In the recent professional negligence case of Steel & Another v NRAM Limited (formerly NRAM plc) the Supreme Court had to determine whether a solicitor instructed exclusively by a borrower, owed an actionable duty of care not to cause loss to its lender.

Background

In 1997 Headway Caledonian Ltd (Headway) purchased Cadzow Business Park, in Hamilton, Scotland (the Park). The Park comprised four units, registered under two separate titles. To fund the purchase, Headway obtained a loan from Northern Rock, in return for granting an ‘all sums’ standard security over each unit.

In 2005 Headway agreed to sell Unit 3 of the Park. It did so having first obtained the consent of Northern Rock, which itself was conditional upon Headway remitting £470,000 from the proceeds of sale in partial redemption of its loan.

In 2006 Headway entered into heads of terms for the sale of Unit 1 of the Park. As before, it approached Northern Rock, who again consented to the sale. However, this too was conditional, upon (i) Headway remitting £495,000 in partial redemption of its loan; and (ii) the balance of the loan remaining secured on Units 2 and 4.

On the eve of the proposed sale of Unit 1 Headway’s solicitor, Ms Steel, sent an email to Northern Rock. In her email, and mistakenly, she advised that Headway’s entire loan was to be paid off and that she had a settlement figure for that.

The next day, and relying on Ms Steel’s email, Northern Rock provided the documents required to discharge its security over not only Unit 1, but also Units 2 and 4. The sale of Unit 1 then followed and the sum of £495,000 was remitted to Northern Rock in partial redemption of the loan.

Subsequently, in 2007, Headway sold Units 2 and 4. While it seems that Northern Rock was made aware of the sales of these units, no questions appear to have been raised by it regarding its security over them.

In 2010 Headway went into liquidation and stopped making the interest payments required on its loan. This, it seems, prompted the discovery by Northern Rock that the security it had previously been granted over Units 2 and 4 had been lost.

Allegations

Northern Rock alleged that although Ms Steel had not been retained by it in connection with the sale of Unit 1, she had nevertheless assumed a duty of care to it in respect of the financial losses that it incurred as a consequence of losing its security over Units 2 and 4.

Decisions of the courts below

In 2014, Lord Doherty sitting in the Outer House of the Court of Session (Scotland) dismissed Northern Rock’s claim. However, his decision was subsequently overturned on appeal by Northern Rock to the Inner House, where Northern Rock was awarded £370,000 by way of damages.

In turn, it was Ms Steel who further appealed to the Supreme Court.

Decision of the Supreme Court

The leading judgment was given by Lord Wilson, with whom the other Lord Justices agreed.

Having considered a number of case authorities as to the appropriate test by which to determine liability in claims for the recovery of economic loss by third parties, the court considered that the circumstances of this case fell squarely within the concept of assumption of responsibility.

In considering the constituent elements of that test and assessing whether they have been satisfied, the court specifically observed that:

• While the parties were not engaged in hostile litigation, it was impossible to subscribe to the suggestion that this was not an arm’s length transaction; and
• The reasonableness of the reliance on the statements of Ms Steel by Northern Rock was central to the concept of an assumption of responsibility.

After doing so, the court concluded that a commercial lender about to implement an agreement with its borrower, referable to its security, does not act reasonably if it proceeds upon no more than a description of its terms put forward by or on behalf of the borrower.

Accordingly, it held that there had been no assumption of responsibility by Ms Steel to Northern Rock and, in turn, that no duty of care arose. The appeal would therefore be allowed and the original decision of the Outer House restored.

Comments

From a claimant perspective, this decision is a reminder that the courts will be cautious about allowing one party to rely on the solicitor of another to shield them from, or not to directly cause them, financial loss. However, this decision should not be regarded as the last word on this issue and there are numerous instances where the senior courts have concluded that a duty of care was owed by a professional not only to a client but also to a third party. Some of these are addressed in our article Third party claims for professional negligence.

In assessing whether a duty of care does arise, careful consideration will need to be given to the facts of each individual case. Here, for example, it is noteworthy that the claimant was an institutional lender, who had itself devised the terms upon which it had funded the borrower and who could have checked those terms, in an instant and without difficulty, as they were already in its possession. Had the claimant been a less sophisticated or vulnerable individual, without ready access to the material terms of the transaction, the decision of the court may well have been different. Similarly, if the parties had been operating on the same side of the transaction, rather than opposing sides, the outcome may also have been different.

From a legal perspective, the decision serves as a clear endorsement of the test of assumption of responsibility, famously enunciated by Lord Devlin in Hedley Byrne v Heller & Partners. That the present decision was unanimous and from the highest court in the land, makes it all the more significant. However, it is doubtful that this decision will entirely displace either the three-fold test enunciated in Caparo Industries v Dickman or the incremental approach advocated by Brennan J in Sutherland Shire Council v Heyman.

As Lord Mance previously observed in Commissioners of Customs and Excise v Barclays Bank Plc:

‘…it has been said on a number of occasions that it is artificial or unhelpful to insist on fitting all claims for breach of a duty of care to avoid economic loss within the conception of assumption of responsibility, and there are several cases involving economic loss where the three-fold test and incrementalism have been preferred.’

Moreover, other judicial pronouncements suggest that the different tests may be used inter-changeably, as well as concurrently. Most notably, in BCCI v Price Waterhouse (No.2), Sir Brian Neill (with whom Nourse and Brooke LJ agreed) stated that:

‘…it may be useful to look at any new set of facts by using each of the three approaches in turn’ and that ‘…if the facts are properly analysed and the policy considerations are correctly evaluated the several approaches will yield the same result.’

It seems more likely, therefore, that despite this decision, the courts will continue to employ different tests for determining whether a duty of care in respect of economic loss is owed to a third party and that, in selecting the appropriate test, much will depend on the circumstances of the case, as well as the individual preferences of the judiciary.

Further legal assistance

As professional negligence solicitors we act for clients nationwide, to resolve claims against a wide range of professionals, including claims against other solicitors.

If you would like to arrange an initial consultation with us, free of charge or commitment, please do not hesitate to contact us on 0800 195 4983 or by email at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

The legal services market is more competitive now than it has ever been: not only are there more practising solicitors than ever before, but there are also more non-solicitors providing legal services than ever before. For the consumer, this may be regarded as a positive development, delivering greater choice and, comparatively, lower fees. However, for practitioners it has increased the pressure to deliver legal results more swiftly and more cheaply than ever before.

While the need to achieve efficiencies in time and cost may well be championed by those who regard it as a sign that the legal profession has become much more modernised and client orientated in its approach, which it has, it can have adverse implications in the context of risk management.

In recent years there have been a string of negligence claims against solicitors, where clients have complained not of the solicitor’s failure to comply with his or her express instructions, or indeed of the pro-active steps taken by the solicitor in that regard, but of the solicitor’s failure to consider and advise upon incidental issues, for which he or she was not specifically instructed.

Leading authority

One of the leading cases in this area is Credit Lyonnais SA v Russell Jones & Walker (A firm).

Here, the claimant bank wished to exercise a break option contained within a 25-year lease of retail premises in Kent. Pursuant to clause 12, the lease could be terminated by the claimant on the third anniversary of the term (“the Termination Date”) by giving the lessor not less than six months previous written notice and upon payment by the claimant of the sum of £11,500, such payment to be made not later than the Termination Date.

The claimant initially instructed the defendant to seek an extension of the Termination Date for a period of 12 months. However, it later wrote to the defendant advising that it wished to exercise the break option pursuant to clause 12 and instructing it to serve the required written notice.

Meanwhile, the claimant prepared to make the termination payment of £11,500 and requested an invoice from the lessor. However, this was not forthcoming and, in the event, the Termination Date passed without any payment having been made. The lessor then refused to accept late payment.

As a consequence of remaining saddled with the lease, the claimant alleged that the defendant should have realised the risk posed to it by clause 12 and should have warned it of the time critical nature of the termination payment. Had the defendant done so, payment would have been made in time.

In determining that the defendant should have apprehended the risk posed by clause 12 and advised the claimant on it, Laddie J observed that:

‘If a dentist is asked to treat a patient’s tooth and, on looking into the latter’s mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him.’

Recent authorities

Since the decision in Credit Lyonnais there has been a steady stream of cases in which the courts have had to consider whether a failure to advise on an issue related to an express retainer can properly be regarded as negligence. While it is not possible to review all of these cases, two may be worthy of note.

Luffeorm Ltd v Kitsons LLP

In Luffeorm the claimant was the intended purchaser of a public house, the Highwayman’s Haunt, in Devon. It instructed the defendant firm of solicitors to act on its behalf in connection with the purchase of the ‘leasehold business’, for which it had agreed to pay the sum of £130,000. Unfortunately, and although the transaction completed without incident for the claimant, the premises produced a poor return and had to be sold a little over a year later for £69,950. Allegedly, this was as a result of one of the vendors taking over another public house in the next village.

The claimant asserted the defendant had been negligent in failing to advise it of the risks associated with the absence of any covenant from the vendors not to compete with it.

In determining the claim, Recorder Acton Davis QC observed that while as a matter of general principle a solicitor’s duty is strictly circumscribed by his instructions, it must not be taken too far. Here, he found that the solicitor should have noticed the absence of any covenant and drawn it to the attention of the claimant.

AW Group Ltd v Taylor Walton (A firm)

In AW Group the claimant was the intended purchaser of an industrial estate located south west of Luton, for £2.8m. It instructed the defendant firm of solicitors to act on its behalf in relation to the purchase, which eventually completed on 2 November 2005. However, less than a year later, planning concerns were raised by the local council over the construction and use of an area of hard standing for HGVs, which eventually led to an enforcement notice being issued against the claimant.

The claimant alleged the defendant had been negligent in a number of respects, including by failing to advise it of the absence of planning permission or to seek detailed planning advice.

In a lengthy judgment, HHJ Hodge QC similarly considered that the defendant should, from information in its possession, have been well aware of the claimant’s intended use of the site. He also considered that while the defendant had not been so instructed, it was within the scope of its duty to have advised the claimant on incidental planning permission issues.

Further considerations

In the cut and thrust of the working day, where litigation and transactional timetables can be tight and where practitioners are often required to keep multiple plates spinning, it can be all too easy to become hard-focussed on completing the task at hand. Hopefully, however, the above cases exemplify the danger for solicitors in not taking time to step back and consider incidental issues.

Prevention is usually better than cure and if practitioners wish to avert the prospect of a professional negligence claim in the future, it may be worthwhile taking the time now to review existing files and to consider whether:

• The work undertaken or to be undertaken will achieve the client’s commercial objectives;
• There could be any disadvantages inherent within the client’s instructions, of which it may be unaware;
• There are any legal remedies available to the client, to circumvent any potential pitfalls;
• The client would be wise to obtain advice from another professional discipline in relation to any ancillary issues, such as valuation, planning or taxation; and
• Any original retainer has changed and with it, the scope of duty owed to the client.

Such an exercise could turn out to be time well spent, serving to preserve an important client relationship which might otherwise have become a tale of the unexpected.

This article was written for and first published in the Leeds & Yorkshire Lawyer, the official journal of Leeds Law Society. It is reproduced here with the kind permission of Barker Brooks Communications Ltd.

In this introductory guide for claimants we explain what professional indemnity insurance is, what benefits it provides to companies and individuals wishing to pursue a claim for professional negligence and how it operates in practice.

What is professional indemnity insurance?

Professional indemnity insurance is an insurance product purchased by professionals to protect them from any financial liability they incur to another party, as a result of any error or omission they make during the course of professional practice.

Professional indemnity insurance is also polyonymous and commonly referred to as PII, PI insurance, professional liability insurance and E&O (short for ‘errors and omissions’) insurance.

PI insurance is widely available, both in the UK and abroad. While it was originally the preserve of traditional professionals (such as solicitors, barristers, accountants and surveyors), it is now considered suitable for almost any firm or practice acting in an advisory or service capacity. As a result, many emerging professionals (such as IT consultants, translators, business consultants and examiners, to name but a few) also obtain this type of cover, as do many local authorities and universities.

How does professional indemnity insurance benefit claimants?

PI insurance is often arranged by professionals for the primary purpose of protecting their own firm or practice, complying with their regulatory obligations, or both. However, there are also a number of benefits for clients, as well as third party claimants, who have suffered a financial loss as a result of professional negligence and who wish to pursue a claim for compensation.

The benefits of PI insurance for these claimants are that it can:

• Reduce the commercial risks ordinarily faced by a claimant of not being able to recover any award of compensation and/or costs secured against a defendant
• Enable disputes to be resolved more efficiently, by removing the need to embark on time consuming and, potentially, costly enforcement proceedings
• Allow consumers to have added trust and confidence in their professional advisers
• Improve the prospects of obtaining third party funding in relation to any claim for compensation
• Make it easier to resolve claims for compensation by taking the claim out of the hands of the policyholder and placing in those of an insurer who, being more dispassionate and objective, may be more accepting of it

Both individually and collectively, these benefits can be of real value. Therefore, before instructing any professional service provider, it is often sensible to enquire as to the existence and level of professional indemnity insurance they have.

What liabilities are covered by professional indemnity insurance?

The liabilities covered can vary enormously from one PII policy to another. For some professions, such as solicitors and chartered surveyors, the PII policies will have to comply with certain minimum requirements (known as ‘minimum terms’) stipulated by the profession’s regulator. In turn, such policies tend to be more consistent in the cover they provide.

Generally, however, PI policies are intended to cover, amongst other things, a firm’s or practice’s liability for any compensation and/or costs that are payable to a claimant and which arise as a result of a civil wrong (such as negligence, breach of contract, breach of fiduciary duty, breach of trust or breach of statutory duty) committed in the ordinary course of business. In many cases, these policies also cover any financial awards made in favour of a claimant by an industry Ombudsman.

How does PI Insurance work?

In most first-party policies, such as buildings and contents insurance, it is the insurance policy in place at the time of the insured event (such as a fire, flood or theft) that responds to the claim. However, PI insurance policies operate differently and on a ‘claims made’ basis. This means that the relevant policy is the one in place at the time that a claim is first made against the professional, rather than the policy in place at the time when the error or mistake which gives rise to the claim occurs.

This has a number of important implications for claimants. Firstly, the policy in place at the time that any work is done, may be written on more generous terms than the policy which ultimately responds to any subsequent claim. Secondly, and if there is a delay in discovering grounds for a claim and/or in pursuing a claim, there may be no policy in place to meet it. For these reasons, it is often advisable for claimants to act swiftly when a financial loss or exposure become apparent.

Where a professional negligence claim is made, it will usually be directed to the firm or practice at fault, rather than to its PI insurer. If the claim is successful, the PI insurer will then indemnify the firm in relation to any compensation payment required.

How do I find out if any PII cover is in place?

There are a number of ways to find out if a firm or practice has PII cover in place. Which method is most appropriate can depend on the type of professional concerned and their financial status.

Under regulation 8(1)(n) of the Provision of Services Regulations 2009 (implementing European Directive 2006/123/EC on services in the internal market) and subject to regulation 2(2), any service provider who is subject to a requirement to hold PI insurance must provide the contact details for any (compulsory layer) insurer and the territorial coverage of the insurance. This information must be made available to a customer in one of four ways (see regulation 8(2) of the 2009 Regulations). These include making it available electronically (such as on a website) or displaying it at the place where the service is provided.

Therefore, a simple way to find out whether any PII cover is in place can be to look on the firm’s or practice’s website, where the name of a PI Insurer is sometimes displayed, or by asking the firm itself. However, it should be noted that these regulations do not require a firm or practice to provide any other details of its PI insurance, such as the amount of cover it has or the level of its policy excess.

If the professional concerned is a solicitor then, pursuant to Rule 18 of the SRA Indemnity Insurance Rules 2013, the firm or practice is obliged to provide to a claimant upon request the name of their (compulsory layer) insurer, the policy number and the address and contact details of the insurer. However, to trigger this obligation a claim falling within the scope of any policy, rather than a simple complaint, must be asserted.

Where the firm or practice has suffered an insolvent event then, pursuant to the Third Party (Rights Against Insurers) Act 2010, a person who has a reasonable belief that a liability has been incurred to them by that firm or practice has the right to request details of any PI insurance held by it. The request must be made in writing and may be addressed either to the firm or practice concerned or to any other party (such as an insurer or insurance broker) who may be able to provide the requisite policy information. The information that may be requested is set out in Schedule 1 of the 2010 Act and as follows:

• whether there is a contract of insurance that covers the supposed liability or might reasonably be regarded as covering it;
• if there is such a contract:
  • who the insurer is;
  • what the terms of the contract are;
  • whether the insured has been informed that the insurer has claimed not to be liable under the contract in respect of the supposed liability;
  • whether there are or have been any proceedings between the insurer and the insured in respect of the supposed liability and, if so, relevant details of those proceedings;
  • in a case where the contract sets a limit on the fund available to meet claims in respect of the supposed liability and other liabilities, how much of it (if any) has been paid out in respect of other liabilities; and
  • whether there is a fixed charge to which any sums paid out under the contract in respect of the supposed liability would be subject.

What level of cover will the professional indemnity insurance provide?

The amount of cover (known as the ‘limit of indemnity’) varies enormously between professions and from practice to practice. Some professions, such as chartered accountants, solicitors and chartered surveyors, are required to maintain specific levels of cover as a minimum. For solicitors, the compulsory level of cover required for any one claim is £3 million for a limited liability partnership and £2 million for an unlimited partnership or sole practitioner.

However, this is only a minimum level of cover and many firms and practices, particularly the larger ones, purchase additional cover, known as ‘excess layer’ or ‘top up’ insurance. As the terms of this additional insurance are not governed by the minimum terms set by some regulators, such cover is often less expensive and, therefore, potentially more attractive. However, it can also be more easily avoided.

Will there be an excess or deductible payable under the policy?

A policy excess or deductible is typically the first amount payable towards any insurance claim by the policyholder. In the case of an excess, the amount payable by the policyholder is in addition to the maximum amount insured under the policy (also known as the ‘limit of indemnity’ or ‘sum insured’). In the case of a deductible, the amount payable by the policyholder is deducted from the maximum amount insured under the policy.

Most professional indemnity policies carry a policy excess or deductible. Depending on the size of the firm or practice concerned, these can range from a few hundred pounds to hundreds of thousands.

In some cases, the excess or deductible is also insured, either in full or in part. This is done through a separate policy often termed ‘in-fill’ insurance. In other cases, the excess or deductible per claim may be subject to an overall limit (or ‘aggregate’) in any policy year.

Under the terms of PI insurance required for solicitors, and in the event that the excess is not paid by the policyholder within 30 days of it becoming due, a claimant may give notice to the insurer of the policyholder’s default, whereupon the insurer itself will become liable to pay the policy excess on the policyholder’s behalf. In turn, this significantly reduces the potential for any shortfall in the recovery of compensation or costs awarded against solicitors.

Will the professional indemnity insurance cover some or all of my claim?

The fact that a professional carries PI insurance does not guarantee that it will cover your claim. However, at a general level, it may be noted that:

• The policyholder will usually have a vested interest in securing cover for any claim
• The policyholder’s insurance broker (if any) is likely to have an interest in securing cover for any claim
• The minimum terms of insurance cover required by traditional professions (such as chartered accountants, solicitors and chartered surveyors) make it much more difficult for the insurers of those professions to decline cover for a claim
• Changes to insurance law introduced by the Insurance Act 2015 make it more difficult for insurers to avoid claims

What if there is no policy or it does not cover my claim?

Whether or not any professional indemnity policy is available to cover a claim has no bearing on its legal merits, but it is relevant to its commercial merits and, specifically, the physical recovery of compensation.

Depending on the size of the claim and the financial status of the professional firm or practice concerned, the absence of cover may have little practical consequence. However, where the value of the claim is significant and the nature and value of any assets held by the policyholder are unknown, there is likely to be greater uncertainty and additional commercial risk.

In the absence of PII cover, and depending on the structure of the firm or practice in question, any successful claim might then be enforced against one or a number of partners personally, or against an incorporated entity. In appropriate circumstances, it may also be possible to pursue a claim against and enforce an award against a negligent employee. This is explained more in our article: Personal liability of employees: An emerging issue

What if the firm or practice is no longer trading?

Because some claims are not discovered until many years after the event, it is not uncommon to discover that the negligent firm or practice has ceased to trade. However, it is still possible that it has maintained professional indemnity insurance cover or that a claim is covered under the policy of another firm, known as a successor practice. This is explained in more detail in our article: Claims against closed professional firms and practices

Where can I obtain further information and assistance?

If you think you might have grounds for making a claim for professional negligence it is often worth contacting a solicitor who specialises in this field.

As professional negligence solicitors we act for clients nationwide, to resolve claims against a wide range of professionals, including claims against solicitors, accountants, insurance brokers and surveyors.

If you are considering bringing a claim for professional negligence, and if you believe that the value of your claim is likely to exceed £100,000, we would be happy to discuss the matter with you.

Most of our clients fund their claims under a private retainer and almost all our instructions commence on this basis. However, in some cases and where requested, we may then be able to offer an alternative form of funding.

To arrange an initial consultation with us, and in the first instance, please complete our Contact Form or email us at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

When contemplating a claim for professional negligence, it is not uncommon to discover that the firm or practice at fault is no longer trading and may have been dissolved. In this article we examine the reasons for this and the support available to claimants seeking compensation.

Defunct firms and practices

There are many reasons why a professional firm or practice may have ceased to trade. While mismanagement is certainly one of them, the cause is not always fault based and can be the result of retirement, ill health or difficult trading conditions. In the latter case, it is notable that 10 years after the start of the Great Recession, economic conditions in the UK remain relatively subdued, while world financial markets are still widely considered to be in a state of fragility.

It is also notable that the UK professional services sector, like many other commercial sectors of the economy, has become much more attuned and responsive to consumer demand. As a result, there are many more examples of professional practices being operated on a temporary basis, in response to specific market trends and opportunities.

Latent claims

Unlike cases of personal injury or medical malpractice where the occurrence of negligence is soon, if not immediately, apparent, in professional negligence the mistake made can remain undiscovered for many years. This means that it can be a long time between a mistake occurring and an enforceable order for compensation being obtained, with the potential that, in the meantime, the professional practice concerned may cease to exist.

This latency was recently confirmed by a study conducted by the Solicitors Regulation Authority entitled Reflecting on Solicitors Professional Indemnity Insurance (PII): market trends and analysis of historical claims data. Here it was found that 24% of all claims against solicitors were made between 3 – 6 years after the occurrence of an actionable event, while 10% were made between 6 – 15 years after the actionable event and 1% were made more than 15 years after the actionable event.

When negligence is discovered, particularly many years after the event, it is advisable for claimants to act swiftly. Not only can doing so help to preserve valuable evidence, it can also prevent any claim from becoming time-barred. This is a serious risk, which is explained in more detail in our introductory guide: Time limits for professional negligence claims – FAQs

Support for professional negligence claims

Whether, and if so how, to pursue a professional negligence claim against a closed firm or practice can depend upon a range of factors. However, chief amongst these is often the prospect of actually recovering any compensation that is ultimately awarded against it.

Below we consider a number of mechanisms at hand that can substantially improve the prospects for claimants in this regard. As will be seen, not all of these mechanisms are universally applicable and how appropriate they are in each case can depend on the professional discipline concerned, the nature and extent of the loss in question and the corporate structure of the closed practice.

1.      Run off insurance

As a pre-condition to trading, and to protect both themselves and their clients against any financial loss caused by professional negligence, most regulated professionals are required to obtain and maintain professional indemnity insurance (PII) cover. The scope and amount of PII cover required varies from one profession to another and may depend in part on the size and structure of the firm or practice concerned.

Unlike most first party insurance policies (such as home contents or medical insurance, for example) where the applicable policy is that which is in place at the time that the insured event occurs, PII policies operate on a ‘claims made’ basis. As a result, the applicable PII policy is that which is in force at the time when a claim is made against the professional, rather than when any negligence occurs.

For claimants, this means that even though there was a PII policy in effect at the time that the professional was instructed, where a claim is made after a firm or practice has subsequently closed, there may be no PII cover in place to meet the claim.

Fortunately, and to afford some protection to claimants from such a scenario, many regulated professionals are also required to maintain PII cover for a set period of time after their firm or practice has closed. This is commonly referred to as ‘run off’ cover.

In the table below, we set out the regulatory requirements to maintain run off cover across a range of different professions:

As run off cover for solicitors is effective irrespective of whether or not the PII policy premium has been paid by the insured firm or practice, it is often very likely that PII cover will be in place for a period of at least 6 years following the closure of a firm or practice. However, in the case of other professions, where run off cover is often dependent upon payment of the policy premium, protection can be less assured. If such practices close as a result of insolvency, run off cover is much less likely to be maintained.

Further, and in the case of solicitors, the Solicitors Indemnity Fund provides supplementary run off cover for claims made more than 6 years after the firm or practice has closed, thereby extending the total period of run off cover to 12 years. Currently, however, this facility will itself cease to accept new claims after 30 September 2020.

It is worth noting that the requirements to maintain run off cover imposed on firms and practices by their respective regulators represent the minimum standards expected. They do not impose a ceiling on cover and it is possible for those professional firms and practices contemplating closure to arrange run off cover which exceeds both the indemnity limits and periods stipulated by regulators. Indeed, with the potential for professional negligence claims to be pursued up to 15 years after an actionable mistake, it will often be prudent to do so.

2.      Third Party (Rights Against Insurers) Act 2010

The Third Party (Rights Against Insurers) Act 2010 (the 2010 Act) came into force on 1 August 2016. Its purpose is to assist claimants in recovering compensation where an insured firm or practice has become insolvent.

Under the provisions of the 2010 Act and in summary:

• Upon the occurrence of an insolvency event, the rights of the insured firm or practice under its PII policy transfer to, and become directly enforceable by, a third party claimant;
• A claimant then has a right to request certain details of any PII cover obtained by the firm or practice, which right it is entitled to exercise before embarking on any claim;
• A claimant may bring proceedings against an insurer to enforce the rights transferred to it, without first having to establish liability on the part of the professional firm or practice;
• A claimant may pursue a claim against a firm’s or practice’s insurer only, without needing to involve or resurrect the insured firm or practice itself;
• A claimant may issue proceedings against both the professional firm or practice and its insurer, for the purposes of establishing liability against both;
• The insurer is prohibited from relying on any failure by the professional firm or practice to notify the claim as grounds for declining cover under its PII policy.

The 2010 Act is a significant improvement on its predecessor (Third Party (Rights Against Insurers) Act 1930), which required a claimant to incur the cost and expense of establishing liability against a professional firm or practice before it could ascertain and enforce the policy rights transferred to it.

Under the 2010 Act, claimants now have an efficient mechanism through which to investigate and determine the prospects of recovering compensation under a professional firm’s or practice’s PII policy, before committing themselves to incurring the cost and expense of seeking to establish liability for negligence or breach of retainer.

3.      Successor practices

Where the closed professional firm or practice against whom a claim is contemplated operated as solicitors, it is possible that compensation is recoverable from a related firm and its insurers.

Under the Minimum Terms and Conditions (MTCs), which are found within the SRA Indemnity Insurance Rules, liability can arise on the part of another practice in circumstances where that other practice is deemed to be a successor of the closed practice, pursuant to the MTCs.

While the successor practice provisions can be complicated and should be considered on a case by case basis, typically liability can be transferred where the principal(s) of a closed practice sets up, or joins, a new practice and/or where the new practice holds itself out as a successor.

For claimants this means that even where run off insurance is not available to cover a professional negligence claim, it may nevertheless be possible to recover compensation from the professional indemnity insurers of another firm or practice.

4.      Financial Services Compensation Scheme

Where the closed firm or practice operated either as financial advisers or insurance brokers authorised or regulated by the Financial Conduct Authority or the Prudential Regulations Authority, it may be possible to recover compensation from the Financial Services Compensation Scheme (FSCS).

Funded by the financial services industry, and effectively operating as an insurer of last resort, the FSCS provides a recovery opportunity predominantly for private individuals and small businesses who are unable to secure compensation from their advisers or the PII providers to their advisers.

There are, however, limits to the amount of compensation that the FSCS will provide and so depending on the amount of compensation being sought, this facility may offer claimants only a partial solution for the recovery of their losses.

5.      Claims against individuals personally

Regardless of the nature of the professional services in question, if the negligent professional engaged operated as either a sole practitioner or within a traditional partnership, each principal is likely to remain personally liable for any negligence committed prior to the dissolution of the practice. This means that, even if no run off insurance cover is in place to meet a claim, compensation should still be recoverable personally from an individual, or a number of individuals, where negligence has been established.

Even if the professional services in question were provided by either a private limited company or a limited liability partnership that has since been dissolved, if run off cover is not in place it may nevertheless be possible to pursue a claim against, and recover compensation from, a negligent employee. While such claims are often considered as a last resort, they can sometimes be the only resort and there are a number of good reasons why they are likely to become increasingly common. This is explained in more detail in our article: Personal liability of employees: An emerging issue

While the potential to recover any compensation awarded against a relatively junior professional may well be limited, as a result of the dramatic increase in property values over the last 20 years and the significant value of many personal pension plans, the prospects of recovering compensation from established professionals can be very good.

Conclusion

While the closure of a professional firm or practice may introduce additional complexity, legal hurdles and uncertainty in relation to a potential professional negligence claim, it does not by itself mean that no claim can be pursued. Nor does it mean that any claim that is successful is bound to go unsatisfied. On the contrary. Claims made after a firm or practice has closed are not uncommon and, for this very reason, there are a number of different mechanisms potentially available to claimants to increase the chances of any claim being satisfied if successful.

Further legal assistance

As professional negligence solicitors we act for clients nationwide, to resolve claims against a wide range of professionals, including claims against solicitors, accountants, insurance brokers and surveyors.

If you are considering bringing a claim for professional negligence, and if you believe that the value of your claim is likely to exceed £100,000, we would be happy to discuss the matter with you.

Most of our clients fund their claims under a private retainer and almost all our instructions commence on this basis. However, in some cases and where requested, we may then be able to offer an alternative form of funding.

To arrange an initial consultation with us, please complete our Contact Form or email us at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

Fees are one of the most common causes of dispute between solicitors and their clients. In this guide for clients we examine the different options available to you for disputing solicitors’ fees and charges and the circumstances in which they might be best pursued.

Causes of fee disputes

There may be a number of different reasons, actual and perceived, which have caused you to be concerned about the fees being charged by a solicitor. Some of the most common causes of fee disputes occur when solicitors:

• Provide misleading information about the level of fees likely to be incurred
• Charge for disbursements without prior notice or permission
• Fail to provide updates as to the level of fees being incurred
• Charge fees in excess of the fee estimate(s) previously provided
• Charge fees in excess of a pre-agreed fee cap or fixed fee, without consent
• Charge fees improperly for work not actually undertaken
• Charge fees which are disproportionate to the outcome achieved
• Charge fees which are disproportionate to the amount of work undertaken
• Charge fees for work which was unnecessary or not authorised
• Charge fees for unreasonable duplication of work between solicitors
• Charge fees for additional work undertaken as a result of a mistake
• Charge fees for work that had to be aborted or proved valueless due to a mistake
• Make accounting errors when calculating fees and disbursements

Options for disputing solicitors’ fees

In the paragraphs that follow, we identify and explain the most common and task-specific options available to you for disputing solicitors’ fees. While these options tend not to be pursued concurrently, some of them may be pursued consecutively, if one or more of them fails to deliver a satisfactory outcome.

The nature of your concern about fees, the level of fees and/or disbursements in question and the circumstances surrounding your concern, can all have a bearing on what course of action is most appropriate for you.

1.      Complain to the firm

Instinctively, complaining to a firm of solicitors about their fees might seem highly unappealing. This is particularly so if you have lost trust and confidence in the firm, or if you perceive the firm to be motivated by its own best interests, rather than yours. However, there can be a number of potential advantages in doing so. These include:

• Securing the release of information or documents which support your complaint
• Achieving a settlement in a swift and cost-efficient way
• Averting costly and potentially unnecessary legal proceedings and/or an adverse court judgment
• Satisfying one of the qualification requirements for using the Legal Ombudsman

Under the SRA Code of Conduct, solicitors are required to inform their clients at the outset of a matter of their right to complain and how complaints can be made. Solicitors are also required to handle any complaints (including any cost complaints) promptly, fairly and free of charge.

However, a complaint to the relevant firm may not be an appropriate starting point in every case. For example, it might not be so where legal proceedings to recover an outstanding fee have already been commenced against you by the firm or where the fees in dispute are part of a range of financial losses that you have suffered as a result of a mistake made by a solicitor at the firm. In either case, a claim (or counterclaim) for professional negligence may be more appropriate.

2.      Complain to the Legal Ombudsman

As a result of its broad remit, the Legal Ombudsman can consider a wide range of concerns about solicitors’ fees, many of which are capable of being categorised as issues of poor service by solicitors. Indeed, costs is one of the biggest themes amongst the consumer complaints made to the Legal Ombudsman.

For an explanation of what the Legal Ombudsman is, how it works and what the advantages and disadvantages of using it can be, please see our guide: The Legal Ombudsman Complaints Service – An Independent Guide.

Some of the specific advantages of using the service for disputing solicitors’ fees are:

• It is free for complainants
• It is not necessary to appoint a legal representative in order to use the service
• There is no risk of having to pay the solicitors’ costs of responding to the complaint
• The complainant is free to accept or reject the Legal Ombudsman’s decision
• The £50,000 compensatory limit does not apply to any fee reductions

You should note, however, that there are certain restrictions on using the Legal Ombudsman, which are set out in our above guide.

3.      Initiate detailed assessment proceedings

If the level of fees charged by a solicitor appear excessive, you can apply to the court for a detailed assessment of those fees in accordance with section 70 of the Solicitors Act 1974.

There are certain time limits that apply to making such applications and these run from the date upon which a final fee note/invoice is delivered to you by a solicitor. These time limits can affect your entitlement to an assessment, as set out in the table below:

To commence the assessment process, a Part 8 Claim Form will need to be completed and filed with the court, together with the appropriate fee (being £55 at the time of writing). The Claim Form should then be issued by the court and a copy served on your solicitor.

Unless your solicitor consents to a detailed assessment, the court is likely to list a hearing at which a judge will listen to your reasons for requesting, and consider your entitlement to, a detailed assessment.

If the judge concludes that a detailed assessment is appropriate, a further hearing will be listed for this purpose. This will require a further court fee to be paid, which will vary (from £335 to £6,160 at the time of writing) according to the total amount of your solicitor’s fees in dispute. This will also require certain preparatory steps to be taken.

It is important to note that when assessing costs, the court will:

• Consider whether the work undertaken and the fees incurred are reasonable
• Presume the fees were reasonably incurred if they were incurred with your express or implied approval as the client
• Presume that the fees incurred are reasonable in amount unless proved otherwise
• Not consider whether the fees are proportionate to the outcome achieved
• Not usually determine whether the fees are a consequence of professional negligence and should not have been incurred at all

It is also important to note that unless:

• The solicitor’s fees are reduced by the court by 20% or more, or
• You originally offered to pay more than the final amount assessed by the court

you are likely to have to pay both your own costs and the solicitor’s costs of the detailed assessment process. Potentially, and collectively, such costs could well exceed the total amount of any reduction made by the court to the solicitor’s original fees. For these reasons, you should seek independent legal advice before pursuing this option.

4.      File a defence & request a common law assessment

In some cases, legal proceedings may be initiated by a solicitor seeking a judgment from the court for the payment of any outstanding fees. Such action may be taken notwithstanding that you have made a prior complaint, either to the solicitor’s firm or to the Legal Ombudsman, which has not been fully investigated or determined.

If proceedings are issued in the face of genuine concerns over the level of fees charged, you may be able to persuade the solicitor to agree to those proceedings being stayed, until such time as the firm or Legal Ombudsman has exhausted its own complaints handling process.

Alternatively, you could file a Defence to the claim with the court in which all or part of the fees are denied as being properly due.

If you accept in principle that your solicitor is entitled to payment of the outstanding fees claimed, but consider that the amount of those fees is unreasonable, you may also make a request to the solicitor and the court for the outstanding fees to be made subject to a common law assessment, by a specialist costs judge.

However, it is important to note that while this assessment process may be similar in a number of respects to the detailed assessment process described above, it will not be the same. Importantly, the additional legal costs incurred by your solicitor in issuing the claim and of assessment may well be recoverable from you, even if you succeed in achieving a reduction of 20% or more of the amount of the original fees claimed. For this reason, and again, you should seek independent legal advice before pursuing this option.

5.      Claim for professional negligence

It is not unusual for clients to incur unnecessary, additional or abortive fees as a result of a mistake made by a solicitor. Such fees might be incurred in isolation or in conjunction with other fees, losses or expenses. Examples of circumstances where this might occur include:

• A property purchase which, because of the solicitor’s failure to comply with an option agreement, could not be completed and had to be abandoned
• A commercial transaction which, because of a solicitor’s delay in undertaking certain legal enquiries, would have been abandoned at an earlier stage
• A compensation claim which, because it was issued late and against the wrong party, had to be discontinued
• A probate claim which, because of the uncertain terms of settlement agreed by the solicitor, required further costs to be incurred to enforce those terms
• An application for an injunction for non-molestation which, because of mistakes by the solicitor, proved wholly ineffective
• A compensation claim which, because of the solicitor’s failure to comply with a court order, was automatically struck out

In appropriate circumstances, you may be able to recover fees already paid to a solicitor as compensation for negligence or breach of contract. Alternatively, and where the fees remain outstanding, you may be able to obtain an order prohibiting the recovery of such fees.

In either event, legal complexities and cost liabilities can arise and, for these reasons, you should seek independent legal advice before pursuing this option. Where the value of any claim exceeds £10,000 and is successful, the cost of obtaining this advice and any associated representation should generally be recoverable from the negligent solicitor.

6.      Counterclaim for professional negligence – set off

If a claim for unpaid fees has been issued against you, and in addition to filing a defence disputing the amount of fees properly due, it may be appropriate to file a counterclaim for professional negligence.

In doing so, it may be possible to circumvent the procedures that must usually be followed by anyone pursuing a claim for professional negligence, as well as ‘set off’ the amount claimed by way of compensation under the counterclaim, against any amount found to be due in respect of the solicitor’s fees.

Again, given the legal complexities and cost liabilities involved you should seek independent legal advice before pursuing this option.

7.      Apply for a wasted costs order

Where the conduct of a solicitor (or other legal representative) in legal proceedings can be shown to have been improper, unreasonable or negligent, it may be appropriate for you to apply to the court for an order for wasted costs. Where granted, such an order can require the solicitor concerned to meet not only the costs that you have incurred as a consequence of the solicitor’s conduct, but also the costs that another party has incurred and for which you have, or may, become liable.

The power to award wasted costs derives from the common law and from statute (section 51(6) of the Senior Courts Act 1981). It is not exercised lightly by the courts and any order made against a solicitor is reportable to the Solicitors Regulation Authority.

Further information about the process of applying for a wasted costs order is contained within the Civil Procedure Rules – Part 46.8  and at paragraphs 5.1 – 5.9 of Practice Direction 46. While a full account of the process is beyond the scope of this article, it may be noted that it involves two stages:

• Firstly, an assessment by the court of whether on the evidence presented to it a wasted costs order is likely to be made; and
• Secondly, an assessment by the court of whether such an order should be made in all the circumstances and having regard to any submissions made by the solicitor.

Each stage can require its own court hearing.

It is important to note that the process is a summary one, generally regarded as being suitable only in relatively clear-cut cases. Again, given the legal complexities and potential cost liabilities involved, it is advisable to seek independent legal advice before pursuing this option.

Further legal assistance

If you are being asked to pay (or have paid) significant legal costs which you believe may have arisen as a result of a mistake made by your solicitor, the most appropriate course for you might be to pursue a claim (or counterclaim) for professional negligence.

As professional negligence solicitors we would be happy to discuss this option with you as part of an initial consultation, if those fees and/or any related losses exceed £100,000. If this would be helpful to you, please complete our Contact Form or email us at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

The Legal Ombudsman can offer an informal mechanism for resolving complaints between clients and their legal service providers. In this independent guide, we explain what the Legal Ombudsman is, how it works and what the advantages and disadvantages of using it can be.

What is the Legal Ombudsman?

The Legal Ombudsman is a legal complaints handling service that was established by the Office for Legal Complaints, under powers conferred to it by the Legal Services Act 2007.

It is designed to resolve disputes over service in an efficient and informal way by seeking a consensus, wherever possible, between a complainant and the legal service provider.

The Legal Ombudsman is staffed by:

• Assessors – who act as the first point of contact for members of the public
• Investigators – who investigate complaints with a view to achieving an informal resolution
• Ombudsmen – who make final determinations in relation to complaints that have not been resolved informally

It is important to note that the Legal Ombudsman is not an advisory body and does not provide legal advice or representation to complainants.

Which professionals does the service cover?

The Legal Ombudsman is not restricted to considering complaints against solicitors alone. It can also consider complaints against barristers, licensed conveyancers, legal executives, notaries, patent attorneys, trade mark attorneys, cost lawyers, accountants (in connection with a reserved legal activity for which they are authorised) and claims management companies.

Can anyone make a complaint?

Not everyone can make a complaint. Under the Scheme Rules, a complainant must be either:

• An individual
• A micro-enterprise (defined as having fewer than 10 employees and an annual turnover or balance sheet below €2 million)
• A charity (provided annual income net of tax is below £1 million)
• A club, association or organisation (provided annual income net of tax is below £1 million)
• A trustee of a trust (provided asset value is below £1 million)
• A personal representative or beneficiary of the estate of a person who has died

What types of complaints are covered?

Generally, the Legal Ombudsman handles complaints relating to poor or inadequate service. This can take a wide variety of forms and can, for example, include:

• Failing to respond in a timely way to client correspondence
• Failing to hand over documents belonging to a client
• Failing to keep documents safe
• Failing to keep a client informed of progress
• Failing to provide appropriate information in relation to costs
• Failing to apply reasonable charges for work undertaken
• Failing to follow instructions within a reasonable period or at all
• Failing to investigate a complaint internally

Although there can be some overlap, this type of conduct may also be distinguished from misconduct and professional negligence.

Misconduct is usually concerned with breaches of the codes of conduct by which a particular profession is regulated and which are liable to result in disciplinary action being taken by a regulatory body, such as the Solicitors Regulation Authority or the Bar Standards Board.

Professional negligence, on the other hand, is usually concerned with mistakes made by legal professionals which result in a financial loss or liability and which, in turn, can give rise to a civil claim for financial compensation.

When can a complaint be made?

Before submitting a complaint to the Legal Ombudsman, a complainant will usually be required to have (i) made a formal complaint to the legal service provider concerned; and (ii) allowed that provider a period of 8 weeks in which to resolve the complaint.

If a final response has been issued by the service provider, but is not acceptable, a complainant who wishes to take the complaint to the Legal Ombudsman must usually then do so within 6 months.

Further, and in any event, complaints must usually be submitted to the Legal Ombudsman within 6 years of the date upon which grounds for the complaint arose, or 3 years from the date upon which the complainant could reasonably be expected to have known of those grounds, whichever is later.

How does the complaints process work?

The complaints process is usually dealt with on paper and while it is possible for either party to request a hearing, these are rare.

A complaint can be made to the Legal Ombudsman by email, letter or telephone and/or by completing a complaints form. Assuming the complaint is one that the Legal Ombudsman can consider (see further above), an investigation is likely to be commenced, with written representations relating to the complaint being requested from the legal services provider.

A written provisional assessment should then be made, which both parties will have the opportunity to accept or reject. If the provisional assessment is not accepted by both parties, the complainant may then request that the complaint be placed before an ombudsman.

After considering the complaint and undertaking such further enquiries as are deemed necessary, an ombudsman will produce a final written determination. The complainant alone will then have the option of accepting or rejecting this determination. If the determination is accepted, it will become binding on both parties, so that neither party may commence or continue legal proceedings in relation to the complaint. If the determination is rejected (or not accepted within the time-frame stipulated) then the complainant will be free to pursue a civil claim for compensation where appropriate.

While a final determination should be complied with by the legal service provider voluntarily, if it is not then it can be enforced through either the County Court or the High Court.

What remedies can the Legal Ombudsman provide?

The Legal Ombudsman has the authority to direct a legal service provider to:

• Apologise for its poor conduct
• Return documents that belong to the complainant
• Carry out additional work required to put things right
• Refund or reduce its fees
• Pay compensation to the complainant

What are the advantages of using the Legal Ombudsman?

Some potential advantages of using the Legal Ombudsman are that:

• The service is provided free of charge to complainants
• It is not necessary to appoint a legal representative in order to use the service
• The service can be relatively swift, particularly if a provisional assessment is accepted
• The Legal Ombudsman has a wide discretion and is not constrained by legal precedent
• A complainant is not bound by a determination of the Legal Ombudsman and if dissatisfied, can reject it in favour of pursuing a civil claim for compensation

What are the disadvantages of using the Legal Ombudsman?

Some potential disadvantages of using the Legal Ombudsman are that:

• A complaint must first be made to the legal service provider concerned, who is entitled to a period of 8 weeks to provide a final response
• The ombudsmen are themselves lay individuals and are unlikely to possess the same level of experience or qualifications as members of the judiciary
• There is a greater risk of inconsistency in the decision-making process, as determinations may be based on what is considered to be ‘fair and reasonable in all the circumstances’, instead of legal precedent
• The maximum compensatory award is limited to £50,000 (although most compensatory awards tend to be less than £1,000)
• It cannot determine allegations of professional negligence
• It does not stop the limitation period running on a professional negligence claim, which could become time-barred before the complaint is resolved
• Unless accepted, neither a provisional assessment nor a final determination in favour of a complainant will bind a court of law. Nor are they likely, by themselves, to be persuasive evidence of wrongdoing
• It is not usually possible to recover the costs of obtaining legal assistance or representation in relation to a complaint
• Without independent legal advice and assistance, presenting and pursuing a complaint can be time consuming, frustrating and bewildering
• The complaints process does not circumvent the procedural rules that must be complied with when commencing a claim for professional negligence, meaning that time can be lost if the complaint is rejected
• If the complaint is rejected, a legal service provider may be emboldened and less willing to concede a subsequent claim for professional negligence

Should I retain a solicitor before making a complaint to the Legal Ombudsman?

This is a decision that should be made on a case by case basis. If a solicitor is retained, he/she may well be able to assist with:

• Determining the merits of making a complaint
• Identifying the scope of the complaint
• Collating relevant evidence in support of the complaint
• Articulating / drafting the complaint in a clear and effective way
• Identifying any limitation issues that arise in relation to the complaint
• Minimising the risk of prejudicing any subsequent claim for professional negligence

However, these advantages should be balanced against the costs that are likely to be incurred in retaining a solicitor, which might exceed any compensation recovered and which themselves are unlikely to be recoverable from the legal service provider concerned, even if the complaint is upheld.

How might PNC Legal be able to assist?

If your legal service provider has made a mistake which has caused you to suffer significant financial loss, it may be more appropriate for you to pursue a claim for professional negligence, rather than make a complaint to the Legal Ombudsman.

As professional negligence solicitors we act for clients nationwide, to resolve claims against a wide range of professionals, including claims against solicitors, barristers and other legal services professionals.

If you are considering bringing a claim for professional negligence, and if you believe that the value of your claim is likely to exceed £100,000, we would be happy to discuss the matter with you.

Most of our clients fund their claims under a private retainer and almost all our instructions commence on this basis. However, in some cases and where requested, we may then be able to offer an alternative form of funding.

To arrange an initial consultation with us, and in the first instance, please complete our Contact Form or email us at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

Whether personal liability should be imposed on an employee has been a troublesome issue for the courts when dealing with claims for professional negligence. In this article, we explain why this issue is gaining prominence, the competing arguments it gives rise to and the different approaches that have been taken to it by the courts.

An increasingly prominent issue

Historically, the issue of personal liability for professional negligence on the part of employees was a relatively benign one. This was for a number of reasons. Firstly, as many professionals traded as partnerships, for which personal liability on the part of all principals is joint and several, there was frequently no need to look to an employee for compensation. This could be sought from any combination of the principals in the practice, who were often best placed to provide satisfaction. Secondly, those in the traditional professions were usually required by their governing bodies to maintain reasonable levels of professional indemnity insurance (PII) cover, which itself would satisfy the vast majority of professional negligence claims made against a practice. Thirdly, the legal duties of professionals recognised by the courts were generally more restrictive, making for fewer professional negligence claims in the first place.

However, over the last 20 years, many professionals have shunned the unincorporated structures of the past, preferring to trade through private limited companies (PLCs) and limited liability partnerships (LLPs). In doing so, the potential to recover compensation from multiple principals has been reduced to a single legal entity. Further, and for the sole practitioner too, personal contracts of appointment have been replaced by corporate ones, only then to be performed by employees.

At the same time, and in conjunction with a growing service-based economy, the professional sector has witnessed the emergence of a diverse range of new professions. While some of these have become well established, many have limited regulatory oversight and, in comparison to the traditional professions, less onerous obligations regarding the PII cover that members must maintain.

Latterly too, and in an economic trading environment that lays claim to a substantial number of ‘zombie’ companies struggling to remain solvent, PII purchasing practices have changed. Now many small and some medium sized professional practices choose to purchase their PII policies online, without using the services of an insurance broker. As a consequence, the cover obtained can be more limited and less suitable than it should be or is realised. In some instances, cost pressures mean that PII cover is dispensed with altogether, often by the very practices that need it most.

Finally, and with Brexit on the horizon, there is the potential for a significant fiscal shock, leading to ever more challenging, and perhaps recessionary, economic trading conditions. In turn, a significant number of professional practices, small, medium and large, could face closure, just at the time when professional negligence claims activity traditionally increases.

In combination, these events suggest that it may become increasingly common for claimants to assert liability on the part of professional employees personally, in order to recover compensation for the losses they have sustained as a result of professional negligence.

The scope of the issue

While the use of incorporated vehicles to deliver professional services may fuel the issue of employee liability, it is not only within this framework that the issue arises. It can also arise where professionals are employed by traditional partnerships, sole practitioners and local authorities.  

Moreover, and when considering whether any liability in negligence should attach to an employee, it is always necessary to consider the type of harm against which any claimant is entitled to be protected. As Lord Bridge stated in the case of Caparo Industries v Dickman:

‘It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.’

In the case of physical injury, directly inflicted to person or property, the courts have been quite ready to uphold a personal duty of care and, in turn, personal liability on the part of a professional employee. However, in professional negligence claims, it is more common for the harm suffered to be of a purely financial nature. Therefore, it is an employee’s personal liability for pure economic loss that is considered further below.

Competing moral standpoints

In considering such liability, the courts have had to consider a range of competing arguments.

For professionals, who have gone to the time, trouble and expense of creating a stand-alone legal entity through which to trade, often with the deliberate intention of availing themselves of the limited legal liability status widely known to be associated with it, it is argued that the imposition of personal liability for negligence is positively unjust. Arguably, this is even more so in circumstances where a client has been advised in writing that the counter-party to the retainer is not the professional but a limited liability, corporate entity. It is also argued that such liability would lead to the perverse scenario whereby those who usually receive no direct benefit from the transaction or service being provided, would nevertheless be expected to shoulder any liability for it, where an error or mistake occurred.

For claimants, especially vulnerable ones, it is argued that the notion that a negligent employee cannot be held personally accountable is equally unjust. This is particularly so where the service was personal in either its nature or delivery and/or involved a significant element of trust. Arguably, it is even more so where, in the absence of personal liability, the claimant would be left to suffer loss or damage without redress. It is also argued that it is reasonable to expect professional employees to ensure that they are protected by appropriate PII cover and that the consistent imposition of personal liability would incentivise them to do so.

The approach taken by the courts

Over the course of the last 20 years the issue of employee liability for professional negligence has come before the courts for consideration on a number of occasions. As can be seen from the cases summarised below, the decisions reached have not always been consistent.

Hale v Guildarch Ltd & Others

In Hale the claimants were an elderly and infirm couple, who wished to release some of the equity in their home to fund certain improvements and the purchase of a car. The claimants met with two financial advisers from ADC Group Ltd (ADC), who advised them to enter into a home income plan. However, this proved disastrous and by the date of trial, the compounding interest on their loan had become unserviceable and had eroded the remaining equity in their property.

Unfortunately for the claimants, ADC was subsequently struck off the register of companies and dissolved. It was also not insured against any liability to the claimants. Therefore, the claimants initiated a claim for professional negligence against the two advisers personally.

Having noted that the claimants’ mortgagee had agreed not to redeem the loan during their lifetime, the court held that no duty of care was owed to the claimants by either adviser personally. This was on the basis that not only had there been no voluntary assumption of responsibility by either adviser, but there had also been no reliance on such an assumption by the claimants, who had always looked to ADC. Therefore, the claim failed.

Harris & Another v Wyre Forrest DC & Another

In Harris the claimants were two young first-time buyers who applied to Wyre Forrest DC (WFDC) for a loan to purchase a modest residential property. In turn, WFDC instructed its in-house surveyor, Mr Lee, to prepare a valuation report. A loan was then granted to the claimants, who had not seen the report, enabling them to proceed with their intended purchase.

Unfortunately, it subsequently transpired that Mr Lee had failed to appreciate that the claimants’ property suffered from serious settlement and was in a dangerous and unstable condition. As a consequence, it was unmortgageable without extensive remedial works being undertaken.

In a claim for professional negligence against WFDC and Mr Lee, the House of Lords held that a duty of care was owed to the claimants by Mr Lee personally, who had been negligent. In doing so, Lord Griffiths stated that:

‘I do not think that voluntary assumption of responsibility is a helpful or realistic test for liability…The valuer is discharging the duties of a professional man whether he is employed by the mortgagee or acting on his own account or is employed by a firm of independent surveyors…Mr Lee was in breach of his duty of care to the Harrises and the local authority, as his employers, are vicariously liable for that negligence.’

Merrett v Babb

In Merrett the claimant and her mother were intending to purchase a residential property with the assistance of a loan from the Bradford & Bingley Building Society. To this end, the building society instructed Clive Walker & Associates, a valuation and surveying practice, of which Mr Babb was a salaried employee.

In due course, Mr Babb inspected the property and provided a self-certified mortgage valuation report to the building society, a copy of which was released to the claimant. However, the report failed to identify the presence of settlement cracks between the original structure and a later extension, which were only discovered after the property was purchased.

Unfortunately for the claimant, Clive Walker & Associates subsequently ceased trading and its sole principal was declared bankrupt. It was also not insured against any liability to the claimant. Therefore, the claimant commenced a claim for professional negligence against Mr Babb personally.

Having considered earlier authorities, the Court of Appeal concluded that a professionally qualified person giving advice may owe a duty of care to an effective recipient of that advice, the question in each case being whether the law recognises a duty of care. Further, and as a matter of fact in this case, it concluded that Mr Babb had assumed personal responsibility to the claimant for his advice, since he had certified his report in a personal capacity and had known that it would be relied upon by the claimant, as indeed it was.

Summit Advances Ltd v Bush

In Summit the claimant was a tertiary mortgage lender who had provided a bridging loan to support the purchase of a substantial 16-bedroom mansion house. Before doing so, it had relied upon a valuation report provided by Mr Bush, who was an employee of Livemore Partnership LLP, who had itself been commissioned to provide the report on behalf of Allied Surveyors plc, at the instruction of a third-party mortgage broker.

In the event, the loan was not serviced and there was insufficient equity to discharge it following the repossession and sale of the property. Therefore, the claimant commenced a professional negligence claim against Mr Bush personally, alleging that he had over-valued the property. In turn, Mr Bush applied to the court for summary judgment.

At first instance the Master dismissed Mr Bush’s application, enabling the claim to continue. However, that decision was then overturned by the High Court on appeal.

In granting summary judgment, the High Court observed that the principles to be derived from Harris and Merrett did not extend to a financial institution, so as to create what would in effect be an insurer of last resort in the form of Mr Bush. It further concluded, upon considering the wording of the valuation report itself, that there had been no acceptance of personal responsibility by Mr Bush to the claimant.

Protective measures

To safeguard against the need to pursue a claim against a professional personally, those instructing professionals should undertake appropriate due diligence, which should include obtaining confirmation that appropriate PII arrangements have been made. While this alone will not guarantee that insurance cover will be in place, that it will be sufficient and that it will respond to any subsequent claim made, it may improve the prospects. For those not in a direct contractual relationship with the professional being appointed, acting promptly in the pursuit of a claim following the discovery of negligence may assist.

Preventative action can also be taken by professionals. In this vein, retaining a specialist PII broker to advise on, and assist with, placing appropriate cover is eminently sensible. Such brokers can also assist with claim notifications, which if mishandled may prejudice the availability of cover, as well as the renewal process. Employees can also obtain their own independent PII cover if they have doubts as to the scope or duration of cover arranged by their employer.

Conclusion

Neither claimants nor the professionals that they instruct should assume that personal liability for professional negligence will never arise. It is clear from the above cases that, in appropriate circumstances, the courts will find a professional personally accountable for his/her acts or omissions. This is so even where the loss suffered is purely economic in nature. To avoid this eventuality, for the benefit of all concerned, an appropriate PII policy should be arranged, maintained and complied with, preferably with the assistance of a specialist insurance broker.

Further legal assistance

As professional negligence solicitors, we act for clients nationwide to resolve claims against a wide range of professionals.

If you would like to arrange an initial consultation with us, free of charge or commitment, please do not hesitate to contact us on 0800 195 4983 or by email at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

In the field of professional negligence, third party claims are more prolific than in any other area of the law of negligence. In this article we explain the nature of third party claims for professional negligence and how they can and do arise in different professional disciplines.

The term ‘third party’ is often encountered in the context of insurance. There it is used to describe an individual or entity who is neither the policyholder (first party) nor the insurer (second party) to a contract of insurance, but an independent party against whose claim for loss, damage or injury the policy is designed to protect.

Similarly, in the context of professional negligence, the term ‘third party’ is used to describe a natural person or legal entity who is not party to the contract of engagement (often referred to as the retainer) between a client and a professional, but who is nevertheless adversely affected by its operation.

The legal basis for third party claims

The legal basis for any professional negligence claim will always depend on the circumstances of the case. Potentially, however, third party claims can be made on a number of different legal footings.

When harm is suffered, it is possible (although less common) that a third party has a contractual claim for compensation, either under the Contract (Third Party) Rights Act 1999 or by virtue of a collateral warranty between the professional and the third party. It is also possible that actionable legal duties arise under statute.

However, more usually, a third party claim for compensation arises as a result of the actionable duty of care owed by all professionals in negligence, under the law of tort. The ambit of this duty is not limited to the counter-parties to the professional’s retainer and may extend to a range of third parties.

The potential for harm

It is a facet of professional life that the work product generated frequently takes the form of information or advice, both of which are commodities capable of being disseminated with relative ease. Indeed, in today’s electronic world of email, instant messaging, Twitter and Snapchat, such dissemination has never been easier, faster or potentially far reaching.

It is also a facet of professional life that the advice and information provided by professionals is usually treated as authoritative and reliable, even when it is received second or third hand. This, coupled with the expense often associated with obtaining professional advice, means that where it is obtained and paid for by someone else there can be a keen inclination to rely on it.

Finally, and in part because of the wide range of purposes for which information and advice can be relied upon, the scope and scale of financial harm that can result from erroneous information or advice provided by a professional is significant.

For all of these reasons, and in contrast to medical negligence, for example, where a surgeon may operate negligently on and cause injury to a single patient, negligent information or advice from a professional is capable of causing significant harm to thousands. It is not surprising, therefore, that third party claims are so prevalent in the field of professional negligence.

The approach taken by the courts

For almost 70 years, the courts have endeavoured to perform a delicate balancing act. On the one hand, the courts have increasingly recognised that in modern life considerable reliance is placed on professional advice by third parties, who may suffer foreseeable harm if that advice is erroneous. On the other hand, where mistakes do occur, the courts have been cautious about exposing professionals to ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class’ (per Cardozo C.J. in Ultramares Corporation v Touche).

As the case examples that follow show, the courts have not always found this balancing process a straight forward one.

Third party claims against accountants

In a commercial context, the financial information generated by accountants and auditors is varied and extensive. It can also be exclusive in nature and, therefore, of great value not only for the purpose for which it was commissioned but for a variety of ancillary and unrelated purposes too. Accordingly, and as a body of professionals, accountants are particularly exposed to third party claims from those who have suffered financial loss.

Case example: Caparo Industries Plc v Dickman

In Caparo the claimant investor had purchased shares in Fidelity Plc after the share price had fallen on the back of poor results announcement ahead of the year end. In doing so, the claimant had relied upon the auditors’ report, which had certified that Fidelity’s accounts gave a true and fair view of its financial status.

However, the claimant subsequently discovered that Fidelity’s accounts were inaccurate, in that they overvalued stock and undervalued after-sales credits. In a third party claim for professional negligence against Fidelity’s auditors, the claimant alleged that it was owed a duty of care as (i) a potential investor in Fidelity and (ii) an existing shareholder of Fidelity (after the first tranche of shares had been purchased). Had it known the true position, the claimant alleged that it would not have purchased the shares at the price it did, or at all.

On appeal to the House of Lords (and reversing in part the decision of the Court of Appeal below), it was held that no duty of care was owed by auditors to the public at large, as potential investors. Nor was any duty owed by auditors to individual shareholders, other than to protect them from losses in the value of the shares which they held, a breach of which would be actionable by the company. Accordingly, the claim failed.

In his often-cited speech, Lord Bridge stated:

‘It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless’.

Third party claims against construction professionals

Like accountants, construction professionals risk a significant exposure to third party claims. In many cases, such claims are made by the subsequent occupiers of development property, both residential and commercial. Whether those claims are likely to succeed, depends in part on the type of loss which the third party has sustained. In their quest to manage the liability of professionals, the courts have awarded damages for some losses, but not others.

Case example: Murphy v Brentwood DC

In Murphy the claimant had purchased a house on a large development site that had been partly filled and levelled. To prevent settlement, independent engineers had been instructed by the developer to design special foundations. These designs had then been submitted to the defendant council, who had approved them on the recommendation of its own independent engineers.

Unfortunately, the design of the foundations for the claimant’s property was defective and cracks appeared throughout the property. Faced with estimated remedial costs of £45,000, the claimant sold the property for £35,000 less than its market value in good repair. He then commenced a third party claim for professional negligence against the council for negligently approving the original foundations design.

Both at first instance and on appeal to the Court of Appeal, the court found in the claimant’s favour. However, on further appeal to the House of Lords it was held that the loss sustained by the claimant was pure economic loss (the defect in the house having been discovered before the occurrence of any injury to person or health or damage to property other than the defective house itself) for which no duty of care was owed to the claimant by the local authority.

Whether a local authority owed a duty in respect of injury to persons or ‘other’ property was expressly left open by the court, as was whether a builder of defective property could be held responsible for the cost incurred by a subsequent owner in protecting himself from potential liability to third parties in respect of personal injury.

Third party claims against insurance brokers

The nature of insurance brokers’ work is such that their exposure to third party claims is much more limited than it is for other professionals. However, such claims can arise, for example, where erroneous statements are made to third parties regarding the existence of insurance cover and where a third party has a direct financial interest in a policy which has been erroneously arranged.

Case example: Punjab National Bank v De Boinville & Others

In Punjab National Bank the claimant bank had provided finance to one of its customers for the purchase and shipment of gasoil. This was on the condition that suitable insurance against political and exchange control risk insurance was effected.

When claims were subsequently made against the insurance policies, multiple disputes arose. These included claims by the bank against the insurance brokers who had arranged cover.

Both at first instance and on appeal, it was held that at times when the bank was not in a contractual relationship with the insurance brokers, it was owed a tortious duty of care by them, both personally and as corporate entities. This was on the basis that it was a justifiable increment to hold that an insurance broker owes a duty of care to the specific person who he knows is to become an assignee of the policy, at all events if (as was the case here) that person actively participated in giving instructions for the insurance to the broker’s knowledge.

Third party claims against surveyors & valuers

The information and advice provided by surveyors and valuers may be relied upon by a number of third parties, such as intended purchasers, intended vendors, lenders or investors, whether original or subsequent. However, establishing reliance by a third party on a particular piece of professional advice is essential for any claim to succeed and can be difficult, particularly where the advice is either preceded or superseded by other erroneous advice.

Case example: Smith v Eric S. Bush (a firm)

In Smith the claimant was the intended purchaser of a modest residential property in Norwich, for which a mortgage was required. The claimant applied to the Abbey National Building Society and, as is usual practice, it instructed the defendant firm of surveyors to undertake a valuation for mortgage purposes. However, the valuation fee was paid to Abbey National by the claimant, who signed an application which provided that a copy of the valuation report would be provided to the claimant, without any acceptance of liability.

Eighteen months after purchasing the property, bricks from the chimneys collapsed and fell through the roof into the loft and the main bedroom and ceilings of the first floor. This was due to the failure by a previous owner to support the chimney breasts in the roof following removal of the chimney breasts on the first floor.

At first instance, the court found that the surveyor had been negligent in failing to check that the remaining chimney breasts were adequately supported. Notwithstanding the disclaimer, it also awarded damages against the defendant.

On appeal, both the Court of Appeal and the House of Lords approved the award. In doing so, the latter observed that the relationship between the claimant and defendant was akin to a contract and that the defendant had assumed responsibility to the claimant, as well as to the mortgagee. It also observed that the surveyor knew or ought to have known that the claimant would only contract to purchase the property if the valuation was satisfactory and that the claimant might suffer injury or damage or both if it did not exercise reasonable skill and care.

Third party claims against solicitors

Whereas reliance by a third party is a key ingredient to establishing liability on the party of surveyors and valuers, the same is not always true of third party claims against solicitors. Moreover, third party claims against solicitors can arise as a result of the unique status of solicitors as officers of the court and/or as a result of an undertaking given to a third party.

Case example: White & Another v Jones & Another

In White, and following the resolution of a family row, the defendant solicitors were instructed by the claimants’ father to prepare a new will for him, under which the claimants would both be beneficiaries. Regrettably, however, little was done by the defendant to comply with its instructions and the claimants’ father died without a new will having been prepared.

The family were unable to agree on how the claimants’ father’s estate should be divided and in due course a prior will, which did not benefit either of the claimants, was admitted to probate. The claimants then commenced a third party claim against the defendant, asserting that its delay in preparing a new will amounted to professional negligence.

At first instance the court rejected the claim. However, it was later allowed by the Court of Appeal and, upon further appeal, the House of Lords. In the latter, it was held that where, as the solicitor can reasonably foresee, his/her negligence may deprive an intended beneficiary of an intended legacy in circumstances where neither the testator nor his estate will have any remedy against the solicitor, the duty of care owed to the testator should be recognised as extending to an intended beneficiary by virtue of an assumption of responsibility to them. Otherwise, a lacuna would exist in that the party owed the duty of care in contract and tort suffered no loss and the third party who suffered the loss was owed no actionable duty.

Third party claims against emerging professionals

The term ‘emerging professionals’ is intended to apply to those individuals working in modern, often unregulated, professions. Such professions are not only extremely diverse, but are growing in size and ambit, particularly in the IT sector. As such, it is difficult to offer general comment on the application of the law to them, the work undertaken by this category of professionals being equally diverse. However, it may be noted that the courts have been increasingly prepared to recognise duties to third parties by the traditional professions and there is no reason to think that emerging professionals will be treated any differently.

Case example: Duncan Investments Ltd v Underwoods 

In Duncan the defendant estate agents had been retained by receivers to sell a portfolio of properties. The claimant had expressed interest in the properties and was advised by the defendant as to the minimum sale price that each was likely to achieve on resale within 6 months. For the properties eventually purchased, the defendant advised that the aggregate minimum sale price was £547,500. In reliance on this advice, the claimant purchased 15 properties for the aggregate sum of £465,200.

On resale, the properties did not achieve the sums anticipated and the claimant commenced a third party claim for professional negligence against the defendant. As it turned out, the true aggregate value of the properties was only £415,250.

The court held that the defendant had owed the claimant a duty of care when advising on resale values, since it had known both that the defendant would rely on its advice in deciding what to offer and that it was unlikely to obtain other independent valuation advice.

Conclusion

To recover compensation for professional negligence, and in the absence of a clear contractual relationship, third party claimants will often have the additional burden of satisfying the court that a duty of care is owed to them. Depending on the nature of the harm suffered, this burden can be more or less onerous.

Where the harm is purely financial the task is often greatest, although where the circumstances of the claim are indistinguishable from those of other claims where a duty has previously been upheld, it is far from insurmountable. Even where the court is being asked to fashion a duty in new circumstances, this does not present a bar, as each successful new such case demonstrates. Furthermore, and in other cases where statutory duties exist, the task may become simplified.

Therefore, where businesses or private individuals have suffered harm as a result of the mistaken information supplied, advice given, action taken or omissions perpetrated by a professional person who they have not directly appointed under a retainer, they should not assume that they have no right of recourse against that professional. Instead, they should seek independent legal advice.

Further legal assistance

As professional negligence solicitors, we act for clients nationwide, to resolve claims against a wide range of professionals, including claims against solicitors, accountants, insurance brokers and surveyors.

If you are considering bringing a claim for professional negligence, and if you believe that the value of your claim is likely to exceed £100,000, we would be happy to discuss the matter with you.

Most of our clients fund their claims under a private retainer and almost all our instructions commence on this basis. However, in some cases and where requested, we may then be able to offer an alternative form of funding.

To arrange an initial consultation with us, and in the first instance, please complete our Contact Form or email us at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

In this substantive guide, we identify and explain the different types of loss and damage that are commonly awarded by the courts in claims for compensation for professional negligence.

Although this guide is of significant length, we have numbered each head of compensation below and addressed it separately. This should make the guide easier to navigate and remove the need for it to be read in its entirety, unless so desired. For each head of compensation, and to provide additional insight and context, we have also given a real-life case example.

For anyone considering making a claim for the first time, we have produced a separate introductory guide to professional negligence claims. This contains answers to a number of the practical questions we frequently get asked, as well as links to further information. The guide is accessible here.

General principles of compensation

The aim of an award of compensation (commonly in the form of ‘damages’) is not to punish the professional concerned, but to compensate the injured party, typically the client. A classic formulation of the principle can be found in the historic judgment of Lord Blackburn in Livingstone v Rawyards Coal Co., where he stated that the measure of damages is:

‘…that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.’

Over the years various legal rules and principles have been established by the courts to ensure that the compensation awarded to clients, and the corresponding financial exposure of professionals, is kept within sensible bounds. These are relatively complicated, not only in themselves but also in terms of their application, and a detailed examination of them is beyond the remit of this guide. However, in summary, it should be noted that:

• Not all financial losses suffered will necessarily be recoverable as compensation for professional negligence;
• In some cases, there can be an element of uncertainty as to both the type and amount of compensation that the court will ultimately award in a successful claim for professional negligence; and
• For loss or damage to be recoverable as compensation for professional negligence, it will generally need to fall within the scope of the professional’s retainer and be caused (both as a matter of fact and law) by the mistake made by the professional.

Against this background, we set out below common categories of loss and damage that have been awarded by the courts in claims for compensation for professional negligence.

1.  Compensation for loss of chance

Compensation claims for the loss of a chance are relatively common in professional negligence claims. They arise where the injured party has, through the mistake of a professional adviser, been prevented from securing a financial gain (or avoiding a liability) which itself was contingent upon the actions of a third party. Where such claims are successful, the court will award as damages such percentage of the loss suffered as reflects the chance that the claimant otherwise had of securing the gain (or avoiding the liability).

Case example: Wellesley Partners LLP v Withers LLP

In Wellesley the claimant was an executive search firm, operating in the investment banking sector. In 2007 and with a view to expansion, it instructed the defendant firm of solicitors to draft a contract to sell 25% of its shares to Addax, a Middle Eastern bank, for £2.5m.

When preparing the contract and contrary to its instructions, the defendant altered a clause so as to give Addax the option to request the return of 50% of its investment within 41 weeks. When Addax later exercised the option, the claimant suffered financial hardship. In turn, this prevented the claimant from opening an office in the US and tendering for a lucrative recruitment appointment.

At trial, the judge concluded that there was a 60% chance that the claimant would have secured the recruitment appointment. He further concluded that there was a 25% chance that the appointment would have been an exclusive one and a 75% chance that it would have been a shared appointment. This meant that the overall chance of the claimant securing the net profit from an exclusive appointment was 15% and the overall chance of securing the net profit from a shared appointment was 45%. Against projected profits of £3,262,551 and £1,262,016 respectively, this produced compensation awards of £489,383 and £567,907 (being £1,057,290 combined) for loss of chance.

2.  Compensation for diminution in value

Damages awards for the reduction in the value of property are extremely common in, but not exclusive to, professional negligence claims against surveyors. Here, the court will award as damages the difference between the price paid for the property (assuming that represents its market value, free of defects) and its actual market value taking into account the defects which the negligent professional failed to identify.

Case example: Watts v Morrow

In Watts the claimants had instructed the defendant building surveyor to provide a full structural report on a house they were intending to purchase. While the report had not identified any significant defects, following the purchase, the claimants subsequently discovered that extensive remedial work to the property was required. The claimants then commenced a professional negligence claim against the defendant, alleging that had they known of the unreported defects, they would not have purchased the house or would have negotiated a lower purchase price.

On appeal, the court held that the appropriate measure of damages was £15,000 plus interest, representing the difference between the price paid for the property and its true value, having regard to the unreported defects. It therefore set aside the higher award of damages of £33,961 originally made by the court below, which represented the costs incurred by the claimants in rectifying those defects which should have been, but were not, reported.

3.  Compensation for wasted expenditure

In claims against solicitors, the assessment of loss can be less predictable than in the case of claims against surveyors. In some instances, where, for example, a party extricates itself from a disastrous transaction brought about by professional negligence, the court may award as damages the reasonable costs incurred by a party in both entering into and exiting such a transaction.

Case example: Hayes & Another v James & Charles Dodd (a firm)

In Hayes the claimants ran a motor repair business, which they wished to expand. They instructed the defendant firm of solicitors to act for them on the purchase of a lease of a workshop and yard, which the defendant advised them enjoyed a right of way over land at the rear of the property.

In the event, no such right existed. As a result, the claimants were unable to operate the business, which they were forced to close after 12 months.

On appeal, the court confirmed that the claimants were entitled to recover as compensation the wasted costs that they had incurred in entering into and then extricating themselves from the transaction. These included the purchase price and rent paid, the loss of goodwill, bank interest, travel expenses and conveyancing costs. This produced a total award of £102,447.81 inclusive of interest.

4.  Compensation for additional legal costs

As a consequence of a mistake made by a professional, a client may find themselves embroiled in litigation with another party. Alternatively, a client may embark on litigation against another party in an effort to mitigate the losses that he or she would otherwise incur. In either case, the additional costs incurred may then be awarded as damages against the negligent professional.

Case example: Hermann v Withers LLP

In Hermann the claimants had instructed the defendant firm of solicitors to act for them on the purchase of a residential property in London for £6.8m. While the solicitors had advised that the property included a right to use a communal garden in a square close to the property, in actual fact, no such right existed.

In a subsequent claim for professional negligence against the defendant, the court considered that the advice it had given had been negligent and it awarded damages under various heads of loss. These included the costs that the claimants had incurred in obtaining independent legal advice as to the existence of any right to use the garden and in negotiating the purchase of such a right. These costs totalled £55,906.28 and were to be assessed on an indemnity basis.

5.  Compensation for lost management and staff time

In commercial claims, and particularly in claims against construction professionals, it is not uncommon for a considerable amount of additional management and staff time to have been expended. This may arise either from dealing with the practical effects of negligent conduct or advice, or in seeking to mitigate the financial losses that flow from such conduct or advice. The courts are alive to the costs associated with this and, in appropriate circumstances, will compensate a business with an award of damages.

Case example: R+V Versicherung AG v Risk Insurance and Reinsurance Solutions SA & Others

In R+V Versicherung the claimant was a German reinsurance company whose chief underwriter had dishonestly conspired with a representative of the defendant insurance broker. The aim of the conspiracy was to deprive the claimant of significant premium income, which was generated under two binder agreements covering short tail property and contingent risks and personal accident risks.

Having found against the defendant on liability, one of the issues for the court to consider in determining the amount of compensation payable was whether the claimant was entitled to recover as damages internal management and staff time, except to the extent that the claimant could prove that it had suffered a loss of profits.

Finding against the defendant again, the court held that wasted management and staff time spent on the investigation and/or mitigation of the defendant’s wrongdoing was recoverable, notwithstanding that no additional expenditure or loss of revenue or profit could be shown. It also held that the claimant could recover as damages its additional staff costs of handling insurance claims arising from the business written under the two binders.

6.  Compensation for loss of profit / income

Where the purpose of a commercial transaction is to generate profit and where that intention is well known to the professional at the time of acting or advising in connection with it, the courts have been prepared to award any subsequent loss of profit or income as compensation for professional negligence.

Case example: Keydon Estates Ltd v Eversheds LLP

In Keydon Estates the claimant was a small property investment company who had instructed the defendant firm of solicitors to act for it on the purchase of the freehold of a commercial office building known as Willow House.

As the defendant knew, the purchase was intended as an investment and therefore the existing tenant’s covenant to pay rent was of the utmost importance. However, following the purchase, the tenant refused to pay rent on the valid grounds that it had assigned its lease as a result of previously granting a sub-lease.

The defendant having admitted negligence, the issue for the court to decide was the appropriate measure of compensation. Here, the court concluded that damages should not to be assessed on the lower basis of diminution in value (as to which, see above) but on the higher basis of the alternative income stream that the claimant would have enjoyed from a comparable property with the desired level of income security.

7.  Compensation for mental distress

While damages awards for mental distress are made by the courts in professional negligence claims, they are not as common as some other awards. Generally, such awards will only be made where either (i) one of the main objects of the professional’s retainer was to provide pleasure, relaxation, peace of mind or freedom from molestation; or (ii) the distress was accompanied by physical inconvenience.

Case example: Farley v Skinner

In Farley the claimant was interested in purchasing a residential property for his retirement. He instructed the defendant surveyor to inspect the property and to ascertain, amongst other matters, whether it was seriously affected by aircraft noise from a nearby airport.

While the surveyor reported that the property was not so affected, after purchasing and moving into the property, the claimant discovered that it was. Having decided to remain in the property, the claimant then brought an action against the surveyor, seeking compensation for professional negligence.

On appeal the court held that to recover damages for mental distress, it was sufficient that a major or important object of the defendant’s retainer had been to give pleasure, relaxation or peace of mind. It therefore restored the damages award of £10,000 originally made by the judge in the court below.

8.  Compensation for physical inconvenience

While awards have been relatively modest the courts have, for some time now, been prepared to compensate individuals for the physical inconvenience and discomfort that they have suffered as a result of professional negligence.

Case example: Wapshott & Another v Davis Donovan & Co (A Firm)

In Wapshott the claimants had instructed the defendant firm of solicitors on the purchase of a small leasehold flat. Two years after the purchase and following the birth of their first child, the claimants decided to sell the flat in order to move to larger accommodation. However, at this point they discovered that the flat had been built on land belong to the neighbouring house, which rendered the flat unsaleable.

At first instance, the court held that the defendant had been negligent and that the claimants were entitled to recover as damages the price that they had paid for the flat. Nevertheless, the court declined to award anything in respect of the physical inconvenience that the claimants had suffered as a result of having to bring up a growing family in the confines of a single bedroom flat.

On appeal, however, the court held that such inconvenience was a foreseeable consequence of the solicitors’ mistake and that it could see no reason of policy on which the law would refuse compensation or recovery. It therefore awarded the claimants additional damages of £3,000 each.

9.  Compensation for pain, suffering and loss of amenity

When professional negligence occurs, it is relatively rare that it will result in physical injury to a person. Therefore, it is not often appropriate to claim or award as compensation for professional negligence, damages for physical pain, suffering and loss of enjoyment of life, which are more usually associated with actions for personal injury. However, such awards can and do occur.

Case example: Malyon v Lawrence Messer & Co

In Malyon the claimant was injured in a road traffic accident in Germany. While he instructed solicitors in England to pursue a claim for compensation on his behalf, the solicitors were slow to act and eventually his claim became time-barred. This prevented him from pursuing it further. The claimant then commenced a claim for compensation for professional negligence against the defendants.

At trial the court accepted that the claimant had been suffering from an anxiety syndrome related to his personal injury claim, that the solicitors had known of the syndrome and that it would probably abate as soon as the litigation was concluded. It therefore determined that the solicitors were liable to pay damages for pain, suffering and loss of amenity in respect of the additional period the claimant had suffered the anxiety syndrome due to their delay.

10.  Compensation for cost of reinstatement / cure

In claims against construction professionals, and where defects arise as a result of negligence in the design, execution and/or supervision of a project or scheme, the primary head of compensation will often be for the costs incurred in curing those defects, through rectification or reinstatement works.

However, and while less common, such compensation has also been awarded in claims against other types of professionals, where pre-existing defects in relation to property have been missed prior to purchase.

Case example: Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd

In Harbutt the claimant was a manufacturer of crayons and chalks. It appointed the defendant to design and install equipment in its factory for storing and dispensing a heavy wax, which had to be liquefied under heat for the manufacturing process. However, as a result of the defendant’s negligence, both in designing and installing a heating system, a fire broke out which caused damage to the claimant’s factory buildings, plant and machinery and stock.

The claimant was insured for the fire and promptly set about rebuilding the factory, albeit to a permitted design specification that was different (but overall no larger) than the original factory. It also commenced a claim for compensation for professional negligence against the defendant.

On appeal, the court confirmed that the appropriate measure of compensation was not the difference between the value of the claimant’s buildings, stock and plant before and after the fire (ie diminution in value) as the defendant had advocated. Rather, the claimant was entitled to recover the costs of replacing the factory, plant, machinery and stock, notwithstanding that in doing so it received ‘new for old’ and, to that extent, an element of betterment.

Conclusion

As the above case examples should demonstrate, in professional negligence claims compensation can be recovered for a variety of different types of loss. While some of these losses can be recovered simultaneously, others cannot, particularly if this would result in ‘double’ recovery.

While the courts have favoured certain approaches in particular types of claims, what type of compensation can and cannot be recovered will often depend on the circumstances of the particular case and the task that the professional was required to undertake.

Further legal assistance

As professional negligence solicitors we act for clients nationwide, to resolve claims against a wide range of professionals, including claims against solicitors, accountants, insurance brokers and surveyors.

If you are considering bringing a claim for professional negligence, and if you believe that the value of your claim is likely to exceed £100,000, we would be happy to discuss the matter with you.

Most of our clients fund their claims under a private retainer and almost all our instructions commence on this basis. However, in some cases and where requested, we may then be able to offer an alternative form of funding.

To arrange an initial consultation with us, and in the first instance, please complete our Contact Form or email us at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

In this brief guide we provide answers to a number of the questions frequently asked by businesses and individuals contemplating a professional negligence claim against an insurance broker.

What role is an insurance broker expected to fulfil?

An insurance broker usually acts as the agent of a policyholder, not the insurer. This is notwithstanding that the broker is frequently remunerated by the insurer, not the policyholder.

However, the day-to-day role of an insurance broker is not pre-ordained and can vary from one appointment to another. Therefore, before commencing any claim, it is important to ascertain the scope of the broker’s appointment, in order to determine what its legal obligations were and the extent to which it has failed to comply with them.

Generally, the role of an insurance broker is to:

• Ascertain the insurance needs of its client
• Arrange insurance cover which meets those needs
• Explain the nature of any cover arranged and any limits or conditions to it
• Assist with the notification and progression of claims

What legal duties does an insurance broker owe?

Insurance brokers are regulated by the Financial Conduct Authority (FCA) and are required to comply with the rules of professional conduct set out in the Insurance Conduct of Business Sourcebook (ICOBS). Insurance brokers owe a variety of legal duties to their clients. These include:

• Contractual duties, expressly or impliedly contained in written retainers / letters of engagement
• Statutory duties, such as those found in the Financial Service and Markets Act 2000
• Tortious duties, to act with reasonable skill and care
• Fiduciary duties, such as not to act where there is a conflict of interests

If, as a result of an insurance broker’s failure to comply with one or more of these duties, you suffer a financial loss, a legal claim for damages is likely to arise.

What type of mistakes usually give rise to claims against insurance brokers?

Frequently, a claim against an insurance broker is based on one or more of the following mistakes:

• A failure to ascertain a client’s insurance needs
• A failure to convey material information about a risk to an insurer
• A failure to arrange insurance cover for a particular risk
• A failure to arrange insurance cover on terms requested by a client
• A failure to arrange insurance which meets the needs of a client
• A failure to notify a claim in accordance with policy terms and conditions

We have written a corresponding article which provides, for each of the mistakes listed above, a real-life example of a claim that has been successfully pursued against an insurance broker. This can be accessed here.

What difficulties can arise in claims against insurance brokers?

One of the key battlegrounds in claims against insurance brokers is causation. A successful claimant will need to persuade the court that it is more likely than not that but for the broker’s errors or omissions, suitable insurance cover would have been in place.

To defeat a claim against it, a broker may well seek to assert that:

• Suitable cover was not available in the market
• Suitable cover was not available at an acceptable / affordable price point
• The conditions of cover would not have been complied with in any event
• Cover for the claim would have been declined in any event

Where such arguments are deployed, evidence from an expert witness may be required to address them.

What sort of compensation is recoverable from insurance brokers?

In many cases, a claimant will seek by way of damages the sum which would have been paid by insurers under the terms of a suitable policy. However, in appropriate circumstances, damages may also be recovered for:

• The costs of any negotiations with or coverage claim against insurers
• Loss of profit arising from the delay in receiving a policy payment from insurers
• The management time expended on mitigating any loss

A claimant will not usually be able to recover costs that would have been incurred in any event or which were not reasonably foreseeable. Examples may include the fees of a loss adjuster or the loss of profit from an unanticipated or undisclosed contract or order.

A more detailed examination of the types of loss for which damages are recoverable in claims against insurance brokers can be found in our related article: Compensation awards for broker negligence

Can claims be made by third parties?

Typically, there is a contractual relationship between the insurance broker and the party wishing to pursue a professional negligence claim. However, in certain circumstances, a claim can be made against an insurance broker by a non-client. This can be possible where, for example, an affected party is named or was intended to be named as a co-insured on a policy or where a policyholder acted detrimentally on the basis of incorrect information or advice given by an un-appointed insurance broker. More information about third party claims is available here.

What issues need to be considered at the outset of a claim?

In addition to the merits of a claim, some of the other issues to consider when contemplating a claim against an insurance broker are:

Funding

How to fund a claim is something that should always be considered at an early stage. While professional negligence claims can be relatively expensive to pursue, they are not always so and many are resolved at an early stage and without any need to go to court. There are also more funding options available now than ever before. You can learn more about these options here.

Limitation

Like all professional negligence claims, there are time limits within which claims against insurance brokers must be pursued. If you fail to comply with these limits, you will be prevented from pursuing any claim. Again, you can learn more about these time limits here.

Mitigation

As an injured party, you are invariably under a duty to take reasonable steps to mitigate your loss. What this means in practice will vary from one case to another. In certain circumstances, you may be obliged to engage in coverage negotiations with your insurer or even to commence legal proceedings against your insurer. In the latter example however, and while there is no invariant rule, this is generally not expected.

Further guidance on the duty to mitigate is available in our article: The duty to mitigate in professional negligence claims

Do I first have to make a complaint against an insurance broker?

Generally, you do not have to make a complaint before commencing a claim for compensation. However, you always have the option of doing so and may request a copy of the broker’s complaints handling procedure.

If you do make a complaint and it is not resolved to your satisfaction, you may then be entitled to make a complaint to the Financial Ombudsman Service (FOS). The FOS can provide an efficient mechanism for resolving low value complaints, particularly ones that are relatively straight forward. However, it is less suitable for large and/or complicated matters.

Do I have to instruct a solicitor?

While you are not obliged to instruct a solicitor in order to commence a complaint or claim against an insurance broker, it is often sensible to do so. A solicitor specialising in professional negligence claims should be able to provide you with independent advice on a range of issues, including the merits of your claim or complaint and the losses that you might reasonably expect to recover.

Professional negligence claims are often complicated and time consuming, and a successful outcome can very much depend on the way in which a claim is presented and pursued.

To help you decide between instructing a solicitor and pursuing a claim as a litigant in person, we identify and comment on some of the key factors to consider in our guide: Professional negligence claims – Do I need a solicitor?

What should I do next?

As professional negligence solicitors we act for clients nationwide, to resolve claims against a wide range of professionals, including claims against insurance brokers.

If you think you may have grounds for making a professional negligence claim against an insurance broker and if you would like to arrange an initial consultation with us, free of charge or commitment, please do not hesitate to contact us on 0800 195 4983 or by email at mail@pnclegal.com.

At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.