The Dishonesty Exclusion was successfully used to defend a professional indemnity claim.
There was a professional indemnity policy indemnifying Joshua & Usman Legal Services Limited (JULS) against "civil liability to the extent that it arises from Private Legal Practice in connection with the firm's practice, provided that a claim in respect of such liability is first made against JULS.
There were two directors in JULS and one of them is Mr A who submitted a property loan application. The other director, Ms U then certified Mr A application and signed as witness.
The Claimant transferred to JULS who represented Mr A, the loan sum in anticipation of the completion of the property purchase by Mr A. However, Mr A had made false statements in his loan application and did not intend to purchase the property, rather, he stole the loan amount as he had accessed and authority over JULS account being one of the two directors.
Interestingly, Mr A's wife also took a property loan from the same lender to buy her husband’s property. It was approved and the loan sum was also given to JULS who also represented Mr A's wife. However this property transaction was also never completed and Mr A again misappropriated the loan money, which had been transferred to JULS.
The Claimant referred the misconduct of JULS to the Office of the Supervision of Solicitors. The Law Society intervened in the affairs and disciplinary proceedings were instituted by the Law Society against Mr. A, Ms U and JULS.
Claimant then instituted legal proceeding against JULS. The latter did not defend the proceeding and the claimant obtained judgment for ￡671,623.89 using the Third Parties (Rights Against Insurers) Act 1930, the claimant sought payment from the defendant, JULS.
The policy covering JULS has the following exclusions:
- Fraud or dishonesty
Any claim falling within the Scope of Cover clauses 1-7 against any Insured arising from dishonesty or a fraudulent act or omission committed or condoned by such insured, except that
- b) no such dishonesty, act or omission will be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of that body corporate or in the case of a limited liability partnership, all members of that limited liability partnership"
Therefore it has to be proven that both the two directors had been dishonest.
The judge applies the test from Twinsectra v Yardley : "....before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest..."
The judge confirmed that the word "condoned" in the policy should be given its ordinary, natural meaning.
It was found that in two previous separate loan applications, Ms U as an experienced solicitor had made identical misrepresentations about her income, which were later found to be false. It is therefore incredible for the judge to have found that she could have made her statement in this case innocently.
The judge also said that documentary evidence amply support the adverse conclusion about Ms U conduct.
Although there was no evidence Ms U had benefitted in the fraud, the judge still concluded that she had committed fraud since she knew that she was assisting Mr. A, her co-director to obtain a loan by deception. In the language of the criminal law she aided and abetted his crime. On any view, her actions amounted to condoning his dishonest and fraudulent mortgage application, which enabled him to obtain a property loan.
The judge was of the view that if an Insured condones a course of conduct, which is dishonest or fraudulent and that course of conduct leads to or permits the specific acts or omissions upon which the claim is founded the insurer is entitled to repudiate liability. The judge had drawn his conclusion from the precedent case of Zurich Professional Ltd v Karim & Others.
Goldsmith Williams v Travelers Insurance Co Ltd - details of the case.