Rahim v Arch Insurance Co (Europe) Ltd

A professional indemnity dishonesty exclusion may apply where the insured knowingly participates in, or condones, a wider course of mortgage fraud, even if she did not participate in the particular frauds giving rise to the claim. Dishonesty is assessed objectively by ordinary standards, while considering the circumstances known to the defendant and her personal attributes. Gross negligence remains distinct from dishonesty. A solicitor may incur liability as a partner by holding out, even without being a partner in law.

The claimant, a solicitor, sought indemnity from her professional indemnity insurers for judgments and costs arising from mortgage frauds conducted at the firm where she worked. The insurer relied on a policy exclusion for civil liability arising from dishonesty or fraudulent acts committed or condoned by the insured.

The central issues were whether the claimant had acted dishonestly in conveyancing transactions, whether she had condoned other frauds at the firm, and whether she was liable as a partner or partner by holding out. The court also considered alternative arguments concerning partnership status and aggregation, but those issues became academic after the exclusion was upheld.

1. Dishonesty. The insurer bore the burden of proving dishonesty. The standard was the balance of probabilities, although strong and cogent evidence was required in allegations of fraud against a solicitor. The assessment involved an objective standard of dishonesty, applied to the claimant’s subjective state of mind and the circumstances known to her, including her experience and intelligence. The court relied on Barlow Clowes v Eurotrust [2006] 1 WLR 1476 and Royal Brunei Airlines v Tan [1995] AC 378.
2. Gross negligence was qualitatively different from dishonesty. The distinction was not merely one of degree. The court referred to Mortgage Express v Newman [2001] 1 Lloyds Rep 669 and considered, but obtained limited assistance from, Zambia v Meer Care [2008] EWCA Civ. 1007.
3. The claimant knew that she acted for mortgage lenders and was required to disclose discrepancies between the true purchase price and the figures reported to lenders, including discrepancies caused by discounts, bonuses, allowances and directly paid deposits. By knowingly failing to make those disclosures in 10 of 11 sample transactions, she deliberately misled the lenders and acted dishonestly.
4. For the purpose of the dishonesty exclusion, condoning did not require participation in the particular frauds giving rise to the insured claims. It was sufficient that the claimant knew that mortgage frauds were generally, or to a significant extent, being carried out at the firm and nevertheless participated in the wider scheme. The court applied the reasoning in Zurich v Karim [2006] EWHC 3355 and Goldsmith Williams v Travelers Insurance [2010] EWHC 26.
5. The insurer could therefore rely on the exclusion and the claim for indemnity failed. The court also observed that the claimant was at least a partner by holding out. It distinguished the circumstances from Young Legal Associates v Zahid [2006] EWHC Civ. 613, but did not need to decide whether she was a partner in law.