PI policy cannot be ceded to third party

Patrick Bracher

The professional indemnity policy issued by the Attorneys Insurance Indemnity Fund is incapable of cession to a third party. A purported cession to the client of a law firm who had lost misappropriated trust funds was declared invalid by the Supreme Court of Appeal.

Contracts can be ceded to third parties if there is no agreement between the parties prohibiting cession (hence the common non-cession clause in contracts) but not if the parties have specifically chosen each other as contracting parties because of a specific relationship between them that would not be shared by a third party (known as a delectus personae).

The Attorneys Insurance Company is specifically established to insure attorneys and provides an indemnity for their ‘legal liability to any third party arising out of the conduct of the profession by the insured’. The insurer can only insure attorneys.

The policy includes cover for claims for theft by any principal, partner, director, candidate attorney, employees or in-house consultants of an attorney. Therefore a specific group or class of people for whose benefit the insurance is established is defined in the policy.

Every individual practitioner who, on the date of a claim being made, is practising in South Africa is indemnified by the policy automatically. The contract gives no right of indemnity to anyone except a legal practitioner.

An attorney may not, without the insurer’s consent, cede their right to obtain indemnification under the PI policy to a client who has lost the funds because of the personal, restricted and statutorily regulated nature of the insurer’s obligation to its attorney insured.

The purported cession would make the client the person making the claim as well as the insured seeking an indemnity under the policy. The client, a victim of the fraudulent conduct, would step into the shoes of the fraudster. That is an untenable situation having regard to the nature of the legal relationship between the attorney’s insurer and attorney insured.

In addition, a contract cannot be ceded if the cession will impose a greater burden on the other party. In this case the cession would allow an entity which is not a practising attorney to become an insured which would place an entirely different burden on the insurer.

On both grounds, the purported agreement of cession was declared invalid and incapable of giving the appellant legal standing to sue the insurers.

The case is Propell Specialised Finance v Attorneys Insurance Indemnity Fund NPC.

First published by: Financial Institutions Legal Snapshot