Exclusion for "condoning" fraud, and aggregation, in a PI policy

In Discovery Land Co LLC v Axis Specialty Europe SE [2023] EWHC 779 (Comm) the court reminded us when considering aggregation under the SRA minimum terms and conditions (MTCs) that:

• for claims to arise from “one series of related acts or omissions”, the same series of acts or omissions must feature in each of the claims which one seeks to aggregate;
• to amount to “similar acts or omissions” there needs to be “a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity”; and
• for acts and omissions giving rise to claims to be “in a series of matters or transactions which were related” those transactions must ‘fit together’.

The court also considered what it means to “condone” the acts and omissions of a fellow practitioner insured under a solicitors’ PI policy governed by the MTCs. Knowles J emphasised that the specific acts or omissions condoned must be the “acts involved in the claims” for the relevant causal link to be established. Therefore, perhaps unsurprisingly given the wide cover provided by the MTCs, Knowles J held that the relevant exclusion did not apply in this case.

Background

This decision concerns claims made under a solicitors’ PI policy, governed by the MTCs, by third parties with unsatisfied judgments against the insured (and now insolvent) law firm (the Jirehouse Entities, comprising an LLP, and two associated private limited companies). The claims arose from dishonest and fraudulent acts by Mr Jones, partner and director of the Jirehouse Entities, who had diverted client funds in several fraudulent transactions.

Mr Prentice, who worked for the Jirehouse Entities for around a decade and purportedly became a partner in 2017, asserted that until he resigned in 2019 he had "not seen anything which would indicate Mr Jones was behaving as anything other than an experienced, honest and reliable solicitor".

Exclusion clause – “condoning” fraud

The Court rejected the contention that the claims were excluded by operation of a clause which excluded any “claims directly or indirectly arising out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured…” (emphasis added).

Insurers argued that Mr Prentice, having worked alongside Mr Jones during the period in which he engaged in his fraudulent activities, had “condoned” those activities.

Taking the ordinary meaning of the word “condone” as conveying acceptance or approval (albeit not necessarily via an overt act), the court found that, although Mr Prentice had known of problems over a long period of time, he did not necessarily know that the issues involved misuse of client monies.

The Court accepted that for a person to “condone” fraud or dishonesty, they do not necessarily have to know of a particular fraudulent act before or at the time it is committed; it is enough “to know and condone a pattern of dishonest behaviour of which the particular fraudulent act forms part”. However, although Mr Prentice’s conduct fell “well below the professional standards to be expected of him” and included “episodes that show he was untrustworthy and prepared to behave dishonestly”, that was not enough to conclude that he “in any way appreciated” the extent of the fraudulent activities which Mr Jones was engaged in, nor that he had specifically approved the dishonest acts which formed the basis of the claims.

Aggregation

The court considered aggregation wording in the policy, and held that the claims were not to be regarded as one claim.

First, the court held that Mr Jones’ various acts of dishonesty were not “one series of related acts or omissions”. Following Lord Bishop of Leeds v Dixon Coles & Gill [2021] EWCA Civ 1211, the same series of acts did not cause both claims and each was brought about separately.

Secondly, the transactions did not “fit together” so as to conclude that the acts or omissions giving rise to the claims were "similar acts or omissions in a series of related matters or transactions” within the policy wording, or in a “series of matters or transactions which were related” (per AIG Europe Ltd v Woodman [2017] UKSC 18). Whereas one involved the theft of a client's purchase monies under a proposed property transaction, the other, later, concerned the theft of monies lent to a client under a secured lending transaction.

On whether or not these amounted to “similar acts or omissions” the court considered that to connect the two thefts would be to ignore the detail of the transactions in question. As held by Teare J in AIG Europe Ltd v OC320301 [2016] EWHC 2398 (Comm), "the requisite degree of similarity must be a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity".

Comment

In addition to reiterating some of the key principles on aggregation, and the court’s guidance on what it is required to ‘condone’ behaviour, this decision is of interest in two respects.

First, in construing the exclusion clause the court had expressly in mind that the purpose of the SRA Indemnity Insurance Rules 2013 (containing the relevant version of the SRA minimum terms) is "to confer on the Law Society the power to safeguard the lay public" (citing Impact Funding Solutions Ltd v Barrington Support Services Ltd [2017] UKSC 57).

Second, Knowles J observed that an exclusion clause which removes cover for a firm where an otherwise “innocent” partner has condoned dishonest acts of another may leave clients without recourse to the protection of insurance. Given the stated purpose of the Rules, this may seem surprising and is an area which Knowles J suggests may merit further consideration by The Law Society and the SRA.