Firm B held funds on trust for Ms A. When it came to light that a former staff member of Firm B had stolen funds from the trust account, Firm B offered to pay Ms A the money that was stolen. This was conditional, however, on Ms A signing a discharge accepting the payment in “full and final settlement” of all claims against Firm B and its insurers, and acknowledging that Ms A had taken independent legal advice, or had elected not to do so.
Ms A felt that she should not be required to sign the discharge and made a complaint to the Law Society.
The lawyers acting for Firm B argued that the discharge was “simply the way insurance companies operate” and that the insurer would not have paid any claim without it. The Standards Committee, however, was unsympathetic to this argument, saying that “underwriters of the legal profession cannot dictate the way in which lawyers must honour their professional responsibilities.”
The Committee acknowledged that the commercial reality was such that Firm B had little choice but to seek the discharge, but said that Firm B nonetheless had an “unconditional professional responsibility” to reimburse Ms A. It was thus “improper,” the Committee said, to require the discharge. To require this of Ms A, it reasoned, would be akin to treating her as a civil claimant, whereas she was a simple victim of theft and was entitled to a remedy as of right under section 110 of the Lawyers and Conveyancers Act 2006.
While the Committee decided to take no further action against Firm B because it was acting in good faith on advice from the insurer’s lawyers, The Committee said that it viewed the matter “seriously” and it warranted a warning.
Philippa Fee, partner at Fee Langstone, says the decision is a significant one for the insurance industry. It is common practice for insurers, she says, to direct insureds to require discharges acknowledging the payment is in full and final settlement before the insurer will pay the claim. Philippa’s view is that “this decision undermines the insurer’s right to insist on a discharge, at least where the claim concerns funds stolen from the lawyer’s trust account. If an insurer were to insist on a discharge in this situation, according to this Committee, the insurer would be requiring the lawyer to breach his or her professional responsibilities. ”
Philippa says that this decision is not just a warning to Firm B but also to insurers’ lawyers; such firms could themselves be in breach of their professional obligations by advising insureds to insist on such discharges.