High Court upholds insurers’ interpretation of ‘dishonesty’ exclusion - Goldsmith Williams (a firm) v Travelers Insurance Company Ltd [26.1.10]

This recent decision is another example of the High Court giving a simple and robust interpretation to the ‘dishonesty’ exclusion in a solicitor’s professional indemnity policy, so as to uphold insurers’ decision to decline cover. The case concerned a clause in a 2002/3 policy which excluded cover for:

“Any claim ... arising from dishonesty or a fraudulent act or omission committed or condoned by such insured, except that … no such dishonesty, act or omission will be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors …”

The insured practice had operated as a limited company. One director, Mr Atikpakpa, had committed the dishonest acts giving rise to the two claims. The issue for the court was whether the other director, Ms Usman, had also committed relevant dishonest or fraudulent acts or condoned those of her fellow director, so that they were to be imputed to the company.

The Claimant stood in the shoes of two mortgage lenders. In the first transaction, Mr Atikpakpa had submitted a fraudulent mortgage application and then stolen the advance. Ms Usman assisted him with the mortgage application by witnessing his signature. In the second matter, Mr Atikpakpa stole monies from client account representing a mortgage advance to a client. Ms Usman did not participate in that transaction – in fact, the client was her own sister.

The court found that Ms Usman committed mortgage frauds herself and was aware of Mr Atikpakpa’s mortgage fraud activities. However, there was no evidence that she knew Mr Atikpakpa would steal the money in either transaction.

The Claimant argued that the claims arose from Mr Atikpakpa’s thefts and that, because Ms Usman had no knowledge of them, the exclusion did not apply.

Decision
The court held that the Claimant’s argument relied on too narrow a view of both the facts and the exclusion clause.

In the first transaction, Ms Usman committed a dishonest act and condoned Mr Atikpakpa’s actions by assisting with the mortgage application, without which he would not have been able to steal the advance.
By the time of the second theft, Ms Usman had known of and condoned several mortgage frauds by Mr Atikpakpa. Had she not condoned his actions, he would not have been in a position to steal again.
Accordingly, the court was satisfied that these were claims ‘arising from’ dishonesty or condoning by Ms Usman, so that they fell within the exclusion clause.

Comment
Following the case of Zurich Professional Ltd v Karim & others [2006], which reached a similar result, this decision gives further pause for thought to anyone seeking to challenge insurers’ reliance on the ‘dishonesty’ exclusion in the solicitors wording. The court will give the clause a broad interpretation and consider a very wide range of evidence when considering both the insured’s dishonesty and ‘condoning’. This is to be welcomed. Ms Usman had, after all, committed fraudulent acts of her own, been aware of other frauds committed by Mr Atikpakpa and had signed the mortgage application for one of the two frauds in question. It would have been an unreasonably harsh result for the court to have upheld such a narrow constructional point.

For further information contact Laurence Guilford or Jeremy Collins, Kennedys, 020 7667 9544.

Advice given to Claimant to settle claim against former solicitors was not negligent - Fraser v Bolt Burdon Claims & others [23.11.09]

In this case, Miss Fraser sued the defendant solicitors, Bolt Burdon, for negligence following advice they, and the Counsel they had instructed, gave her to settle her negligence claim against her previous solicitors, Parlett Kent (PK). The barristers were third parties to the litigation because, by the time Miss Fraser sought to join them, the claims against them were time-barred.

In the underlying proceedings, Miss Fraser had instructed PK to commence a clinical negligence claim in respect of psychological disturbances she claimed followed the abrupt withdrawal of drugs during a hospital stay. PK issued these proceedings out of time, so the claim was dismissed.

When sued, PK admitted liability but disputed quantum. On the day of trial, Miss Fraser accepted, on advice, a sum in settlement of the claim against PK. Subsequently, she claimed to have been negligently advised by Bolt Burdon and the third parties to accept too low a settlement sum.

Decision
The test to be applied, under the principles in Bolam v Friern Hospital Management Committee [1957], is whether no reasonably competent solicitor or barrister could have advised settlement on the terms achieved. Only if this was the case, would the advice given be negligent. That would turn on what, at the date the advice to settle was given, a reasonably competent adviser would have assessed were the prospects of success in the claim against PK and what sum was likely to be recovered, had the claim been tried. Those things did not turn on the immediate circumstances in which the settlement was achieved or the actual thoughts of the legal advisers involved but on an assessment of the strength of the case which the reasonably competent lawyer would have made on the papers.

In this instance, the claims were dismissed, as the advice given was, on the facts, “extremely good advice”. The overwhelming likelihood was that, had Miss Fraser not settled, she would have recovered less - quite possibly nothing - at trial.

Comment
The case serves as a harsh reminder of how cascading litigation against legal advisers by a determined individual can arise from time to time. This is notwithstanding the payments of what seem, to insurers and professionals, to be reasonable settlements, which more than cover the original loss and which insurers fund largely because of irrecoverable costs risks, rather than on the merits. Cases of this sort are thankfully rare, but are usually disproportionately expensive and often the unsuccessful claimant has very limited assets to satisfy any costs award that may be obtained if the case is successfully defended.

One interesting (if unanswered) question is whether the general diminution in the availability of legal aid over recent years has resulted in a drop-off in claims of this type. Much has been written about the reduction in legal aid reducing access to justice, but less about its effect on deterring vexatious litigants.

For further information contact Barnaby Winckler, Kennedys, 020 7667 9359.

On 15 December 2009, the English and Scottish Law Commissions published their draft Bill on what consumers must tell an insurer before taking out insurance and the consequences of misrepresentation.

Duty to volunteer
A fundamental feature is the proposed abolition of the duty on consumers to volunteer information which a ‘prudent insurer’ would consider relevant. This would be replaced by a duty on consumers “… to take reasonable care not to make a misrepresentation to the insurer” (clause 2(2)). Insurers will need to ask questions at the application stage on what they want to know, which is the approach already endorsed by the Financial Ombudsman Service. Consumers will be required to answer insurers’ questions honestly and take reasonable care the answers are accurate and complete.

When reasonable care has not been taken, the insurer must then ask whether it would not have entered into the policy contract at all, or on those terms. This reflects the law on ‘inducement’ from Pan Atlantic v Pine Top [1994].

Compensatory remedies
The draft Bill also introduces proportionate claims outcomes for misrepresentation by a consumer before the insurance policy is entered into or varied, so that:

• If a consumer has acted ‘carelessly’, the insurer has a compensatory remedy based on what it would have done had it known the information.
• If a consumer has acted ‘deliberately or recklessly’, the insurer may still avoid the policy and refuse all claims.

‘Deliberate or reckless’ misrepresentation is defined in the draft Bill as meaning that the consumer:

• Knew it was untrue or misleading, or did not care whether or not it was untrue or misleading, and
  
• Knew that the matter to which the misrepresentation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer (clause 5(2)).

Careless misrepresentations are those that are not deliberate or reckless. Where the misrepresentation is careless and the insurer would have applied different terms, or a higher premium, or both, either side can terminate future cover on reasonable notice if the insurance is non-life.

Implications
How to categorise a misrepresentation will remain one of the challenges in practice. In the explanatory notes to the draft Bill, the Law Commission explains that a person is careless when they make a statement which they genuinely believe to be true but have not taken sufficient care to check the facts. It would be more serious if the person made a statement without care and regard for its truth or falsity, as this would come within the ‘reckless’ category, where avoidance is permitted.

When could these sweeping changes start to apply? The draft Bill needs to be debated by Parliament: hopefully, the impending election will not prove a distraction, given the work put in to get this far in the reform process. Once Parliament has approved the draft Bill, another year will need to pass before the Act comes into force. It would then apply to policies incepted or variations agreed after it came into force.

For further information contact Helen Tilley, Kennedys, 020 7667 9355.