UK: Solicitors PI: Insurers' Fraud Exclusion Upheld

Last Updated: 25 February 2010
Article by Anna Crew and Peter Maguire

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.

To view the article in full, please see below:

Full Article

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, fraudulent acts or omissions. Insurers were, therefore, entitled to decline indemnity.

Joshua & Usman Legal Services Limited (JULS) traded as Joshua & Usman Solicitors. The directors of JULS were Mr Aikpakpa (Mr A) and Ms Usman (Ms U).

Travelers Insurance Company Ltd (the Insurer) provided professional indemnity insurance for JULS from 1 October 2002 to 30 September 2003.

Another firm of solicitors, Goldsmith Williams (GW), had acted for the lenders in respect of two transactions where mortgage fraud had been committed by Mr A. They had settled the lenders' claims of just over £650,000 and now sought a recovery from JULS's Insurer under the Third Parties (Rights Against Insurers) Act 1930 (having obtained judgment in this sum against JULS in August 2007). The Insurer's defence was based upon the fraud exclusion in its policy.

Transaction 1

In late 2001, Mr A applied for a loan to purchase 5 Montague Place. In the application, Mr A made a number of false representations. The lender instructed GW to act for it and Mr A instructed JULS. Ms U witnessed Mr A's signature on a document and certified a copy of his passport. Upon completion, Mr A did not complete the purchase but stole the advance of over £500,000 (which had been paid over to JULS via GW).

Transaction 2

Also in late 2001, Mrs A applied for a loan to purchase 42 Tulse Hill from Mr A. The lender instructed GW and Mr A, as seller, instructed JULS. When the advance of over £140,000 was transferred to JULS (via GW), the purchase was not completed and Mr A stole the money.


JULS was intervened and made the subject of a winding up order.

The lenders in the two transactions made a claim against GW for the advances transferred to GW and to be loaned to Mr A and Mrs A. GW settled with the two lenders, who assigned their rights against JULS to GW. This enabled GW to pursue JULS and, in turn, to make the present claim against JULS's Insurer.

If the Insurer was bound to indemnify JULS in respect of the claim brought by GW it was also liable direct to GW.

The Insurer's primary defence was that indemnity for the two directors of JULS was excluded by its fraud or dishonesty exclusion for:

"Any claim falling within the Scope of cover... against any Insured arising from dishonesty or a fraudulent act or omission committed or condoned by such insured..."

In order for the exclusion clause to apply, the Insurer had to establish either that:

(a) the claim by GW against JULS arose from the dishonesty and fraudulent acts of Mr A and that the claim arose from the dishonesty and fraudulent acts of Ms U; or

(b) the claim arose from the dishonesty or fraudulent acts of Mr A which were condoned by Ms U.

It was accepted by GW that the claim arose from dishonesty and/or fraudulent acts on the part of Mr A.

Meaning of condonation

In the context of the policy, the word "condone" was intended to convey a state of affairs where the non-dishonest director knows of the dishonesty or fraud of his co-director yet overlooks it.

The factual matrix

There was no dispute that Ms U's conduct helped Mr A obtain the loan in respect of 5 Montague Place (she witnessed his signature on a document and certified a copy of his passport) but, if this conduct stood alone, it would be insufficient to show Ms U was a participant in Mr A's dishonesty and fraud or that she had condoned his dishonesty and fraud.

There was no evidence that Ms U played any part in facilitating the transaction relating to 42 Tulse Hill or that she had even been aware of it. Nor was there any evidence that Ms U obtained any personal direct benefit from Mr A's theft of the two advances.

In the circumstances, the Insurer had to rely on the wider facts, which were characterised into three strands. The Insurer argued that, taken in the round, these strands of evidence showed Ms U's dishonesty or fraud and/or Ms U's condonation of Mr A's dishonesty or fraud. The applicable standard of proof was the balance of probabilities.

1. The first strand - wide ranging dishonesty on the part of Mr A

The judge was presented with evidence that, between May 1999 and September 2001, Mr A participated in mortgage fraud and/or misappropriated mortgage advances on a number of occasions. Whilst there was no direct evidence that Ms U facilitated Mr A in these transactions, the position was different in a transaction in the summer of 2001.

In June 2001 Mr A entered into a contract to purchase a property called Netherstone and Ms U witnessed his signature. In October 2001, Mr A applied for a loan of £1,800,000 for the purchase. Mr A represented that the balance of the purchase price (an extra £840,000) was being funded from his savings. Prior to completion in early 2002, Ms U signed a certificate of title in respect of the property but there was no evidence to suggest she had investigated title. GW accepted that the funds to complete the purchase over and above the advance were stolen from the client account of JULS. The judge found that Ms U must have known Mr A's income was insufficient to service the loan.

2. The second strand - mortgage applications made by Ms U

In March and May 2002, Ms U made two mortgage applications (as well as completed a further application) where she knowingly misrepresented the prior purchase price and/or misrepresented her income. On one of the applications, Ms U named Mr A as her referee. The judge believed Ms U would only name Mr A if she was confident that Mr A would confirm her overstated income. The judge concluded that Ms U was engaged in "mortgage fraud" in her own right.

3. The third strand - mortgage applications made by Mr Okporuah (Mr O)

In May 2001, Mr O (Ms U's nephew) applied for a mortgage of around £100,000. The application contained false information that Mr O was employed by JULS as a solicitor with an income of just under £30,000. Ms U signed a letter to the lender that (falsely) confirmed his employment (albeit not as a solicitor) and his salary. The judge concluded that Ms U knew the part relating to income would be identical to the income in the mortgage application.

In early 2002, Ms U provided Mr O with £10,000 towards the purchase price of a property where Mr O's loan was obtained by an application with similar misrepresentation regarding his employment and income.


The judge found that the evidence demonstrated that Mr A, Ms U and Mr O were each engaged in mortgage frauds. It was not credible that Ms U was engaged in mortgage fraud herself but yet knew nothing of the fraudulent activities of Mr O and Mr A. The conclusion was that Ms U knew that both Mr A and Mr O were engaging in mortgage fraud from, at the latest, June 2001 i.e. prior to the two transactions which were the subject of the claim. The judge found, however, that he was not justified on the evidence available to find that Ms U knew of Mr A's theft of the advances in the two transactions.

Was the Insurer entitled to repudiate liability under the policy?

Ms U committed a fraudulent act in respect of 5 Montague Place since she knew that, by witnessing Mr A's signature and certifying a copy of his passport, she was assisting Mr A to obtain a loan by deception. Her actions amounted to condonation of his dishonest and fraudulent mortgage application. The judge rejected GW's argument that the claim arose from the theft of the money and not from the dishonest and fraudulent mortgage application. The judge found that the phrase "arising from" embraced both aspects of Mr A's dishonesty.

The judge cited with approval the decision of Irwin J in Zurich Professional Ltd v Karim & Others. In Karim, Irwin J had to consider whether insurers were entitled to rely upon an almost identical exclusion clause.

Irwin J made the following findings on the question as to whether insurers could only decline indemnity if they could demonstrate that an insured committed or condoned the specific 'dishonesty' or 'fraudulent act or omission' from which the claim arose or, alternatively, whether it was sufficient that the insured condoned general practice or conduct which was dishonest or fraudulent:

  • it is, ultimately, a question of the construction of the exclusion clause;
  • the natural meaning of the word "condoned" was reflected in the Oxford English Dictionary definition, which was "To forgive or overlook an offence, so as to treat it as non-existent; especially to forgive tacitly by not allowing the offence to make any difference in one's relation with the offender";
  • you cannot condone an act or omission of which you are not aware, so that if the wording of the policy requires there to be condonation of the specific acts or omissions which give rise to the liability, cover cannot be denied on the grounds of condonation of general dishonesty;
  • the phrase "...dishonesty or a fraudulent act or omission committed or condoned..." is intended to be disjunctive as between "dishonesty" and "a fraudulent act or omission". They are, therefore, alternatives;
  • when considering the objective test - the reasonable person would be surprised if this Clause allowed the Insurers to step aside from those within the firm who practised or condoned the specific forgery but not from partners who condoned persistent dishonest handling of money, breaches of the rules, and so forth, which allowed the specific act or omission to take place.

Accordingly, in Karim, Irwin J decided that if an insured condones a course of conduct which is dishonest or fraudulent and that course of conduct leads to or permits the specific acts or omissions upon which the claim is founded, the insurer is entitled to repudiate liability for all claims after the date of condonation.

In Goldsmith, Williams J adopted the same approach in relation to the construction of the fraud or dishonesty exclusion.

He found that, by the time that Mr A stole the money in each of the two transactions, Ms U knew that he was engaging in mortgage fraud and that she condoned this. Her condonation of Mr A's fraudulent mortgage applications permitted a state of affairs to arise whereby he was left free to steal. It followed that Insurer's defence was successful.


  • 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.
  • In following the decision in Karim, the present case reinforces the fact that a solicitor insured can condone a dishonest course of conduct by a co-director or partner without being directly involved in, or specifically aware of, fraudulent acts or omissions. 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. That cannot be right and such a result would fly in the face of both common sense and public policy generally.
  • The decision in Goldsmith, whilst confirmatory of Irwin J's earlier judgment, is an encouraging one for insurers, who are facing a raft of claims for mortgage fraud (particularly in the two partner sector). In particular, the judgment of Williams J emphasises that the findings in Karim extend well beyond the somewhat extreme circumstances of that case.
  • This case highlights the importance for insurers of thoroughly investigating the wider factual matrix in mortgage fraud cases. Depending upon the circumstances, such investigations should not be limited to the specific transactions that are the subject of claims.

In assessing the position of allegedly "innocent" partners, a number of factors are relevant including the following:

    • evidence of any involvement in other suspect transactions (subject to considerations of confidentiality);
    • evidence of any association with other fraudulent parties (e.g. borrowers, underlying principals or other suspect professionals, such as valuers or intermediaries);
    • the scale and number of frauds committed;
    • the nature and size of the firm;
    • whether the "innocent" partner had conveyancing experience and understood his or her obligations to lenders;
    • evidence of widespread regulatory breaches within the practice (e.g. of the Solicitors Accounts Rules).
  • Potential sources of information, further enquiry and evidence may include:
    • the firm's electronic documents and records (subject to issues of confidentiality);
    • the use of enquiry agents;
    • Law Society and SRA records (in so far as they are complete and accurate);
    • handwriting experts;
    • accountancy experts (subject to issues of admissibility);
    • lenders' documents;
    • the firm's accounting documents and bank statements, etc;
    • present or (more likely) former members of staff;
    • enquiries of previous insurers (subject to data protection and confidentiality issues).

In general terms, whilst regard must always be had to the economics, there are usually no short cuts and insurers who undertake a detailed analysis of the position are more likely to achieve a successful outcome.

  • Where law firms have incorporated, the directors of the body corporate can include non-lawyers, subject to the prior approval of any such individual under regulation 3 of the SRA Recognised Bodies Regulations 2009. In circumstances where insurers cannot decline indemnity unless all directors of the body corporate have committed or condoned dishonesty or a fraudulent act or omission, it may well be more difficult for insurers to demonstrate commission or condonation on the part of the non-lawyer than in the case of a solicitor or registered foreign lawyer (RFL). This may, in turn, encourage the appointment of such persons by fraudulent or dishonest solicitors or RFLs.
  • The decision in Goldsmith illustrates the inherent difficulties facing claimants who are pursuing claims for indemnity under the 1930 Act, where the outcome is dependant upon whether the Court accepts or rejects allegations of fraud or dishonesty against the solicitors involved in the underlying transactions. In the present case, both Mr A and Ms U had left the country (for Nigeria and Egypt respectively) and neither gave evidence in the proceedings.
  • The fraud exclusion in the present policy reflects the Law Society MTC and did not require condonation of the specific acts or omissions giving rise to the claims. The comparable exclusions in the policies of some larger law firms are more restrictive (and, therefore, less favourable for insurers) although, in practice, nothing is likely to turn upon the point given the large number of partners in such firms and the composite nature of solicitors' policies, which means that the position of each "Insured" needs to be considered individually.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 23/02/2010.

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