Discovery Land Company LLC & Ors v Axis Specialty Europe SE

For a dishonesty exclusion in a compulsory solicitors’ professional indemnity policy, “condone” bears its ordinary meaning of acceptance or approval. It may arise without an overt act. Knowledge and acceptance of a pattern of dishonest behaviour may suffice, even where the insured did not know of the particular dishonest act. The conduct condoned must nevertheless be identified with care. A general awareness of financial pressure, poor management or misconduct does not establish condonation of a particular fraud, or of conduct from which the claim arises, unless the necessary connection is proved.

For aggregation, claims arise from the same series of acts only where the same series caused each claim. Related transactions must also genuinely fit together; a high-level connection involving the same property, client or firm is insufficient if the transactional detail shows separation.

The claimants held unsatisfied judgments against insolvent Jirehouse entities arising from two dishonest transactions concerning Taymouth Castle. They sought to enforce the entities’ rights under a primary solicitors’ professional indemnity policy issued by AXIS.

The principal issues were whether Mr Vieoence Prentice was a director and LLP member, whether he condoned dishonest conduct by Mr Stephen Jones within the policy’s fraud exclusion, and whether the two claims aggregated as one claim. The court also considered a late privilege application concerning an interview with Mr Prentice.

1. Condonation. The policy was construed against the statutory purpose of the compulsory insurance scheme under Solicitors Act 1974, section 37, but the word “condone” retained its ordinary meaning. It conveyed acceptance or approval and did not necessarily require an overt act.
2. AXIS’s submission that it was sufficient for Mr Prentice to know and condone a pattern of dishonest behaviour was correct. The relevant question was not confined to whether he knew of the particular dishonest transaction before or when it occurred. However, the court had to identify what conduct was actually condoned and whether the claims directly or indirectly arose from, or in any way involved, that conduct.
3. Mr Prentice’s appointments as director of Jirehouse and JTL and member of Jirehouse Partners LLP were effective. They were not shams. Although he fell well below the professional standards expected of him and had behaved dishonestly on some matters, the evidence did not establish that he knew or should have appreciated that Mr Jones was stealing client money or pursuing the multi-million-pound frauds in issue.
4. Mr Prentice therefore did not condone the dishonest conduct giving rise to either claim. At most, the evidence established awareness of financial difficulties and possible use of client money to meet temporary pressures. That was not the conduct involved in the two insured claims, and the necessary causal connection under clause 2.8 was absent. AXIS failed to discharge the burden of proving condonation.
5. Aggregation. Applying the approach in Lord Bishop of Leeds v Dixon Coles & Gill and AIG Europe Ltd v Woodman, the two claims did not arise from the same series of related acts or matters. The Surplus Funds Claim concerned the later wrongful release of purchase monies. The Dragonfly Loan Claim involved a separate secured lending facility, drawdown and release nine months later. Although both concerned Taymouth Castle and Jirehouse, the detailed transactions did not fit together and were not sufficiently similar for aggregation.
6. The claims were consequently not one claim under clause 5.2(c) or (e). The claimants succeeded on the coverage and aggregation issues. The application to strike out evidence concerning Mr Prentice’s interview was refused because no relevant privilege or unfairness was established.