It is common knowledge that dishonesty will usually trigger an exclusion for cover under a professional indemnity policy. However, dishonesty is an elusive concept when benefit to the insured with detriment to the advisee is lacking but the insured advisor’s conduct has been so recklessly indifferent to the plight of the advisee that allowing coverage seems ‘just not right’.
The issue received treatment in the Victorian case of Solak v Registrar of Titles  VSC 614 where Davies J considered the concepts of ‘wilful blindness’ and ‘reckless indifference’.
The Solak proceedings involved a person purporting to be Mr Solak, who fraudulently obtained loan funds from Bank West by forging Mr Solak’s signature on a loan agreement and a mortgage document. The ensuing proceedings dragged in several other parties particularly those involved in processing the relevant documents, including the Victorian Registrar of Titles.
The Registrar sought to amend its pleadings to include an allegation that ‘at the time the bank executed the mortgage, the bank acted fraudulently in that it acted with reckless indifference as to whether [Solak] was or was not the actual signatory’.
Davies J stated:
In other words, it may not be necessary to prove actual dishonesty in order to establish fraud where the conduct is such that it denotes a deliberate or wilful failure to make enquiries “for fear of learning the truth”.
The Court of Appeal in Macquarie Bank Ltd – v- Sixty-Fourth Throne Pty Ltd distinguishes between deliberate and wilful failure to enquire that is, a “reckless indifference to consideration of a relevant matter” or a negligent failure to enquire. The concept of fraud imports “a flavour of dishonesty rather than mere negligence”…
For instance, the deliberate failure by an advisor to draw an advisee’s attention to a risk for fear of offending the source of the risk, can amount to dishonesty and may trigger the fraud and dishonesty exclusion clause in the advisor’s professional indemnity insurance policy.
As Davies J (at paragraph 32) put it, “in other words, it may not be necessary to prove actual dishonesty in order to establish fraud where the conduct is such that it denotes a deliberate or wilful failure to make enquiries “for fear of learning the truth”.
A wilfully blind perpetrator may not have been behaving so for personal gain. While personal gain is an indicator of dishonesty, it does not follow that in order to prove dishonesty or fraud one has to prove that the conduct in question advanced or was expected to advance some interest of the alleged perpetrator. i
In these situations, it is wilful blindness or reckless indifference that can amount to dishonesty, not negligence, gross negligence, stupidity, gullibility, incompetence or stupidity.
Coverage under a professional indemnity policy usually extends to being ‘stupid’ but not ‘playing stupid’.
View the case here: