29 July 2010
The Court of Appeal has upheld a ruling in Quinn v Law Society [2010] EWCA Civ 805, which has significant implications for insurers in the solicitors’ indemnity market. Absent an express or implied waiver of the fundamental human right of privilege, a solicitor must preserve the client’s confidential and privileged documents/information, even if this puts him in conflict with his duties of disclosure to Insurers.
Quinn were Qualifying Insurers to the 2 partner practice of South Bank Solicitors. One partner was a conveyancer; the other dealt with immigration matters. Following an investigation, the Solicitors Regulation Authority (“SRA”) intervened in the practice, and seized all files and documentation. Subsequent disciplinary proceedings were brought against both partners, but the allegations against each were different. The conveyancer was charged with suspected dishonesty; the other with failure to comply with the Solicitors Accounts Rules.
Quinn duly declined to indemnify the conveyancing partner on the ground that “the fraud provision is engaged”, but needed to investigate whether they could refuse to indemnify the other on the basis that he had condoned the fraud. They sought access to files and accounts information which were held by the Intervention Agent, on behalf of the SRA. Where formal claims had been made, it was agreed that copies of files would be delivered up (on the basis that there had been an implied waiver of privilege). However, there was a refusal to provide copies of any file in respect of which there was no formal claim, nor any general accounting documentation, so as to “…protect the interests of former clients and in accordance with the Code of Conduct.”.
First instance
Quinn applied to the Court
for an Order granting them inspection of all documents recovered
from the intervened practice. The Application first came before Mr
Justice Peter Smith, who dismissed it on the basis that Quinn’s
status as a Qualifying Insurer did not elevate it to the status of
the Law Society such that it was entitled to disclosure, and in any
event the underlying reason for the Application was contrary to the
principle behind the regulatory regime, which is there to protect
the public. Quinn could not rely on contractual provisions in the
insurance policy, as the Law Society was not a party to that
agreement.
Court of Appeal
- The Court of Appeal upheld the decision at first instance on six grounds:
- A solicitor is not entitled or bound to disclose to his insurer, either on inception, renewal or notification, confidential and privileged material, without the client’s actual, or implied consent;
- Duties of good faith owed by the solicitor to his insurers cannot override privilege, even if the PI policy requires notification of circumstances;
- Upon an intervention, the solicitor/insured is bound to deliver up all documents, including those which are subject to clients’ privilege; but the Law Society is not under any corresponding obligation of disclosure to the solicitor/Insured;
- The Law Society/SRA have public functions for the protection of the public and clients of the firm, or solicitor in respect of whom the intervention is made. To the extent that a Qualifying insurer is part of the regulatory system, it is not so for the purposes of receiving services or information;
- The objective behind Quinn’s Application for disclosure was not for any public purpose, but for its own private purpose of seeking evidence to justify a refusal of indemnity – completely at odds with the regulatory role;
- To the extent a “circle of confidence” existed, there was no reason why it should include a Qualifying insurer.
We don’t know what we don’t know
Clearly,
there are serious implications for insurers on notification of
circumstances, as well as considering claims records on
renewal.
- How do insurers assess the validity of a notification of circumstances without being able to investigate fully?
- How do insurers judge the extent of possible exposure?
- When notified of a circumstance, insurers will often liaise with the insured to seek to rectify problems, with the intention of avoiding a potential future claim. If, because of this decision, an insured is prevented from discussing a circumstance frankly with his insurers, with a view to agreeing a strategy to avoid the circumstance developing into a claim, insurers may see an increase in the number of claims which might otherwise have been avoided.
Imperfect solutions
Insureds might report
circumstances without reference to client names, and remove any
detail which might otherwise identify the client. No doubt this
will result in Insurers increasingly reserving rights. It could
also cause problems with managing internal conflicts, identifying
fraud (borrowers’ names being crucial in this regard) as well as
potential difficulties in identifying which policy year should
respond (particularly where there has been a change in Insurers on
risk);
Privilege can be waived by informed consent. It is conceivable that when a circumstance arises, a client might be asked to waive privilege, such that the Insured can liaise with Insurers with a view to establishing whether rectification might be possible. This may be a reasonable solution for a sophisticated client. However, to ask this of a lay client, could be counter-productive, and encourage claims which otherwise might never be made, particularly once “Insurers” are mentioned;
An alternative is that solicitors might seek to incorporate a clause into their standard terms of business, such that at the outset of a retainer, a client agrees that the solicitor would be entitled to disclose relevant matters to his insurers, in order to protect the insurance position. Whilst there is nothing stopping solicitors amending their standard terms straight away, it is possible that the SRA will step in and amend the Code of Conduct, so as to make this an additional requirement of a retainer letter.
Whether Quinn intend to petition the Supreme Court for permission to appeal, we shall have to wait and see. Either way, we must assume that, as part of the on-going review of the Solicitors Code of Conduct, the SRA will consider what changes are required to the initial retainer documentation.
Watch this space.
