Goldsmith Williams v Travelers Insurance1 is the first decision to consider the dishonesty exclusion in a solicitor’s professional indemnity policy, since the 2006 decision in Zurich v Karim2. The court followed Karim, holding that the dishonesty exclusion applied where a director of the solicitors firm had condoned a state of affairs which allowed her fellow director to steal mortgage monies. She was not directly involved in, or even aware of, the specific theft carried out, but she had known that the other director was engaged in mortgage fraud generally and had facilitated two fraudulent mortgage applications by him.
The claimant firm of solicitors (C ) brought a claim against the defendant insurer under the Third Parties (Rights Against Insurers) Act 1930 (the 1930 Act) in respect of its insured – Joshua & Usman Legal Services Limited (JULS) – in respect of various mortgage frauds perpetrated by one of the directors of JULS. The two directors of JULS were Mr Atikpakpa (A) and Ms Usman.
The defendant insurer provided cover to JULS for the year commencing 1 October 2002. The policy contained the usual dishonesty exclusion in the following terms:
“The Company shall not be liable under the Policy in respect of…
Any claim ….against any Insured arising from dishonesty or a fraudulent act or omission committed or condoned by such insured, except that -
a. this Policy shall cover each other Insured, and
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”
The mortgage frauds
The claim concerned two mortgage frauds perpetrated by A in which C had acted for the lenders:
- 5 Montagu Place: A applied to the lender for a loan in excess of £500k. In the application A made false statements as to his ownership of JULS and that the balance of the purchase price for the property was to be provided from his savings. Ms Usman witnessed A’s signature on a document relied upon by the lender and certified a copy of A’s passport. A did not complete the purchase of 5 Montagu Place, but stole the monies advanced by the lender.
- 42 Tulse Hill: A’s wife (Mrs A) applied for a loan from the lender to purchase this property which was owned by A. The mortgage advance was paid to JULS. The transaction between A and Mrs A never completed. A stole the mortgage advance. Ms Usman played no role in facilitating this transaction.
The Law Society intervened in JULS. A left the UK for Nigeria. Ms Usman moved to Egypt. Neither gave evidence in these proceedings. Disciplinary proceedings were commenced against A, Ms Usman and JULS.
The lender claimed against its solicitors, C, for the mortgage monies transferred to C for the two transactions. C reimbursed the monies (in excess of £670k) to the lender. C then brought proceedings and obtained judgment against JULS. C brought the current case to recover the judgment under the 1930 Act. It was common ground that if the insurer was obliged to indemnify JULS in relation to C’s claim, then it was also obliged to C under the 1930 Act. The issue therefore was whether the insurer was obliged to indemnify JULS, or could rely upon the dishonesty exclusion.
The tests for dishonesty and condonation
It was not disputed that C’s claim against JULS arose from dishonesty by A. However C alleged that the evidence did not establish that the claims arose from any dishonesty by Ms Usman, nor did it establish that she had condoned the dishonest acts of A.
The court did not analyse the authorities on the test for dishonesty. It applied the test as articulated in Twinsectra v Yardley3, that:
“….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….”.
In relation to condonation, the court applied the word’s ordinary, natural meaning. It held that "In the context of this policy, the word “condone” is intended to convey a state of affairs where the non-dishonest director knows of the dishonesty or fraud of his co-director yet overlooks it”. The standard of proof required was on the balance of probabilities.
Evidence of complicity by Ms Usman
There was no evidence that Ms Usman obtained any personal benefit from either transaction (and she did not know of the Tulse Hill transaction). The insurer relied on a number of strands of evidence which pointed to Ms Usman being complicit in A’s dishonesty or at the very least condoning it:
- A was clearly guilty of extensive dishonesty whilst a director of JULS going far beyond the two transactions in issue. The evidence established that Ms Usman had facilitated A’s mortgage fraud in the 5 Montagu Place transaction and another transaction not in issue here
- Ms Usman had made dishonest mortgage applications in her own right
- Ms Usman had given evidence in proceedings relating to mortgage fraud by another JULS employee, Victor Okporuah (O), in St Paul Travelers Ins Co Ltd v Victor Okporuah and others4. The judge concluded that her evidence in that case was false and that it was inconceivable that she had not known that both O and A were engaged in mortgage fraud.
5 Montagu Place - Findings
The judge was satisfied that Ms Usman had knowingly facilitated the mortgage fraud perpetrated by A by signing documents verifying his income which were false. The claim arose from dishonesty on her part or from dishonesty and fraudulent acts by A, which Ms Usman had condoned.
42 Tulse Hill - Findings
Different considerations arose here because Ms Usman was not aware of this transaction. Here the judge relied upon Karim and found that the claim arose from general conduct on the part of A which Ms Usman condoned. By the time A stole the mortgage monies, Ms Usman knew that A was engaging in mortgage fraud. She was aware of at least two specific transactions in which she knew A had made false representations on the application forms. That was a course of conduct which she condoned. Her condoning of that conduct permitted a state of affairs to arise whereby A was left free to act dishonestly. It was not necessary to establish that Ms Usman had condoned the theft itself.
Paul Castellani, Professional Risks Partner comments, "This is an important decision for insurers. The court has now twice confirmed that, to establish condonation and rely upon the fraud exclusion, it is not necessary for the specific dishonest acts which are causative of the loss to be condoned – instead it is enough for a general dishonest state of affairs to be condoned. The 'innocent partner' will now have to be truly innocent of all nefarious dealings, and not just the ones relied on to support the specific claim."