Exclusions and aggregation in a solicitors’ PI policy

In Axis Specialty Europe SE v Discovery Land Company LLC & Ors the Court of Appeal considered whether the PI insurers of an insolvent law firm were liable to indemnify former clients of the firm. The former clients had suffered losses through the dishonesty of one of the firm’s solicitors.

At first instance and on appeal the court was asked to decide:

• whether an exclusion clause in the policy operated to exclude insurers’ liability; and
• whether an aggregation clause operated so that the claims were to be treated as one.

The Court of Appeal upheld the first instance decision answering both of those questions in the claimants’ favour.

Background

Former clients of a dishonest solicitor, who had unsatisfied judgments in respect of claims against that solicitor, sought to claim under the PII policy held by his (now insolvent) law firm, using the Third Party (Rights Against Insurers) Act 2010.

The firm comprised an LLP, and two associated private limited companies (Jirehouse). The claims arose from dishonest and fraudulent acts by Mr Jones, partner and director of Jirehouse, who had diverted client funds in several fraudulent transactions.

In line with the SRA Indemnity Insurance Rules 2013 (the Rules), Jirehouse was required to have professional indemnity insurance in place which satisfied the minimum terms and conditions (MTCs) requirements for "qualifying insurance" under the Rules.

Exclusion clause – “condoning” fraud

The policy contained 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 condone by the insured…”(emphasis added).

In this case, the operation of the exclusion clause turned on whether the only other member and director of Jirehouse, a Mr Prentice, had condoned Mr Jones' dishonest behaviour.

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 by turning a “blind eye” to the wrongdoing.

At first instance (see our analysis here), the court had 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. 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 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.

The Court of Appeal declined to interfere with the first instance decision, finding that Mr Prentice had not condoned Mr Jones’ dishonest acts. Although another judge may have found differently, given the court’s findings on Mr Prentice’s (lack of) integrity, honesty and professionalism, the Court of Appeal was not prepared to overturn conclusions based on findings of fact that were rationally supportable, and based upon a perfectly proper evaluation of all the relevant evidence at trial. Whilst Mr Prentice may appear to have turned a “blind eye” in general to Mr Jones’ actions, as alleged by insurers, the court at first instance had decided that the facts did not amount here to condonation of the relevant acts.

Aggregation

In line with the MTCs, the aggregation wording in the policy provided that:

"All claims against one or more insured arising from
...

• one series of related acts or omissions;
• the same act or omission in a series of related matters or transactions;
• similar acts or omissions in a series of related matters or transactions

will be regarded as one claim …."

The appeal turned on whether the claims arise from "similar acts or omissions in a series of related matters or transactions."

There was no appeal against the decision below that these did not fall to be considered as being “one series of related acts or omissions”. At first instance, the court had reminded us 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’.

Here, Mr Jones had, variously, misappropriated client account funds intended for a property purchase, and later registered that same property as security for a loan which he then largely misappropriated (but in part used to restore retention sums to the client account in order to cover his tracks).

The Court of Appeal acknowledged that there might appear to be a “substantial similarity between the acts generating the claims” – both involved stealing client money from a client account and the clients were closely connected – but (upholding the first instance decision) this approach involves considering similarity at too high a level. It “does not necessarily follow from the fact that the acts giving rise to the claims are of a similar nature … that there is a real or substantial similarity between them”. On the facts, there were “substantive differences between the acts complained of”. The judge’s decision that these acts were not related was right. Accordingly, the claims did not aggregate.

Comment

Both questions of condonation and those of what is sufficiently “related” for the purposes of aggregation will always turn on the facts.

In AIG Europe Ltd v Woodman and others the Supreme Court held that the word "related" implies that the matters or transactions “must in some way fit together." Determining this is “an acutely fact-sensitive exercise” requiring identification of the relevant matters or transactions, and then identifying and evaluating the nature and degree of any connecting factors.

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. The ordinary meaning of the word “condone” is to convey acceptance or approval (albeit not necessarily via an overt act). Here, the Court of Appeal has made clear that the language of the exclusion clause is wide enough to catch a situation in which someone condones a pattern of dishonest behaviour which is of the same type as the dishonest behaviour that directly gives rise to the claim. It is always a question of fact in each case, however, as to whether or not knowledge and acceptance or approval of other acts in the same pattern amounted to condonation of the particular act or acts which gave rise to the claim.