Axis Speciality Europe SE v Discovery Land Company LLC & Ors

Compulsory solicitors’ professional indemnity cover is interpreted with its public-protection purpose in mind, but policy terms and exclusions are otherwise construed neutrally. An exclusion for dishonesty may be engaged by condonation of a wider pattern of similar wrongdoing, yet the dishonest conduct giving rise to the claim must be causally connected to the condoned conduct. Condonation requires awareness or knowledge; blind-eye knowledge requires a firmly grounded, targeted suspicion and a deliberate decision not to confirm it. Primary fact-findings are only disturbed where plainly wrong or rationally insupportable. For aggregation, similarity must be real or substantial and assessed by the substance of the acts or omissions. Transactions are related only where they objectively interconnect or fit together. Shared property, affiliated claimants and a common opportunity for fraud do not suffice.

The respondents were clients of a dishonest solicitor, Mr Jones. They sought recovery from Axis, the professional indemnity insurer of the insolvent Jirehouse Entities, under section 1 of the Third Party (Rights Against Insurers) Act 2010.

After trial, Knowles J held that the other member and director, Mr Prentice, had not condoned Mr Jones’s dishonesty and that the claims did not arise from similar acts or omissions in a series of related matters or transactions. The judge also rejected an unappealed allegation that Mr Prentice’s appointments were sham transactions. Axis appealed the findings on condonation and aggregation.

The Court of Appeal dismissed the appeal on both grounds. Lady Justice Andrews gave the judgment, with Lord Justice Phillips and Lady Justice Elisabeth Laing agreeing.

1. Condonation. The dishonesty exclusion in clause 2.8 required a causal nexus between the dishonest conduct said to have been condoned and the claim. Condonation means treating unlawful or blameworthy conduct as acceptable. It may occur silently, after the event, or through assistance with concealment, false statements or failure to take action expected of an honest person. Some knowledge or awareness is required. Blind-eye knowledge requires a subjectively held, firmly grounded and targeted suspicion, together with a deliberate decision not to confirm it. Mere negligence or failure to inquire is insufficient. The clause could, in principle, extend to condonation of a pattern of dishonest conduct of the same type, but whether the particular wrongdoing formed part of that pattern remained a question of fact and degree.
2. Appellate review. The judge’s findings about Mr Prentice’s state of mind were primary findings based on a lengthy assessment of the evidence. They could be disturbed only if plainly wrong or rationally insupportable. The Court was not entitled to substitute its own evaluation of witness reliability. The judge’s conclusions had a rational evidential basis, despite his adverse findings about Mr Prentice, and Axis failed to show material error.
3. Aggregation. Applying AIG Europe Ltd v Woodman and others [2017] UKSC 18, “related” matters or transactions must interconnect or fit together, assessed objectively and in the round. The required similarity must be real or substantial and must be assessed by examining the substance, circumstances and features of the acts or omissions, rather than at an excessively high level of abstraction. The first claim concerned misappropriation of funds transferred for a specific purchase. The second involved an unauthorised loan and charge, drawdown and onward payment. Those were materially different acts and arose from separate transactions. The shared property, affiliated claimants and opportunity for dishonesty did not provide the necessary connection. The aggregation clause therefore did not apply.

• Court of Appeal (Civil Division): Appeal dismissed on both grounds; [2024] EWCA Civ 7.
• High Court, Commercial Court: Knowles J found no condonation and no basis for aggregation; [2023] EWHC 779 (Comm).