INSURANCE, FUNDING AND LITIGATION: INSURERS HAD TO PAY SOLICITORS

There is an interesting judgment by Stuart Brown QC (sitting as a judge of the High Court) in Nesbit Law Group LLP -v- Acasta European Insurance Company Limited (Leeds Mercantile Court 15.9.16).

The judgment is available here nesbitjudgment

A judgment on a supplementary issue is available here nesbitprelim

The Note in relation to permission to appeal is available here nesbit-refusal

THE CASE

The defendant had provided insurance to the claimant solicitors.   The agreement was terminated in 2009 with large sums still owing. The hearing was held to determine what sums, if any, the insurer was liable to pay the insurers under the terms of the policies. It was agreed that the primary question of construction did not require witness evidence.  The claimant’s case was that payment was due under the policies, the defendant argued that it had no liability to pay.

THE OVERALL RESULT

Following lengthy oral submissions, and after further consideration overnight, I indicated that I was quite satisfied that Acasta’s case was untenable and thus it followed that the Claimant’s case must succeed. No question as to quantification of loss apparently arises though issues were raised as to the form of the order and in respect of ancillary matters (interest and costs).”

THE JUDGMENT ON THE ISSUE OF CONSTRUCTION

 

  1. Mr Chapman’s case is simple. Nesbit, as required of them, took out FGI policies in hundreds of claims and paid premiums so as to obtain cover in respect of incurred irrecoverable costs in unsuccessful claims. Those claims were made but no payment has been forthcoming. I digress to note that it is common ground that over the two or so years of the tripartite relationship (no policies being issued after termination / refinancing) no claim was ever met though it may be no notifications were earlier given.
  1. Ms Troy’s case is more complicated. Stripped to its core she asserts that upon refinancing insurance cover ceased. There was no longer any subsisting (but only substitute) indebtedness. That bold submission reflects her “primary” case but she bolsters such by reference to the definition of irrecoverable losses, the reference to limit of cover (and the balance outstanding) and separately and critically to Clause 2.1.3 (G) as set out above. I shall consider her arguments below but first I need to give some greater flesh to Nesbit’s contentions.
  1. First Mr Chapman reminds me that I (or the reasonable person) should have regard to the overall background. This was a scheme designed to (hopefully) benefit all. Clydesdale would loan millions at a “generous” rate of interest (and additionally receive commission); Acasta would receive large sums by way of ATE premiums which would only rarely result in pay-outs and Nesbit would (if they will excuse my putting it this way) be overrun with work.
  1. The FGI policy was plain on its face. It was intended to provide cover in respect of the risk of incurring irrecoverable costs in unsuccessful cases (not, as Ms Troy essentially asserts, against the risk of defaulting on the loan). This was the object of the scheme as the Recitals made plain and as the cover schedule recites. As a matter of simple common sense Nesbit might for a variety of reasons (a lottery windfall, tax planning or a desire to end their relationship with Clydesdale) repay their loans but preserve accrued rights under the FGI policies (perhaps not then knowing whether claims would or would not be successful).
  1. Ms Troy focuses upon the loan. The initial loan was superseded first by the term loan and later by the settlement agreement. Thus she asserts that if, at the time the claim was made, the loan was no longer subsisting, then no liability arose. I am bound to say that this primary submission makes no business sense (save from the insurer’s own standpoint). At first Ms Troy was bold enough to submit that if Nesbits “came into money” and decided to free themselves from the interest burden then Acasta would similarly be freed from any obligation. Imagine if, as required, Mr Nesbit on the 1st April 2008 took out 50 policies (both ATE and FGI) for a coachload of innocent passengers and then, a month later, paid off all his debts he would have paid out several thousand pounds with no prospect of ever recovering under the policy were one or two (or perhaps more) “phantom” passengers to be identified.
  1. Ms Troy’s submission at this point is based upon the definitions first of irrecoverable losses and second as to the limit of cover. I have set these out above but repeat their essentials now.
“Irrecoverable costs -….. the capital costs incurred by you …. which are funded by way of a Loan provided to You by the Funder under the Litigation funding scheme.”
 
“Limit of cover -means the lower of
  1. The amount outstanding balance of the Loan
 
  1. This last definition requires me also (given the use of the capital in “Loan”)
to set out a further definition:
“Loan – the funds advanced to you by the Funder to finance the irrecoverable costs…. and interest”
 
  1. Ms Troy asserts that, as at the moment the claims were notified there were no longer any scheme loans subsisting but only the substitute term loan. That is right but it is, it seems to me, wholly beside the point. The reference in the definition of irrecoverable costs to the Loan (capital L) is merely to identify the source of the monies. Acasta were only insuring scheme (Clydesdale) loans as used to fund irrecoverable costs. As and when the policy took effect these costs had been so funded and that is the critical moment. The officious bystander if asked would say, having regard to the scheme as a whole, that the purpose and intent of the scheme had been met and, if a claim later arose, then the rights and obligations that had accrued upon policy inception persisted even if the loan no longer remained. The use of the past tense in the definition of “Loan” is consistent with such common sense interpretation.
  1. As to the reference to “balance amount outstanding of the Loan” Ms Troy sought to suggest that with refinancing there was no such balance outstanding and thus no obligation to repay. The first observation is that, as written, the phrase makes no sense lacking perhaps both preposition and article but, even if it be the case that, on a strict factual analysis, after refinancing there was no such outstanding balance (on the original loan) Ms Troy’s submission bears no commercial common sense. These claims all concern policies issued before refinancing. The sums claimed reflect incurred irrecoverable costs before refinancing. The time for determining the balance of the loan is then – I entirely accept that if the term loan provided for enhanced interest such could not be added to the claim but it is not suggested that has occurred. Again the short answer to Ms Troy’s submission is that the scheme, read as a whole, provided for continuation of accrued or contingent liability (under the policy) even if the loan had been repaid or the scheme itself terminated.
  1. Before I leave this point I should refer to one specific argument advanced. Ms Troy hypothesised the situation where on an interlocutory application Nesbit received a costs order in their favour. Ultimately however the claim was unsuccessful. She postulated that in such circumstances those costs recovered should be deducted from the outstanding balance so negating the idea that the sum once drawn was, interest apart, fixed and immutable. I am far from sure there would have been any such obligation on Nesbit’s part to hand over these costs. They do not fall within the definition of irrecoverable costs and my provisional view would be that no credit need be given therefor. The point is however academic only. It was, in my view, only raised because Miss Troy sought to categorise the Claimant’s case as being one where the policy was an unqualified repayment guarantee. I did not so regard Nesbit’s case but rather the policy was precisely what it purported to be one insuring against the risk of incurring irrecoverable costs in an unsuccessful claim.
  1. Miss Troy clearly recognised the difficulties of her principal submission. The funding agreement provided for early repayment and it would, certainly in my (or the reasonable person’s) view be an affront to common sense to say that Acasta could tear up their policies in such circumstances. She was therefore obliged to recognise that repayment might not of itself serve to negate cover. She therefore sought to refine her submission and focus upon the policy exclusions. I again turn to Clause 2.1.3 (G):
We will not cover You for any Irrecoverable Costs; where
The terms and conditions of the Loan have not been strictly adhered to, including but not limited to any agreement entered into by You and the Funder to repay a Loan”
 
  1. The first part of this exclusion is, I think, easy to construe. Acasta would not be obliged to provide cover if there had been a breach of one of the obligations of the loan agreement but no such breaches are relied upon. I again digress to suggest that, strictly read, the provisions as to repayment dates could well be taken to mean that in every case the solicitor would be in breach whilst awaiting payment from Acasta under the policy. Whilst not deciding the matter there would clearly be an argument that such would not accord with common sense when the whole object of the scheme was that cash flow difficulties were eased by introduction of insurance monies. No such breaches are however relied upon and I am spared that interesting debate.
  1. I recognise that speculation is dangerous and that the matter was not addressed before me. I am further conscious that the point does not strictly arise for determination but I do wonder whether there is not an obvious explanation for Acasta’s failure to advance such arguments (however attractive / unattractive /, meretricious or lacking in merit they may be). Nesbit’s present claim is founded upon hundreds of individual FGIs. When refinancing and later settlement occurred such involved not only irrecoverable losses but also other loans made. It would be necessary for Acasta to consider each claim individually and identify a breach whether as to payment or otherwise. I understand the difficulty but breach in an individual case cannot be presumed from re-financing and Acasta’s logistical problems, if such there were, are an inevitable consequence of the form of scheme adopted for what then seemed sound commercial reasons
  1. It is the second limb of the Clause upon which Miss Troy focuses. She asserts that Nesbit were not only possibly in breach of the original loan agreements but also of the term loan and thus Nesbit are not covered. I am bound to say that I find the argument difficult to follow. As at the moment of inception of the policy the only loan then in existence was that advanced upon confirmation the policy was in existence. In my view the refinancing (and any breach of that agreement) are wholly irrelevant to Acasta’s obligations under the policy. If the bystander were asked he would simply say that Acasta remained liable to provide cover unless it could point to some specific breach of the original loan agreements.
  1. In this regard I am bound to say that, even after re-reading the Part 20 Defence (CB Tab2), I can find no pleading which mirrors or foreshadows this particular submission. At Paragraph 12 reliance is placed upon the “full terms of the policies and their effect”. At paragraph 14 the primary case is set out in full asserting (and I summarise) that with the making of the term loan all liability ceased. I have rejected such primary argument above. There is no specific reference to Clause 2.1.3 (G) still less is any breach (any failure to strictly adhere whether to the original Loan or any other agreement to repay) identified.
  1. I do not decide the matter on a “pleading point” but rather I simply confirm that, in my view, Mr Chapman is right when he asserts that the clause is intended to allow Acasta to avoid cover if the loan (and the initial loan only) conditions, including obligations to repay, are breached. That is not pleaded nor relied upon. Further I am bound to note that the term loan (CB Tab 24) does not, on its face meet the definition of “Loan” (Capital L) given the use of the past tense. The term loan was a substitute not fulfilling such definition and certainly not made in respect of past advances.
  1. Given my determination that refinancing had no impact upon Acasta’s accrued or potential obligations it follows that the settlement agreement had no such impact either. Acasta’s only liability is in respect of those policies taken out with funds supplied by Clydesdale under the scheme. It has no liability arising out of term loan or settlement agreement.
  1. I next need deal, only briefly, with certain “extraneous matters”.
  1. I was referred (Bundle B Tab 27) to the Key Facts document jointly produced by Clydesdale and Acasta as a “quick guide to the scheme”. I am conscious of the parol evidence rule but am bound to observe that in so far as such sets out the purpose and general nature of the scheme it entirely conforms with that contended for by Nesbit. Miss Troy drew my attention to paragraph 3 on page B 313 where the FGI policy is described as “providing an indemnity to solicitors for work in progress funding advances provided to them…..The indemnity is provided in the event that a repayment demand is made and the repayment has not been made within the terms of the funding contract”.
  1. Such extraneous material must be viewed with caution (if at all) but I do not see how it assists particularly if it were to be put alongside the descriptions given at p.319 or the final answers given at pages 315 (Question 10) and 321 (Question 8).
  1. In a similar vein my attention was drawn to the reservations / concerns apparently expressed by Mr Nesbit as and when refinancing was under discussion. Such are most clearly expressed at CB Tab 27 p.321 where Mr Nesbit postulated Acasta relying upon refinancing as a reason for declining cover. In my view his fears are largely if not wholly irrelevant to the question of construction and were, as it transpires, ultimately groundless.
  1. The last matter raised was that of Acasta’s concerns as to refinancing best seen at Bundle D
p.783 onwards. That document pre-dates the refinancing of Nesbit’s loan  but is subsequent to Clydesdale’s notice of termination. It is to be read in tandem with the unexecuted variation agreement (CB Tab 22). The only comments I need make are that it is entirely understandable that variation would have to follow the introduction of term loans, given a need to relook at volumes of assured business, changed economic circumstances and past experience as to security and numbers of unsuccessful claims but none of this has any relevance to agreements entered into some years previously. It is interesting to observe that the new focus was not on insuring irrecoverable costs but upon insuring (my phrase) “bad debts”. I have already ruled that such was not the real focus earlier.
Conclusion
  1. It follows from the above that I am quite satisfied that the policy cannot be read in the way contended for by Ms Troy, namely that Acasta’s obligations thereunder ceased upon the loan being refinanced or compromised. Nor am I persuaded that any breach of the term loan, such being, as I understand it, the thrust of the submission under Clause 2.1.3 (G) is material to my deliberations. That clause refers to the advance loan only and no breaches in respect of that loan are pleaded or made out.
  1. I have assumed that the capital sum in issue between the parties is agreed and amounts to £991,908.86 although, given the recent history of this matter, I would seek confirmation thereof.

REFUSING PERMISSION TO APPEAL

The judge refused permission to appeal.

  1. I propose that this Note be added to the form refusing permission to appeal so that, if any appeal is made, the Court is aware that I have considered all matters raised.
  1. Some 24 hours after delivering judgment and making a final Order Ms Troy of Counsel has brought to my attention the decision of David Richards J in Clydesdale Finance and others v Smales and others [2009]EWHC 3190 Ch. I find it astonishing, whatever its materiality, that the decision, if now relied upon by Acasta, was not brought to my attention earlier given that Acasta (Focus as they then were) were joint Claimants with Clydesdale and the policy under consideration appears to have been the self same one as that in the instant case.
  1. There is one interesting but perhaps ultimately immaterial difference in that Clydesdale paid the premiums in the name of the scheme solicitors.
  1. In the event I am quite unpersuaded that the case assists Miss Troy in her primary submission that the risk was (defaulting) on loans and not capital (irrecoverable) costs as funded by loans.
  1. At Paragraphs 17 and 20 Richards J expressed the cover provided as being for capital costs funded by a loan. I agree; it is not the loan itself that is covered.
  1. It is right that Clause 8.2 (and the purpose of the policy itself) provides that payments made thereunder will be used to satisfy indebtedness but that refers to the use to be made of insurance monies and not the entitlement thereto.
  1. Similarly, in so far as Richards J refers to the purpose of the policy as providing security that is of course right in two respects. Clydesdale could sue themselves and, if they did not, they can look to Nesbit to hand them on, as will transpire here given the terms of the settlement agreement and the proffered undertaking.
  1. I see nothing in the judgment which requires me to amend or add to my reasons as given but, I repeat, I am anxious that any future Court should know all materials have (if belatedly) been looked at.

 

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