Andrew Ottley and Alan Weir are unhappy with the implications for lawyers and their clients of a dishonest partner in the wake of Zurich v Karim


Not surprisingly, professional liability insurers baulk at picking up the tab for a claim when an insured has committed the fraud out of which that claim arises. To ensure they do not, they will insert an exclusion. However, where liability insurance is a mandatory professional requirement, the ability of insurers to exclude liability is usually circumscribed by the profession's regulations.



One would expect the court to be careful to ensure that the scope of any exclusion does not trespass over the line, to the detriment of those consumers. For the reasons behind that public policy, one need look no further than Mr Justice Thomas's judgment in Kumar v AGF Insurance Ltd & Ors [1999] 1 WLR 1747. The facts underlying the recent judgment of Mr Justice Irwin in Zurich Professional Ltd v Karim & Ors [2006] EWHC 3355 - where such an exclusion has been considered - are, to say the least, out of the ordinary, but the outcome suggests that public policy is not at the forefront of all judges' minds.



In brief, there were three defendant lawyers - a mother, son and daughter - all in practice together as solicitors. They were insured, through the assigned risks pool (ARP), by the claimant insurer, Zurich, and the other 'qualifying insurers' participating in the solicitors' primary market. Their firm had a chequered past. Eventually, the mother embarked on a series of highly dishonest deals. Her offspring were not involved; while they appear to have been in her thrall, they did not participate in these acts.



The ARP represents the professional indemnity insurer of last resort for English solicitors, but this is not a charitable service provided by the insurance industry; the premiums charged are eye-wateringly high. The terms of ARP cover are essentially the Law Society's prescribed minimum terms, and the clause that fell to be considered is one generally replicated in every solicitor's policy. All solicitors should therefore be aware of the judgment as, subject to any appeal (which appears unlikely in these proceedings), the interpretation given to this clause binds us all.



The ARP insurers were faced with considerable claims triggered by the mother's final spate of dishonest dealings. On their behalf, Zurich sought a negative declaratory judgment that they were not obliged to indemnify anyone in the firm for those claims. Such a declaration would leave the damaged clients without recourse (apart from a possible application to the Solicitors Compensation Fund for a discretionary grant), as well as exposing the son and daughter to bankruptcy.



It was an unsatisfactory trial since the defendants were unrepresented; mother and son claimed illness but did not substantiate that, while the daughter seems to have been residing on Sunset Boulevard during the trial. Nor were the client victims represented. So allowance must be made for those factors in criticising the outcome. That said, the public policy aspect receives surprisingly little attention in the judgment. The judge's conclusions on the scope of the exclusion may therefore need to be viewed with care, particularly since, in key respects, they look questionable.



To walk away from these claims, Zurich had to secure the negative declaration it sought against all three lawyers; any one of them who was 'innocent' would remain entitled to coverage, enabling the victim claimants ultimately to recover from insurers. The mother had committed the frauds, so liability to her was plainly excluded. However, since the son and daughter had not committed the underlying frauds, Zurich had to persuade the judge to apply the exclusion in respect of 'liability [arising] from dishonesty or a fraudulent act or omission... condoned by that insured' (our emphasis). Zurich's difficulty was that, in Mr Justice Irwin's view, the evidence showed neither son nor daughter had even known of the recent frauds, so they could hardly be held to have condoned them.



Nevertheless, the judge granted the declaration. Irwin J concluded that the son and daughter had repeatedly condoned 'persistent dishonest handling of money, breaches of rules and so forth' on their mother's part, and had they not condoned her general dishonesty in the past, the mother would not have generated the claims in question. That was enough, in his view, to trigger the exclusion, because 'dishonesty' was to be read disjunctively from the words 'fraudulent act or omission'. Thus it sufficed that the mother's 'generic' dishonesty had been condoned. He added that he was fortified by his belief that 'the reasonable man on the Underground' would be surprised if coverage to the mother was excluded, while cover to her offspring was not.



While Irwin J may have been right that such a man would, so to speak, expect sauce for the goose to be sauce for the goslings, the touchstone of English legal contractual interpretation is not the expectations of that faceless hero, the man on the Clapham omnibus, even when he has been rebranded in this way. It is the words of the contract, construed in the factual matrix known to both parties, which the court must consider. As to the relevant factual matrix here, both the firm and the insurers can reasonably be taken to have known not only that there is a powerful public policy in favour of protecting the consumer, but also that 'innocent partner' clauses do exist and have led to the opposite conclusion.



A second criticism is this. Mr Justice Irwin accepted that the exclusion could be 'open to more than one reasonable interpretation'. That seems a textbook definition of genuine ambiguity. If so, the principle (much in the headlines apropos Hurricane Katrina) that ambiguous exclusions in policies should be given the narrower meaning, ought to have been fatal to Zurich's case. However, the impact of ambiguity in a policy exclusion is not explored in the judgment.



Lastly, one should examine how it is said that these claims 'arose out of' the dishonesty condoned by the children. After all, 'arising out of' is, on most cases, an indication that the parties seek a proximate causal connection between the loss and something preceding it. These losses followed the earlier pattern of dishonesty in time, but was that plainly the proximate cause of these claims? It is unclear whether Irwin J had this issue in focus in reaching his conclusion. In our view, the children's condoning of the mother's general propensity to dishonesty could not be enough to trigger the exclusion, because that propensity of itself could not constitute the proximate cause of the claims by the victim claimants.



The logic of Irwin J's decision has to be that, in condoning the mother's past transgressions and general misbehaviour, the children are to be taken as having condoned - prospectively - repetitions of her dishonest behaviour in the future. The judgment contains no discussion as to whether the meaning of 'condoned', in this or any context, can stretch that far, and we suggest that had the matter been analysed in this way, Irwin J would have concluded that it could not. As he asked rhetorically: 'How can you be taken to forgive or overlook a fact which you do not know about, even if you should know about it?' Are the children to be taken to have known about frauds which the mother might (or might not, despite her track record) commit in the future?



This leaves the law in an unsatisfactory state. Insurers deserve a proper premium for protecting the public against miscreant members of the profession. It is a pity, on the minimum terms as they now stand, that the scope of protection is less than many would expect. The terms need revisiting in light of this ruling. Until this is addressed, partners would be advised to consider the implications for their own financial well-being of 'rogue' partners and not to assume that their premiums are buying a true sense of security.



Andrew Ottley and Alan Weir are partners in the insurance and reinsurance group of City firm Ince & Co