Sudden Impact – Law Firms, Partner Fraud, Professional Indemnity Insurance, Aggregation

Lord Bishop of Leeds v Dixon Coles And Gill (A Firm) & Ors [2020] EWHC 2809 (Ch) (28 October 2020)

Partner Fraud

Over many years in the course of managing a large portfolio of solicitors professional indemnity claims both as an insurance claims broker and claims manager acting under a delegated authority, I had on more than one occasion, cause to experience first-hand the significant impact partner fraud could have on the innocent partners of a law firm. This unfortunate scenario is thrown into sharp relief in the recent judgment handed down by His Honour Judge Saffman in Lord Bishop of Leeds v Dixon Coles And Gill (A Firm) & Ors [2020] EWHC 2809 (Ch) (28 October 2020)

In outline Dixon Coles And Gill were a “long-established and well-respected” firm of solicitors based in Wakefield. The firm had 3 equity partners Mrs Linda Box, Mr Julian Gill and Mrs Julia Wilding. “On Christmas Eve 2015 Mr Gill, no doubt to his horror, discovered evidence that Mrs Box had dishonestly made unauthorised payments from client account. She was confronted by Mr Gill and Mrs Wilding and acknowledged her defalcations and she was promptly expelled from the partnership at the beginning of January 2016 and reported to the police.

Initially it seems that the wholly innocent partners, Mr Gill and Mrs Wilding, were under the impression that the misappropriation of client monies was confined to the tens of thousands of pounds. In fact, it soon transpired that her dishonest misappropriation of client monies had been going on for years and the sum total of her misappropriations ran into the millions of pounds.

In March 2017 she pleaded guilty to 12 offences of dishonesty comprising offences of theft, fraud and forgery involving the misappropriation of a little over ￡4 million. She was sentenced to a term of imprisonment of 7 years.

As a result of her dishonesty not only did she create victims of clients of the firm and others who relied upon her integrity, but she also created victims out of Mr Gill and Mrs Wilding and no doubt all the employees of DCG because, at the end of January 2016 the firm, which had been established some 200 years previously, was obliged to close. In April of that year the Solicitors Regulation Authority (SRA) intervened through their agents, Messrs Gordons, and took away all DCG’s files and accounting records. In June 2016 DCG entered into a Partnership Voluntary Arrangement.

Sad as the closure of their firm is, that is not the only consequence of Mrs Box’s dishonesty that Mr Gill and Mrs Wilding have to confront. They currently face 2 separate claims brought by parties who assert that they have been significantly financially disadvantaged by Mrs Box’s defalcations and who look to Mr Gill and Mrs Wilding, as Mrs Box’s erstwhile partners, to make good their losses. The applications with which I have to deal arise in those 2 separate claims”

The impact on the firm and its innocent partners was clearly catastrophic with closure quickly following discovery of Mrs Box’s dishonesty and thereafter there was early intervention by the Solicitors Regulation Authority.

The Innocent Partners

The innocent partners had a professional indemnity insurance policy with HDI Global Specialty that provided a limit of indemnity of ￡2 million any one claim. The policy also had an aggregation clause providing that when considering what may be regarded as one claim for the purpose of the limit of indemnity, certain claims can be aggregated and be treated as one.

The judge observed “I think that misappropriations will significantly exceed ￡2 million. If the misappropriations are one claim then HDI’s obligations will be satisfied as and when they have paid ￡2 million and any balance must be met, so far as possible, by Mr Gill and Mrs Wilding personally in so far as they are found to be liable for Mrs Box’s defalcations. It is the assertion of HDI that, notwithstanding that Mrs Box misappropriated funds from different parties, this is all one claim and that thus its liability is confined to ￡2 million.

If, however, the claims by each party are separate claims, as Mr Gill and Mrs Wilding assert, then each attracts its own ￡2 million indemnity limit. The personal exposure therefore of Mr Gill and Mrs Wilding in those circumstances would be considerably attenuated”

For the purpose of this short article I will review the judge’s analysis in respect of:

1.   The liability of the innocent partners for Mrs Box’s dishonesty

2.   The insurance aggregation clause

I will also make some observations in relation to the cover available under the Law Society of Northern Ireland Master Policy which provides professional indemnity cover in respect of all current and former solicitors who are or were in private practice in NI.

Liability for Mrs Box’s Dishonesty

The “claimants assert that all the equity partners in DCG are liable as partners and trustees for Mrs Box’s misappropriations of their funds and, in that capacity, are liable to account for misappropriated monies had and received by DCG and also monies that have not been received by DCG but were received and misappropriated by Mrs Box in the course of the business of the firm and with DCG’s apparent authority deriving from her position as a partner in that firm”

The judgment considers in some detail the circumstances in which an innocent partner will have a liability for his/her dishonest partner’s acts with it being observed “At first blush one might think that it can never be part of the ordinary course of the business of a firm of solicitors to misappropriate monies but that is not what [1]Dubai Aluminium says. In that case it was held that a solicitor would have been acting in his capacity as a partner and in the ordinary course of the firm’s business when he dishonestly assisted in the perpetration of a fraudulent scheme by drafting various agreements necessary to the fraud”

The nature of the frauds perpetrated by Mrs Box varied and it was argued by counsel for the firm that in relation to certain sums that were misappropriated (The Red Ledger Fraud) she “was implicitly trusted with the administration of this fund, not specifically as a partner in DCG but in her own, personal, capacity. He asserts that it is manifestly arguable that when she raided this fund she was not acting as a solicitor in the course of business but on a frolic of her own. In short, it is at least sufficiently arguable to meet the requirements of CPR24 that what she was doing was personal rather than work related”

In rejecting the application for summary judgment in respect of the Red Ledger fraud it was held “I am satisfied that Mr Dumont has discharged the evidential burden of establishing a real prospect of successfully defending the claim in respect of this ledger on the basis that there are sufficiently arguable issues revolving around ordinary course of business and apparent authority. That is not to say that at trial that defence will succeed. However even if success is improbable that is not enough for summary judgment. The test is simply that the defence is better than merely arguable”

In relation to a further fraud involving a ledger that “did not reflect any genuine underlying transactions whatsoever” but was merely a means to raid clients’ money it was again argued by counsel for the firm that this was outside the ordinary course of the firms’ business. The judge was not persuaded by this argument in the context of this particular fraud observing “Furthermore, I do not see that it is realistically arguable that setting up and transacting through a client account ledger is outside the apparent authority of a partner. Solicitors do it, and are indeed expected to do it, every day. True it is that in this case it was for dishonest purposes but it is difficult to see any realistic basis for concluding that setting up and transacting through a client ledger is not sufficiently closely connected with the acts that the partner is authorised to do so as to make it an act in the ordinary course of business. I have in mind here the use of the phrase “closely connected” to which I refer in paragraphs 61 and 68 above”

The judge held that the claimants in relation to this fraud were entitled to summary judgement as there was no prospect of successfully defending their allegations however he was not prepared to order an interim payment. This was on the basis that the quantification of the claim required further scrutiny.

There were also a number of conveyancing frauds and in relation to these it was held “I do not see a realistic basis for arguing that Mr Gill and Mrs Wilding are not party or privy to the fraud where the Partnership Act fixes them with a direct liability in respect of Mrs Box’s fraud. I accept that in one very obvious sense they are not party or privy because they knew nothing about the fraud but the fact is that the Partnership Act deems them to have been party or privy in the context of actions undertaken by the errant partner in the ordinary course of business or within the scope of apparent authority – as the conveyancing transactions quite obviously were”

Again whilst it was accepted by the judge it was appropriate to grant summary judgment in relation to the conveyancing transactions it was not appropriate to grant an interim award as further scrutiny of the amounts claimed was required.

Aggregation

HDI the professional indemnity insurers for the firm sought to argue that all of the claims from all of the clients who suffered a loss as a consequence of Mrs Box’s dishonesty should be aggregated and treated as one claim. Whereas the claimants co-joined by the innocent partners sought to argue “The claimants seek a declaration against (HDI) that it is not entitled to aggregate the claims of the Bishop with those of (LDBF) nor (still more significantly) the claims of both claimants with those of other victims of Box’s frauds.”

It was observed that “The firm’s policy and the terms of the MTC appear to accord the one with the other but in any event, insofar as there is a difference, the wording in MTC trumps that of the policy”

The minimum terms provide amongst other things:

“1. Scope of cover

1.1 Civil liability

Subject to the limits in clause 2, the insurance must indemnify each insured against civil liability to the extent that it arises from private legal practice in connection with the insured firm’s practice, provided that a claim in respect of such liability:

(a) is first made against an insured during the period of insurance; or

(b) is made against an insured during or after the period of insurance and arising from circumstances first notified to the insurer during the period of insurance.

The sum insured in relation to any one claim is set at a minimum of ￡2 million. One claim is defined as:

“The insurance may provide that, when considering what may be regarded as one claim for the purposes of the limits contemplated by clauses 2.1 and 2.3:

(a) all claims against any one or more insured arising from:

(i) one act or omission;

(ii) one series of related acts or omissions;

(iii) the same act or omission in a series of related matters or transactions;

(iv) similar acts or omissions in a series of related matters or transactions

and

(b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.”

Claim is defined in the Glossary and is given the following definition:

“Claim means a demand for, or an assertion of a right to, civil compensation or civil damages or an intimation of an intention to seek such compensation or damages. For these purposes, an obligation on an insured firm and/or any insured to remedy a breach of the SRA Accounts Rules, or any rules which replace them in whole or in part, shall be treated as a claim, and the obligation to remedy such breach shall be treated as a civil liability for the purposes of clause 1 of the MTC, whether or not any person makes a demand for, or an assertion of a right to, civil compensation or civil damages or an intimation of an intention to seek such compensation or damages as a result of such breach …….”

The insurers arguments in relation to aggregation can be simply stated as “HDI’s case is put on the basis that the claims against the firm arise from one act or omission and thus falls within the definition in MTC 2.5(a)(i) as being “one claim”, alternatively, they are one series of related acts or omissions and thus are deemed to be “one claim” pursuant to MTC 2.5(a)(ii)”

The position adopted by the claimants and the innocent partners was that “the claims by each separate client are separate claims, each of which has the benefit of indemnity cover of ￡2 million”

As with most cases involving disputes in relation to aggregation there was a lot at stake for the parties and this is reflected in the detailed analysis of the issue in the judgment. After carefully considering the nature of the defalcations and the MTC to include the definition of claim in the Glossary HH Judge Saffman held:

 “I have concluded that the thefts from Mr Halpern’s clients and from Mr Learmonth’s do not have a sufficient interconnection or unifying factor with any other claims to bring them within MTC 2.5(a)(ii) even if there was wholesale teeming and lading.

263. I accept that the language of this aggregation clause, when coupled with the glossary definition of claim, may not equate “claim” with cause of action and that the scope for aggregation by virtue of the MTC is wider than it was in Lloyds TSB but, notwithstanding that, I do not think that it permits aggregation of the Bishop’s Claim and the claim of LDBF on the one hand with those of the Scholefield claimants on the other, or of the claims of either party with claims of other clients whose claims have already been satisfied. 13

264. In my view a unifying factor which is sufficient to unite these acts of theft for aggregation purposes is simply not present in this case. By reference to the comments of Lord Hobhouse which I recount at paragraph 225 above, what caused the financial losses to the two sets of claimants in this case were separate thefts from each of them.

265. It was not Mrs Box’s dishonesty which was the proximate cause of their loss. I agree with what Mr Halpern says in this connection which I recount at paragraph 200 above. Dishonesty is not an act, it is a state of mind. What caused these claimants’ losses were the individual thefts from them. True it is that these were motivated by dishonesty but it is the “acts” that matter, not the motivation for the “acts”. These acts resulted in different losses to different clients. There cannot, in my view, be said to be a single loss because I am satisfied that the acts of theft were not related on a proper construction of MTC 2.5(a)(ii).

266. Furthermore, I simply do not see that there is sufficient “interconnection” between the acts, to use the words of Lord Toulson in AIG to which I refer in paragraph 236 above. I do not see that the thefts from the Bishop and from LDBF “fit together” with the thefts from the Scholefield claimants save that they were all committed by the same person and perhaps concealed by the same process, factors which, in my judgment, are not enough”

Northern Ireland Master Policy

For solicitors in private practice in Northern Ireland who have the benefit of indemnity under the Law Society of Northern Ireland [2]Master Policy I will make some general observations on the policy wording, focusing on aggregation in the context of the judgment referenced above.

Unlike England and Wales (and Ireland) where solicitors purchase compulsory limits of professional indemnity in the open insurance market all current and former solicitors in private practice in Northern Ireland are insured under a policy procured by the Law Society of Northern Ireland. In light of this there is only one insurance wording to consider as in effect the Master Policy singularly provides for the compulsory professional indemnity minimum terms and conditions.

There is no definition of claim in the Master Policy and therefore any aggregation issue would be decided primarily on the basis of the Civil Liability Clause and the Limit of Indemnity Clause.

Pausing for a moment to reflect on the absence of a claim definition it will be recalled that in the SRA Glossary claim included the definition “For these purposes, an obligation on an insured firm and/or any insured to remedy a breach of the SRA Accounts Rules, or any rules which replace them in whole or in part, shall be treated as a claim, and the obligation to remedy such breach shall be treated as a civil liability for the purposes of clause 1 of the MTC, whether or not any person makes a demand for, or an assertion of a right to, civil compensation or civil damages or an intimation of an intention to seek such compensation or damages as a result of such breach …….”

In the context of partner fraud resulting a shortfall in a solicitors client account the definition of claim is important in view of the regulatory obligation for a solicitor to make up such a shortfall. As counsel for the plaintiff observed in the Dixon, Coles and Gill case “If the solicitor was required to reconstitute the client account out of its own funds and could not recover from his insurer until the client had made a claim this would not assist in achieving that aim, because many solicitors would be unable to comply. Hence the purpose of rule 7 is to accelerate the reconstitution of the client account.”

The Civil Liability Clause under the Master Policy is:

1 Civil Liability

The Insurers will indemnify the Insured in respect of claims or alleged claims made against the Insured and notified to the Broker (subject to Special Condition 4) during the Period of Insurance specified in the Schedule in respect of any civil liability (including liability for claimant’s costs and expenses) incurred in connection with the Practice carried on by or on behalf of the Solicitor or any Predecessor provided that no indemnity will be given

A) to any individual committing or condoning any dishonest fraudulent criminal or malicious act or omission

B) to any partnership or incorporated Practice or limited liability partnership in respect of any dishonest fraudulent criminal or malicious act or omission committed or condoned by all of its Partners directors officers or Members (including all the Partners directors officers or Members of any partnership or incorporated Practice

or limited liability partnership which is a Member of that partnership or incorporated Practice or limited liability partnership)

This compares to the wording provided for under the MTC which provides:

“1. Scope of cover

1.1 Civil liability

Subject to the limits in clause 2, the insurance must indemnify each insured

against civil liability to the extent that it arises from private legal practice in

connection with the insured firm’s practice, provided that a claim in respect of

such liability:

(a) is first made against an insured during the period of insurance; or

(b) is made against an insured during or after the period of insurance and

arising from circumstances first notified to the insurer during the period of

insurance.

The respective clauses are substantially the same dealing with claims made and notified during the period of insurance although it will be noted the Master Policy wording also makes reference to alleged claims (claim not being defined). Having due regard to the issue of public protection it is clear that the insuring clauses seek to ensure an indemnity is provided in relation to any civil liability incurred in connection with the practice.

In relation to the aggregation clause the Master Policy provides:

The liability of the Insurers under Insurance Clause 1 under this Evidence of Professional Indemnity Insurance and any other Evidence of Professional Indemnity Insurance issued under the Master Policy arising out of any one claim shall not exceed the Limit of Indemnity specified in the Schedule

All claims attributable to the same act error or omission or series of acts errors or omissions consequent upon or attributable to the same original cause or source will be regarded as one claim

Provided that where the Insurers are liable to indemnify more than one Insured in respect of any claim the total amount of indemnity payable under this insurance shall not exceed the Limit of Indemnity specified in the Schedule

The Self Insured Amount will not reduce the Limit of Indemnity

It will be recalled the aggregation clause that was the subject of considerable scrutiny by HH Judge Saffman provided:

The insurance may provide that, when considering what may be regarded as one claim for the purposes of the limits contemplated by clauses 2.1 and 2.3:

(a) all claims against any one or more insured arising from:

(i) one act or omission;

(ii) one series of related acts or omissions;

(iii) the same act or omission in a series of related matters or transactions;

(iv) similar acts or omissions in a series of related matters or transactions

and

(b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.”

I have underlined the main terms used in the Master Policy that do not appear in the MTC and clearly their meanings in the context of an aggregation dispute would be the cause for much argument and debate.

Whilst in a fraud case the use of the word “error” is unlikely to be of significance when focusing on deliberate act(s), the other highlighted terms will require to be defined in the context of their meaning under the contract to determine if aggregation will operate to the benefit of the insured. For example the dictionary meaning of the word “source” includes “A place, person, or thing from which something originates or can be obtained” Therefore, could it have been argued that in the Dixon, Coles and Gill matter that all claims were attributable to the same source i.e. Mrs Box, the dishonest solicitor? Had that been the outcome the maximum liability of insurers in relation to the fraud would have been ￡2m thereby exposing the innocent partners to considerable personal liabilities.

Conclusion

Fortunately policy disputes under solicitors professional indemnity policies are not common place and this should provide a high degree of comfort for the profession, however when disputes do occur there is usually a lot at stake for both the insurers and their insured. It is then that policy wordings are subjected to forensic scrutiny.

This article whilst not legal advice will hopefully provide a useful basis for members of the Northern Ireland solicitors’ profession in particular, to better understand the professional indemnity cover available to them and how it might operate in certain given circumstances.

Should you have an insurance or risk management related issue which you would like to discuss please do not hesitate to contact me.

[1] Dubai Aluminium Co Limited v Salaam [2003] 2 AC 366

[2] Master Policy Wording for Policy Period 2019-2020

Email: [email protected]

Telephone: 07808052857

[1] Dubai Aluminium Co Limited v Salaam [2003] 2 AC 366

[2] Master Policy Wording for Policy Period 2019-2020