Solicitors PI: insurers’ fraud exclusion upheld 23 Feb 2010

The recent decision in Goldsmith Williams (a firm) v Travelers Insurance Company Ltd (following that in Zurich v Karim [2006]) is further authority for the proposition that a solicitor insured can condone a dishonest course of conduct by a co-director (or partner) without being involved in, or specifically aware of, the fraudulent acts or omissions giving rise to the claim(s) in question.

Insurers were, therefore, able to successfully defend a claim brought under the Third Parties (Rights Against Insurers) Act 1930 in respect of thefts by an insured arising out of fraudulent mortgage transactions.

Key points arising from the Goldsmith decision

In the context of the policy, the word “condone” was intended to convey a state of affairs where the non-dishonest director or partner knows of the dishonesty of his co-director or co-partner yet overlooks it and allows the business relationship to continue.

The phrase “…dishonesty or a fraudulent act or omission…” (our emphasis) is intended to be disjunctive, as opposed to conjunctive (i.e. they are alternatives). If the position were otherwise, Partner A could be aware that he was in practice with a dishonest and fraudulent solicitor, Partner B, but the absence of knowledge of specific frauds committed by the latter would enable Partner A to obtain indemnity from the firm’s insurers. Such a result would fly in the face of both common sense and public policy generally.

The application of the fraud or dishonesty exclusion is usually a pivotal issue in mortgage fraud cases, as is the existence (or otherwise) of “innocent” partners. The decision is, therefore, an encouraging one for insurers who are facing a raft of claims for mortgage fraud, particularly in the two partner sector. It also emphasises that the findings in Karim extend well beyond the somewhat extreme circumstances of that case.

In more general terms, the decision underscores the importance of insurers thoroughly investigating the broader factual background at an early stage. For more detail on the decision itself and potential sources of evidence in such mortgage fraud cases, click here.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com.