Former partners of HLB Kidsons have lost a battle with their insurers over failed tax schemes that could create a damages bill of more than £20m but won a small victory which may help other firms.

A Court of Appeal ruling, which largely went against the former partners of HLB Kidsons, could have positive implications for accounting firms in relation to disputes with their professional indemnity insurers, lawyers have said.

The Kidsons case concerned failed tax schemes run by Solutions at Fiscal Innovation Limited (S@FI), a company managed by the firm prior to its merger with Baker Tilly.

Kidsons wanted its former insurers, Lloyds Underwriters and Others, to cover it after clients sued the firm over flaws in S@FI’s tax avoidance products.

The insurers rejected these claims as they occurred after the policy expired in April 2002, but Kidsons maintained that as they had notified the underwriters of possible problems during the insured period, the insurers should pick up the tab.

It was ruled that the notifications made to insurers had been too vague in the initial High Court case, but a Court of Appeal decision conceded they were valid.

However, the court said notifications only covered problems with the implementation of S@FI schemes, not the design of the schemes themselves, so the insurers’ liability is limited and the former partners of Kidsons are still likely to be facing payouts in excess of £20m.

The case has wider implications for the industry, says Nik Carle, a partner specialising in professional indemnity at law firm Browne Jacobson.

‘It is going to be more difficult for insurers to reject vague notifications in the future whereas they had been able to do that with some confidence before,’ he said.

David Turner, a junior barrister at Four New Square, which represented Kidsons, said the case may also lead to a review of ICAEW guidance on professional indemnity.