Last week the Commercial Court provided helpful guidance on the interpretation of “condoning” and what professional indemnity insurers need to prove to establish that a partner or director of a law firm has condoned a dishonest or fraudulent act to allow them to decline insurance cover.

Background

Solicitors’ Professional Indemnity Insurance policies must comply with the Solicitors Regulation Authority’s Minimum Terms and Conditions of Professional Indemnity Insurance (the “minimum terms”).

Under those minimum terms, insurers can decline to cover a claim which arises from dishonesty or a fraudulent act/omission and which was either committed or condoned by all the LLP’s members or directors of the (legal) company.

The burden of proof is of course on the insurer.

In Discovery Land Co LLC & Ors -v- Axis Speciality Europe SE [2023] it was accepted that one of the directors of the law firm (which comprised both a company and LLP), Jirehouse Partners LLP, had dishonestly taken client moneys on two occasions (“director 1”).

Axis sought to decline the claim by arguing that, although the second director (“director 2”) did not specifically approve the dishonest acts, he had condoned the dishonest acts.

Axis argued that:

• director 2 was aware of the financial problems of the firm and the temptation for director 1 to “help himself to client funds”.
• director 2 had turned a “blind eye” and told multiple lies to cover up director 1’s dishonest behaviour.
• there was nothing in the language of the policy to suggest that it is only if a person knows of a particular fraudulent act that he is taken to have condoned it. Instead, that it is enough to know of and condone a pattern of dishonest behaviour of which the particular fraudulent act forms a part.

Decision of the Commercial Court

Although the wording of the Axis insurance policy in question was slightly different than the minimum terms, it was intended to comply with the minimum terms.

Mr Justice Knowles moved away from previous case law on condonement because there were no true parallels between the facts.

He examined the definition of “blind eye knowledge” in Group Seven -v- Nasir [2020] and accepted that it requires a suspicion “firmly grounded and targeted on specific facts” and a deliberate decision to “avoid obtaining confirmation of facts in whose existence the individual has good reason to believe”.

He made the following comments in respect of the interpretation of “condone” for insurers seeking to decline cover on the grounds of dishonesty:

• That condone is an “ordinary word” that should be given its meaning in ordinary language;
• In ordinary language condone conveys acceptance or approval.
• In some situations, to condone does not require an overt act.
• The question of condonation, and of what it was that was condoned, will require close attention to the facts.
• Knowledge of a consistent pattern of dishonest behaviour and of the specific fraudulent act(s) relevant to the claim are required.

In conclusion, Mr Justice Knowles found that whilst director 2’s actions and professional standards fell well below that required by the profession, there was insufficient evidence to prove that he had direct knowledge of the specific dishonest acts of director 1 that formed the basis of the claims. As such, he had not condoned them.

Axis therefore had to provide cover under the policy.

Comment

This judgment is the first guidance on this issue in over a decade and will therefore be important to both professional indemnity solicitors and insurers.

It highlights that proving condonation is a major undertaking and requires a detailed and close analysis of the facts of each claim.

In this instance, even knowledge of some dishonest acts and/or a pattern of dishonest behaviour and lies told to cover up that behaviour was not enough for the insurer’s argument to succeed. It was necessary to go further and prove specific knowledge of those acts that led to the claim.

WYNTERHILL LLP

Jenny Hutchinson (Consultant Solicitor) and Michael Howard (Partner) are solicitors specialising in insurance coverage and professional negligence claims.  They bring negligence claims against a wide range of professionals, advise on complex insurance coverage disputes and bring claims against insurers to challenge insurance decisions.

This post is intended to provide guidance of a practical nature but does not contain legal advice or advice as to what action you should or should not take specific to your insurance needs or those of your business, or with regard to any particular situation.