To whom do Insurance Proceeds belong when an Insured becomes Insolvent? 

The recent Court of Appeal decision in Desai v Wood [2025] EWCA Civ 906 considered whether professional indemnity insurance payouts (“Insurance Proceeds”) should be ring-fenced for an insured’s clients if the insured party becomes insolvent.

Background

The case involved a professional negligence claim against Boscolo Limited (“the Company”), who provided interior design and project management services to its client, (“the Client”). The Company had professional indemnity insurance in place (“the Policy”).

The Client engaged the Company to refurbish an apartment in London by a written contract (“the Refurbishment Contract”). The Company advised the Client that Listed Buildings Consent was not required for the refurbishment job. The Client later contended that this advice was negligent and so made a claim against the Company.

Under the Policy, there was a limit of indemnity for any one claim of £250,000. There was also a Claims Condition under the Policy, which allowed Royal & Sun Alliance Ltd (“the Insurer”) to pay the limit of indemnity direct to the Company and, in so doing, relinquish control of any such claim and be under no further liability in connection with the claim.

The Insurer elected to exercise its power under the Claims Condition and duly paid out the £250,000 limit of indemnity to the Company (before the Company’s liability was established), then ceased involvement.

Soon after, and to the dismay of the Client, the Company entered creditors voluntary liquidation, which left the burning question – who was entitled to the Insurance Proceeds? Should the Insurance Proceeds be ring-fenced for the Client, or should they form part of the Company’s insolvent estate?

Court Decisions

At first instance, the Client argued that the Insurance Proceeds should be held on trust for them, either by an express or implied term in the Refurbishment Contract, or via a constructive trust to prevent unjust enrichment. The judge rejected both arguments, finding no implied term or constructive trust that would give the Client a proprietary interest in the Insurance Proceeds.

On appeal, the Client argued the following:

• There was an implied term in the Refurbishment Contract and the Policy that, if the Company believed it might not be able to pay a claim from its available resources (i.e. the Company had the “Relevant State of Mind”), it would not dissipate the Insurance Proceeds or use them to pay other creditors or for any purpose conflicting with the “Paramount Purpose”. The Paramount Purpose was namely to secure that the Company was financially able to compensate its clients.
• Given the Company had the Relevant State of Mind at the time it received the Insurance Proceeds, it held those monies on an implied trust not to use them inconsistently with the Paramount Purpose.

The Court of Appeal ultimately rejected the Client’s arguments on the following grounds:

• The Court found no basis to imply such a term into the Refurbishment Contract. The insurance was primarily for the Company’s benefit, and any benefit to the Client was indirect.
• The Court emphasised that implied terms must be necessary and certain. Here, there were “insurmountable difficulties” regarding the requirements of necessity and certainty for implication of terms.
• The parties could have expressly provided for ring-fencing of any Insurance Proceeds in the Refurbishment Contract but did not do so.
• Even if a term was to be implied, it would not give rise to any trust, which requires certainty of intention, subject matter and objects. Here, there were too many possible options and uncertainties about when and how such a trust would arise.
• The Court also rejected the Client’s less-pressed argument for a constructive trust, noting that the Company was entitled to use the Insurance Proceeds to fund its defence, which was inconsistent with a trust for the Client.

Conclusion

The case is clear on whether Insurance Proceeds should be ring-fenced for an insured party’s clients, regardless of any hardship this may cause. Unless a contract specifically provides otherwise, Insurance Proceeds paid to an insured will not be ring-fenced for clients and will instead form part of the insolvent estate. This decision should not, as Lord Justice Zacaroli concluded in his judgment, preclude parties seeking to provide, by express terms, protection against an insured’s insolvency. Parties engaging with professional service providers may, therefore, consider seeking to negotiate a clause in the contract to protect their interests in this regard.

Should you need legal advice or support in drafting construction contracts that include protective clauses in light of Desai v Wood, or advice on managing risks where a professional service provider faces insolvency and an insurance claim is involved, we would be happy to assist.