was to prevent insurers being responsible for liabilities which affected solicitors personally, such as office photocopiers, leases or mortgages.
He concluded that obligations arising out of loans made to cover disbursements in the case of intended litigation were “essentially part and parcel” of the obligations of a solicitor in respect of professional duties to the client.
Lord Justice Longmore allowed Impact’s appeal. Lord Justice Patten and Lady Justice Gloster agreed.