Solicitors' policies of insurance are usually governed by a provision that any disputes should be referred to arbitration. For that reason, it is relatively unusual for cases concerning policy application to come before the Court. However, in a recent decision, Rahim v Arch Insurance (Europe) Company (2016) the Court was asked to adjudicate on an insurer's right to rely on dishonesty as a ground for avoiding cover where the solicitor claiming indemnity maintained that her involvement in mortgage frauds being perpetrated by a more senior figure in the practice was that of an unwitting accomplice.
In many cases, as in Rahim, there is no doubt that one of the partners was behind the frauds and insurers can avoid cover for that partner. However, where a claim is made against the practice then if any of the principals are innocent of the fraud, insurers will be obliged nonetheless to indemnify the practice and to meet the claim. Insurers' right of recovery against the guilty party is often of little consolation if that partner has absconded or is impecunious.
This decision will therefore be of some comfort to insurers facing similar situations (which are relatively common) where the issue is not whether the main instigator of the fraud is dishonest but whether others within the practice knew or could work out enough about what was going on to constitute condonement of the fraud or were in fact far from innocent participants and were actively engaged in deceit.
Mr Islam was the principal of O'Sullivan Law. Ms Rahim worked for the firm for 18 months and, despite her relatively recent qualification, was held out as a partner for most of the time, during which time she carried out conveyancing work.
Both Mr Islam and Ms Rahim were subject to various disciplinary and Court proceedings. Mr Islam was found guilty of dishonesty by both the Solicitors' Disciplinary Tribunal and the Crown Court in criminal proceedings (and jailed for 4 years). In contrast, the SRA did not allege dishonesty against Ms Rahim in SDT proceedings, in which she was fined £2,000. She was charged with, and admitted, signing Certificates of Title whilst failing to disclose material information to her lender clients and failing to act in their best interests.
Barclays Bank ("Barclays") later obtained judgments against Ms Rahim for around £4.4 million and Heritable Bank Plc ("Heritable") for just over £300,000. Ms Rahim had not had a role in the particular transactions which gave rise to these claims, which had been carried out by Mr Islam.
Previously, in November 2008, the firm's insurers, Arch, declined to cover Ms Rahim on the basis of a standard dishonesty exclusion as follows:
"We will not cover the insured for any claim or defence costs in respect of
5.6 Fraud or dishonesty
Any insured to the extent that any civil liability or related defence costs arise from dishonesty or a fraudulent act or omission committed or condoned by the insured except that
We shall nonetheless cover each other insured" [i.e. the innocent partner].
Ms Rahim disputed this repudiation on the basis that she was an innocent partner. In finding for insurers, the Court focused on two key issues: the commission of dishonest acts (albeit not the dishonest acts which gave rise to the Barclays and Heritable claims) by Ms Rahim herself and, allied to this, her condonement of the fraudulent acts of Mr Islam which had given rise to the Barclays and Heritable claims . Other issues argued by the parties fell away given the Court's findings on these aspects.
The Main Issues
Having set out the factual context - including the fact that (as was common ground) a very substantial amount of mortgage fraud was being undertaken at the firm, presided over by Mr Islam, the principal form of which was misleading lenders to make mortgage advances based on a sale price which was higher than the true price – the Court summarised the following points relevant to the law on dishonesty:
- It was for insurers to prove dishonesty, and strong and cogent evidence is required where fraud or dishonesty is alleged.
- The standard by which dishonesty is determined is objective.If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges it by different standards.
- In considering whether Ms Rahim was dishonest, the Court had to examine all the circumstances known to her at the time. Gross negligence is not the same as dishonesty.
The Court then considered Ms Rahim's evidence generally. For example, in an attempt to explain why she, on transactions she had undertaken, had included figures on reports on title which did not correspond with the true price being paid, at various stages in her evidence Ms Rahim suggested that she did not know that she was in fact acting for a lender as well as the purchaser client. The Judge conclusively found against her on that given her admission under cross examination and previous interview with the SRA amongst other things.
She was taken to various references such as the Law Society Guidelines, her own LPC conveyancing textbook, The CML Handbook and the Law Society's Green Card Warning (Mortgage Fraud).
The latter, non-exhaustively, sets out irregularities in a conveyancing transaction that might be indicative of property fraud. This includes misrepresentations as to the purchase price and states that the solicitor must ensure the true cash price is identical to the price shown in the mortgage instructions and the report on title to the lender. It also refers to directly paid deposits.
The Court took a dim view of Ms Rahim's attempts to downplay her knowledge of these publications. Likewise, the Court rejected as "wholly implausible" Ms Rahim's suggestion that she thought discrepancies between the price being paid and that stated in the mortgage offer were irrelevant to her duty to the lender because they were a benign incentive to the buyer.
The Court accepted that Ms Rahim treated Mr Islam as her boss. He told her to take the purchase price from the mortgage offer when submitting the Certificate of Title without more. However, given the Court's findings about what Ms Rahim knew her duties to lender clients were, such an instruction could, the Court found, have given Mr Rahim no comfort as to what she was doing.
The Court concluded that Ms Rahim knew perfectly well when she was dealing with the conveyancing transactions that she owed a duty to the lender to report, amongst other things, any discrepancy in the price. By not doing so she would be facilitating, albeit not instigating, a mortgage fraud.
The Court then considered 11 sample transactions put to Ms Rahim in cross-examination, which revealed that Ms Rahim was alerted to a true purchase price while reporting another. Ms Rahim failed to report price discrepancies totalling nearly £475,000 in those samples.
The Judge concluded that it had been compellingly established that Ms Rahim had acted dishonestly in relation to at least 10 of the sample transactions. The Court held that these established a course of conduct during which Ms Rahim deliberately misled lenders, consistently with the mortgage fraud being practised by others at the firm. The Court rejected any suggestion that because she did not receive any reward for taking part in the fraud there was no reason for her to be dishonest.
As noted above, Ms Rahim did not play any specific role in the Barclays or Heritable matters – but that was not necessary in order to establish condonement. Rather, the Court used its findings of dishonesty against Ms Rahim in relation to the sample transactions as a springboard to finding that she had also condoned dishonesty more broadly, including the dishonesty in the Barclays or Heritable matters. The Court concluded that Ms Rahim knew perfectly well that she was part of the undisputed systematic mortgage fraud operation being undertaken at the firm. This general knowledge was sufficient. Since the frauds complained of in the Heritable and Barclays claims arose from the frauds of, or led by, Mr Islam she condoned them in the required sense. Accordingly, the dishonesty exclusion applied to those claims.
Ms Rahim was part of a mortgage fraud operation, albeit not specifically involved in the transactions that led to claims from Barclays and Heritable for around £4.7million. However, her role was sufficient to amount to condonement and for the dishonesty exclusion to apply.
Happily, instances where the dishonesty exclusion is applied are rare. However, what the case does illustrate is that it is open to insurers faced with clear dishonesty on the part of one of the partners to review the actions of others within the firm who may not have played the leading role but who may nonetheless know enough about what is going on or who choose simply to turn a blind eye and to consider whether they too may not be entitled to cover.