UK – Duty of care owed by partner in reporting circumstances to insurer

A partner in a UK law firm, entrusted with the responsibility of dealing with all aspects of the firm's professional indemnity insurance, was found to have failed to fulfil his obligations to notify a matter to the firm's professional indemnity insurer. The insurer had refused indemnity. Bernard Livesey QC, sitting as a Judge of the UK High Court (Chancery Division), determined that liability for the matter was to be borne personally by Mr Herrington. The reason for this being Mr Herrington was responsible for notifying the insurers that a claim had been made and his delay in doing so caused the refusal of indemnity.

Partnership Act

The issue was determined in the context of a final partnership account, following the dissolution of a partnership between Mr Tan and Mr Herrrington.

The Court considered section 24 of the UK Partnership Act 1890 (the Act), which provides:

'The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules ...

(2) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him

(a) in the ordinary and proper conduct of the business of the firm;

or (b) in or about anything necessarily done for the preservation of the business or property of the firm ...'

The Court accepted that in order to justify a departure from the general rule set out in section 24 of the Act, 'some element of culpability must be shown on the part of the partner responsible'. The issue in dispute was the nature and extent of 'the element of culpability' which was required and what exactly amounted to 'culpable negligence'.

The Court was faced with an absence of judicial authority dealing with the issue where the loss involved a partner whose default occurred in the management of the firm's administrative affairs and where the default was by a partner entrusted with the responsibility of protecting the firm by complying with the insuring provisions of a professional indemnity insurance policy.

Decision

In a scathing judgment, Mr Livesey QC rejected Mr Herrington's argument that he did not notify the matter because he was waiting for relevant documentation. He found that Mr Herrington had not notified the matter because he believed the claim was 'spurious' or a 'dinner party claim', and that 'at the end of the day if he ignored it, it might well go away and not be pursued'.

Mr Livesey QC held that if he was correct in finding that the duty owed was a duty to exercise reasonable care and skill, and that this was an objective standard, Mr Herrington had breached this duty. Mr Livesey QC also held that if he was wrong about this, and the duty was a lesser duty to 'do his best' or to 'act to the standard that he would apply in looking after his affairs', then Mr Herrington would also have breached this duty. His failure to report the claim to insurers was determined to be 'culpable or gross negligence'.

It followed that the costs of the uninsured claim were not entitled to be recovered from Mr Tann.

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