A cautionary tale on professional indemnity insurance and insolvent professionals

A recent ruling from the Court of Appeal In the Matter of Boscolo Limited [2025] EWCA Civ 906 has highlighted a gap in the protection available to clients pursuing professional negligence claims against professionals that become insolvent.

Whilst the judgment was given in the context of a “perfect storm” factual matrix, it serves as a warning as to the extent to which claimants can access insurance proceeds in cases where a professional facing a negligence claim has received an insurance payment direct and subsequently becomes insolvent.

We recommend that lenders revisit their professional panel terms/letters of instruction to mitigate the risk of not receiving claim proceeds which should be paid to them.

Background

Boscolo Limited was engaged to carry out refurbishment works on a listed property in Hampstead. The contract, based on the British Institute of Interior Design’s standard terms, required Boscolo to maintain professional indemnity insurance. When the clients later alleged negligence (specifically, that Mr Lakhaney, an employee of Boscolo, had wrongly advised that it was not necessary to obtain listed building consent for the proposed alterations), the matter was referred to the insurer.

By the time of the referral, Boscolo was already technically insolvent; however, before Boscolo formally entered liquidation, the insurer exercised a clause in the policy allowing it to pay the indemnity limit directly to Boscolo (and effectively walk away from any further involvement). Crucially, this payment was made before Boscolo became a “relevant person” under the Third Parties (Rights Against Insurers) Act 2010 (the Act), meaning the aggrieved clients had no automatic right to claim the proceeds from the insurers directly.

The Court therefore had to determine whether the insurance monies formed part of Boscolo’s assets or whether the clients (whose claim had prompted the payout by insurers) were entitled to the insurance monies. In his initial judgment, HHJ Matthews ruled that they did constitute part of Boscolo’s assets, and that the insurance monies therefore fell to be distributed pari passu among the general body of creditors.

The claimants appealed the decision.

The Appeal

The central question for the Court of Appeal was whether the insurance proceeds paid to Boscolo should be earmarked for the claimants. The claimants argued that a trust had been created for the insurance proceeds on two grounds:

• There was an implied term in the contract requiring the proceeds to be held on trust in the event of insolvency; and/or
• There was a constructive trust over the proceeds.

The first ground was rejected by the Court of Appeal. It held, applying well established principles as to when a term will be implied into a contract, that the suggested term was (i) not necessary; (ii) imprecise, in that it did not meet the “reasonable bystander” test; and (iii) incapable of creating a valid trust.

The second ground was dismissed as an attempt to revive a form of remedial constructive trust previously rejected by the Supreme Court and therefore had no basis in English law.

As a result, the insurance monies formed part of Boscolo’s general assets and therefore were to be distributed among all creditors. (To rub salt into the wounds of the aggrieved clients, one of the creditors was Mr Lakhaney himself, who therefore indirectly benefited from his negligent advice.)

Key takeaway for lenders

This decision highlights a troubling reality that even when a professional is insured, clients may not benefit from that cover if the professional becomes insolvent, and the insurer pays out before statutory protections under the Act are triggered. The judgment confirms that, unless the contract explicitly states otherwise, insurance proceeds paid to a professional belong to the professional, not the claimant.

Lenders and clients relying on professional indemnity insurance should consider revisiting their service level agreements and letters of instruction with professional advisers in light of the judgment. One practical step is to include a clause that requires insurance proceeds received by the insured in relation to a claim to be held separately on trust for the claimant party and used solely to satisfy the relevant claim. This kind of ring-fencing term will assist in arguing that insurance proceeds received in circumstances such as the Boscolo case are held on trust and do not become absorbed into the insolvent professional’s general pool of assets.

We have significant experience in professional negligence claims, as well as drafting and negotiating third party professional supplier terms, and would be happy to assist you with any support you need.