Pemberton Greenish LLP v Henry

A professional indemnity claim based on subrogation succeeds only to the extent that the insured professional’s breach was dishonest where the policy excludes recovery for non-dishonest conduct. Dishonesty is assessed by the applicable legal test, on the balance of probabilities, but allegations of fraud require sufficiently cogent evidence. Serious professional carelessness, regulatory breaches, hindsight and later dishonest conduct do not, without more, establish that the earlier breaches were dishonest. The court must assess the defendant’s state of mind when the relevant acts or omissions occurred.

The claimant, a solicitors’ limited liability partnership, sought recovery from the defendant, a consultant solicitor, of sums paid under its professional indemnity policy following losses connected with a fraudulent property transaction. The policy permitted subrogated recovery against an employee only where the claim was brought about or contributed to by dishonest, fraudulent, intentional, criminal or malicious conduct. The parties agreed that the claim was limited to losses caused by dishonesty.

The claimant alleged that the defendant had breached the Money Laundering Regulations 2007 and related internal procedures, and that those breaches were dishonest and caused the loss. The central issue was whether the proven regulatory breaches were dishonest acts or omissions, rather than professional carelessness.

1. The claim was dismissed. The claimant established several breaches of the Money Laundering Regulations 2007, but failed to prove by sufficiently cogent evidence that the breaches were dishonest or that the losses were caused by dishonest conduct.

2. The applicable test was that stated by Lord Hutton in Twinsectra Limited v Yardley [2002] UKHL 12: dishonesty required knowledge that the conduct would be regarded as dishonest by honest people. The defendant could not rely on a personal standard of honesty.

3. The civil standard remained the balance of probabilities. However, the seriousness and inherent improbability of an allegation of fraud meant that sufficiently strong or cogent evidence was required. The court relied on Re H and Others (Minors) [1996] AC 563 and Foodco UK LLP v Henry Boot Developments Limited in applying that approach.

4. The defendant had breached regulation 5 by failing to identify both clients properly, by failing to obtain identification evidence for Mr Kingston, and by failing to notice material anomalies in the council tax bill. She had also breached regulation 8 by failing to update the risk assessment when funds were to be paid to third parties. Other alleged failures were not established as regulatory breaches.

5. The defendant’s later forgery, deletion of emails and concealment of Mr Lloyd-Cooper’s involvement were dishonest, but occurred after the fraud had been discovered. They could inform the assessment of her state of mind but did not establish that the earlier regulatory breaches were dishonest.

6. The defendant had initially been entitled to regard the apparent clients and the transaction as legitimate. Her long-standing relationship with Mr Lloyd-Cooper had impaired her objectivity, and urgency had caused her to overlook regulatory requirements. Those circumstances established serious professional carelessness, not dishonesty.