Transfer troubles: from novation to no-cover

The High Court judgment in Roger Leggett & 40 Others v American International Group UK Limited [2025] EWHC 278 (Comm) provides a useful reminder on the scope of cover afforded by solicitors' professional indemnity policies as well as the implications of the successor practice rules.  It also underscores the complex coverage issues that can arise for both policyholders and claimants following a business restructure.

BACKGROUND

Giambrone Law LLP (the LLP) was incorporated in April 2008, having previously traded as an unincorporated partnership, Giambrone & Law (the Firm).

The Claimants (of which there were 41) initially retained the Firm throughout 2007 and 2008 to provide legal advice on purchasing off-plan apartments in the 'Jewel of the Sea' development in Calabria, Italy. After the LLP's incorporation, the claimants continued their retainer with the LLP.

AIG provided a policy of solicitors' professional indemnity insurance to the LLP for the relevant period (the Policy).  In addition to the LLP, the Policy also provided cover to the Firm and its former partners, including Mr Giambrone.  Both the Firm and the LLP were manifestations of Mr Giambrone’s legal practice from time to time and, for the purposes of the Successor Practice regime under the Policy (as included in the Policy pursuant to the SRA Minimum Terms & Conditions for all regulated firms), the Firm was the “Prior Practice” and the LLP was the “Successor Practice”.

The Primary Proceedings

The Jewel of the Sea development did not go as planned.  The Claimants sued both the Firm and the LLP, which was by then in liquidation, alleging inadequate due diligence, failure to report planning issues, and misrepresentation of the project's viability.  In doing so, they failed to differentiate clearly between the alleged failings of the Firm and those of the LLP.

The Claimants failed to effect good service of the proceedings on the Firm, and the claim against it was struck out. The claim against the LLP, on the other hand, continued undefended, resulting in a default judgment in favour of the Claimants.  An undefended hearing followed, at which Fordham J assessed the damages payable by the LLP. 

Fordham J held that the transfer of the solicitors' practice from an unincorporated partnership to a limited liability partnership had, in the particular circumstances of the case, given rise to an implied novation, or novation by conduct, of the Claimants' retainers with the Firm.  This had the effect that the engagement contracts between the Claimants and the Firm were discharged and replaced by contracts between the Claimants and the LLP.  It was held, therefore, that the LLP alone was liable for any prior breach of contract by Firm and that the LLP was liable to indemnify the Claimant for any such breaches.

Damages in excess of £3.2m were awarded.

The claim against insurers

The Claimants then advanced a claim against AIG, the LLP's professional indemnity insurer, under the Third Parties (Rights against Insurers) Act 1930 (the 1930 Act), seeking a declaration that AIG was liable to indemnify the damages awarded to the Claimants in the Primary Proceedings.

Under the 1930 Act, due to the LLP's insolvency, the Claimants were entitled to enforce any right of indemnity which the LLP had against its insurer. However, the Claimants’ rights against the insurer were only as good as the LLP’s rights would have been: if the insurer would have had a coverage defence against the LLP, it would also be entitled to rely on that defence against the Claimants.

AIG declined the claim arguing (amongst other things) that the LLP's liabilities arose from the Firm's breaches of professional duty (rather than the LLP's) and were not, therefore, covered under the Policy.  AIG asserted that even if the court in the Primary Proceedings had been right to find that the LLP was liable for the Firm's failings (which finding AIG also sought, unsuccessfully, to challenge), there was, nonetheless, no obligation for it to indemnify the LLP under the policy. AIG argued that the liability of the LLP to the Claimants was not a civil liability arising from any failing on the LLP's part to perform “Legal Services”, as required by the insuring clause of the Policy.  Rather, it arose solely by reason of the novation which transferred the liabilities of the Firm to the LLP.

DECISION

The Court accepted AIG's argument.  Noting at the outset that "solicitors’ professional indemnity policies, such as the Policy, do not indemnify solicitors in respect of all liabilities they may incur", Recorder Janet Bignell KC (sitting as a High Court judge) went on to conclude that, on its terms, the Policy was not intended to cover the LLP for liabilities it assumed, by reason of the novation, arising from the Firm's breaches: it was intended to cover liabilities arising from the LLP's own performance of legal services.

The Court considered whether LLP's status as a "successor practice" of the Firm for the purposes of the Policy made any difference to the analysis, concluding that it did not.  The Court reasoned that the fact that an insurer is obliged to provide cover to both a prior and a successor practice does not, of itself, "magically have the effect of transferring liability from one to the other in order to effect an indemnity for the LLP in respect of liabilities of the Firm." 

The Court also considered public policy considerations, noting that the primary purpose of solicitors' professional indemnity insurance is to protect clients from the negligence of their legal advisers. Despite expressing "very considerable concern" for the Claimants' predicament, the Court nonetheless found that, on its terms, the Policy was not triggered.

The Court therefore found in favour of AIG, leaving the Claimants without access to the proceeds of the insolvent judgment debtor's professional indemnity insurance. 

COMMENT

The judgment serves as a reminder to:

• policyholders as to the importance of ensuring risks arising from business transfer arrangements are adequately mapped onto professional indemnity insurance policies; and
• claimants as to the importance of ensuring that judgment is entered against an entity that is both legally liable and relevantly insured.

It serves also as a reminder that the deeming effect of the successor practice regime under the SRA Minimum Terms creates an insurance effect only, not a liability effect: so the insurer of the Successor Practice is required to indemnify the relevant liabilities of the Prior Practice, but the Successor Practice does not itself "magically" assume any additional liabilities by reason of that regime.