In February 2025 the English High Court delivered a 202-paragraph judgment only to come to the conclusion that the lawyers professional indemnity policy covering both insured entities did not mean that the successor firm could be indemnified for the negligent performance of services by its predecessor firm.
The policy covered both the previous firm with its former partners (the Firm) as well as the LLP which replaced the Firm but was now insolvent. The insurers agreed in the policy to “pay on behalf of any Insured a Loss arising from any Claim for any civil liability of any Insured which arises from the performance of or failure to perform Legal Services”.
When the LLP was established, the Firm’s practice was transferred to the LLP which gave rise to a novation of the client contracts with the Firm. Novation does not transfer legal rights and liabilities. It discharges the original contract and replaces it with a new contract, typically on the same terms but with a different counterparty. Even though it was found by the court (and in two previous decisions relating to claims by the clients against the Firm) that the transaction gave rise to a novation, the liability of the LLP was not civil liability arising from the LLP’s performance or failure to perform legal services. The liability to clients arose by virtue of the novation. The fact that the policy provided cover for both the Firm and for the LLP did not magically have the effect of transferring liability from one to another so that the insurers had to indemnify the LLP in respect of the professional negligence of the Firm. The fact that the LLP was the successor practice to the Firm did not render the LLP liable itself for any breaches of duty to clients on the part of the Firm nor oblige the insurers to provide an indemnity under the policy to the LLP in respect of any liabilities of the Firm transferred to the LLP. A professional indemnity policy may cover prior and successive practices and the changing composition of practices, but it does not follow that an indemnity will be afforded to the successor practice in respect of the failings of the prior practice.
The claimant’s had obtained a judgment against the LLP and not against the Firm. This was fatal to their direct claim against the insurers of the insolvent LLP because the policy only provided cover to the LLP for liabilities arising from its own breaches of duty not liability transferred to it by way of the novation.