Goldsmith Williams (a firm) v Travelers Insurance Company Ltd

An insurer may rely on a professional indemnity exclusion for dishonesty or fraud where an insured director knowingly facilitates a fraudulent transaction or condones a dishonest course of conduct which enables the liability to arise. The phrase arising from may encompass both the fraudulent application which enabled funds to be obtained and the subsequent theft. Condonation does not require knowledge of the precise later act if the insured knowingly overlooks a dishonest course of conduct which permits that act to occur. Alleged dishonesty is proved on the balance of probabilities, applying the ordinary standards of reasonable and honest people and the defendant’s appreciation of those standards.

The claimant sought £671,623.89 from the defendant insurer under section 1 of the Third Parties (Rights Against Insurers) Act 1930. The claim followed a judgment obtained against Joshua & Usman Legal Services Ltd, an insured solicitors’ practice, after mortgage advances were misappropriated in two transactions.

The defendant relied principally on a policy exclusion for claims arising from dishonesty or fraud committed or condoned by an insured. The central issues were whether a director had acted dishonestly or fraudulently, whether she had condoned the other director’s conduct, and whether the claims arose from that conduct.

1. Primary defence. The claim was dismissed because the defendant established the policy exclusion. The court found that Ms Usman knowingly assisted the fraudulent mortgage application concerning 5 Montague Place by witnessing a signature and certifying a passport copy while knowing that she was helping Mr Atikpakpa obtain a loan by deception.
2. Applying Twinsectra v Yardley [2002] 2AC 164, dishonesty required conduct dishonest by the ordinary standards of reasonable and honest people, together with the defendant’s awareness that the conduct was dishonest by those standards. The relevant standard of proof was the balance of probabilities: S-B (Children) [2009] UKSC 17.
3. The policy’s reference to claims “arising from” dishonesty or fraud was not confined to the theft itself. The fraudulent mortgage application was an essential precondition to the theft and fell within the exclusion.
4. The court followed the reasoning of Irwin J in Zurich Professional Ltd v Karim & Others [2006] EWHC 3355 (QB). An insured who condones a dishonest or fraudulent course of conduct, and that course permits the specific acts giving rise to the claim, may fall within such an exclusion. Ms Usman knew of Mr Atikpakpa’s mortgage fraud before the 42 Tulse Hill transaction and had condoned the relevant course of conduct, even though she was not shown to have known of the particular theft.
5. The court found that the evidence did not establish that Ms Usman knew of or condoned the theft relating to 42 Tulse Hill in isolation. That distinction did not assist the claimant because the exclusion covered the broader dishonest course of conduct which enabled the theft.
6. The secondary defences were treated as technical. Had the primary defence failed, permission would have been granted to amend the prayer for relief if necessary.

Accordingly, the defendant established its primary defence and the claim failed.