London Market - August 2010

Fraud, Exclusion Clause, Professional Indemnity Insurance

In Goldsmith Williams (A Firm) v Travelers Insurance Co Ltd [2010] EWHC 26 QB, the defendant had insured under a professional indemnity insurance policy a firm of solicitors, Joshua & Usman Legal Services Limited (“J&U”), against civil liability arising from its practice.

It was alleged that the directors of J&U had either been engaged in or had condoned mortgage fraud and that the defendant was therefore entitled to repudiate liability under the policy.  This argument was based on the fact that there was an exclusion clause in the policy which provided that the defendant was not liable in the event of directors' fraud or dishonesty.

The directors of J&U were Mr Atikpakpa and Ms Usman. Mr Atikpakpa had applied to a mortgage provider (“Mortgages 5”) for a loan to purchase a property.  Mortgage 5 instructed Goldsmith Williams to act in relation to the proposed transaction. Ms Usman had assisted with the documentation for Mr Atikpakpa to obtain the loan.

The loan was granted but Mr Atikpakpa did not purchase the property, instead stealing the money. Mr Atikpakpa's wife subsequently applied for a second loan from Mortgage 5 to purchase a property owned by Mr Atikpakpa.  The mortgage company again appointed Goldsmith Williams.  Mr Atikpakpa, in his capacity as vendor, appointed J&U. Mortgage 5 advanced the sum of money to Mr Atikpakpa’s wife, which was then transferred to J&U, but the transaction was never completed.  Mr Atikpakpa stole the money.  J&U were subsequently investigated by the Office of the Supervision of Solicitors and struck off the register.

By deed of assignment, Mortgage 5 assigned its claim against J&U to Goldsmith Williams.  They in turn proceeded against J&U, claiming the total sums advanced by Mortgage 5.  They relied upon their rights as assignee under the deed and the right to be indemnified under the Civil Liability (Contribution) Act 1978.

Goldsmith Williams obtained judgment against J&U (J&U did not defend the proceedings).  Goldsmith Williams then brought proceedings against the defendant under the Third Parties (Rights Against Insurers) Act 1930 s.1.

The defendant argued that it was not bound to indemnify J&U and therefore also not liable to Goldsmith Williams.  The defendant argued that it was entitled to repudiate liability under the policy based on an exclusion clause which provided that insurers “shall not be liable under the policy in respect of fraud or dishonesty” although “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 of that body corporate”. 

The defendant argued that the evidence established Goldsmith Williams’ claim against J&U arose from the dishonest and fraudulent acts of Ms Usman and Mr Atikpakpa. 

Goldsmith Williams did not dispute that Mr Atikpakpa had acted dishonestly or fraudulently but denied that Ms Usman had condoned the activity and therefore argued that the exclusion clause did not apply.

Mr Justice Wyn Williams, finding in favour of the Defendant, held that:

1. The defendant was correct in its submission that Mr Atikpakpa was guilty of extensive dishonesty and fraud during his time as director.
2. There was evidence that Ms Usman had made fraudulent mortgage applications in her own right.  She had additionally helped a further colleague to engage in fraudulent applications.  It was not credible that Ms Usman was engaged in mortgage fraud herself but yet had known nothing of the other fraudulent activities going on in and around J&U. On the evidence Ms Usman had known of Mr Atikpakpa’s mortgage fraud and had aided and abetted Mr Atikpakpa's crime and had condoned his dishonest and fraudulent mortgage application, enabling him to obtain the loan.
3. If an insured condoned a course of conduct which was dishonest or fraudulent and that course of conduct led to or permitted the specific acts or omissions upon which the claim was founded, the insurer was entitled to repudiate liability (Zurich Professional Ltd v Karim (2006) EWHC 3355 (QB)).
4. The claim in respect of the first mortgage fraud had arisen from Ms Usman’s dishonesty in conducting the fraudulent acts on the part of Mr Atikpakpa.
5. Ms Usman had known of Mr Atikpakpa’s fraud relating to the second mortgage fraud (the apparent sale of Mr Atikpakpa's property to his wife). The fraud would not have taken place had Ms Usman not condoned the fraud.  Therefore both Ms Usman and Mr Atikpakpa had engaged in or condoned dishonest or fraudulent activity.
6. The defendant was therefore entitled to repudiate liability under the exclusion clause.