Zurich Professional Ltd v Karim & Ors

An insured may be excluded from professional indemnity cover where civil liability arises from dishonesty or a fraudulent act or omission committed or condoned by that insured. The policy wording may distinguish between condoning specific fraudulent acts and condoning a persistent dishonest practice which enabled those acts. A person cannot condone an act of which they are unaware, but specific knowledge is unnecessary where the policy separately excludes liability arising from general dishonesty. The relevant dishonesty may be assessed by reference to knowledge of the circumstances making conduct dishonest according to ordinary standards.

The insurers sought declarations that claims arising from the conduct of a solicitors’ firm were outside cover under an assigned-risks professional indemnity policy. The first defendant controlled the firm’s finances and was found to have committed dishonesty and fraud. The second and third defendants were qualified partners who did not directly commit the individual fraudulent transactions but knowingly allowed the firm to operate under their apparent partnership and failed to supervise it. The central issue was whether clause 6.9 excluded cover for them where they had not specifically known of, or condoned, each individual fraudulent act.

1. Findings of dishonesty. Allegations of fraud are proved to the civil standard of probability, but the evidence required in practice is more convincing than for ordinary allegations: (1957) 1 QB 247. The ingredients of deceit stated in Derry v Peek (1889) 14 AC 337 were applied. The defendants’ conduct was also dishonest under the approach discussed in Barlow Clowes v Eurotrust International [2006] 1 All ER 333.
2. Construction of the policy. Clause 4.1, which prevented avoidance or repudiation for misrepresentation or non-disclosure, had to be read consistently with clause 6.9. Dishonesty causing a claim could therefore remove the insurer’s liability for that claim without permitting avoidance of the policy itself.
3. Meaning of condoned. Condonation ordinarily requires knowledge of the act or omission being forgiven or overlooked. The court could not therefore treat the defendants as having condoned particular frauds of which they were unaware. However, clause 6.9 was disjunctive. It covered dishonesty separately from a fraudulent act or omission. The second and third defendants’ deliberate acceptance of a dishonest system, persistent breaches of the accounts rules and abandonment of their supervisory responsibilities enabled the specific transactions and fell within the clause.
4. Disposition. The insurers were entitled to the declarations against all three defendants. The claim was determined in the insurers’ favour.