This case is important in the field of solicitor professional negligence. It addresses when an insurer can deprive a solicitor firm of insurance cover for a claim by exercising a dishonesty exclusion.
Joshua & Usman Legal Services Limited (“JULS”), trading as Joshua & Usman Solicitors had two directors, Mr Atikpakpa and Ms Usman. Travelers Insurance Company Ltd (“Travelers”) provided professional indemnity insurance to JULS, subject to an exclusion clause in respect of fraudulent or dishonest acts committed or condoned by all directors of the company.
In November 2001, Mr Atikpakpa applied for a loan to fund the purchase of a property. Goldsmith Williams were instructed to act on behalf of the lender. Mr Atikpakpa provided documentation to Goldsmith Williams, including a “Bond to Let Account Assignment” document signed by Mr Atikpakpa and witnessed by Ms Usman, and a copy of his passport certified by Ms Usman. The mortgage advance of £507,941 was transferred to JULS in January 2002, but the transaction was not completed and Mr Atikpakpa stole the funds.
In late 2001 Mr Atikpakpa’s wife, who was also Ms Usman’s sister, applied for a loan from the same lender to purchase a property from Mr Atikpakpa. Goldsmith Williams acted for the lender and JULS acted for Mr Atikpakpa. The mortgage funds of £143,019 were transferred to JULS, but again the transaction was not completed and Mr Atikpakpa again stole the money.
JULS was intervened by the Law Society and subsequently wound up. The lender assigned its claims against JULS to Goldsmith Williams and judgment was obtained against JULS for the full amount of both loans. Goldsmith Williams relied on the Third Party (Rights Against Insurers) Act 1930 to seek recovery from Travelers under JULS’ indemnity insurance policy. However, Travelers argued that the claim was excluded from cover because both directors of JULS had been dishonest or condoned the dishonesty of the other. The issue was therefore whether it could be established that Ms Usman had been dishonest or condoned Mr Atikpakpa’s dishonesty.
Travelers relied on three strands of evidence in support of this contention.
1. The Law Society’s investigations revealed that Mr Atikpakpa had been involved in numerous other acts of mortgage fraud, and Ms Usman was linked to at least one of these transactions.
2. Evidence came to light from a separate trial that Ms Usman had personally committed mortgage fraud by falsifying her income on two applications she made in 2002.
3. Ms Usman had assisted her nephew to fraudulently obtain a mortgage by representing to the lender that he worked full time for JULS on a certain salary, when in fact this was not the case and he only worked part time for JULS.
To determine whether Ms Usman had acted dishonestly, the Court applied a test based on whether her acts would be considered dishonest by the standards of a reasonably honest person. Condoning Mr Atikpakpa’s actions would mean she had to know about the dishonest act and did nothing about it.
There was no doubt Ms Usman’s conduct in the first transaction assisted Mr Atikpakpa, but this in itself did not mean she condoned it. The Court found that there was no evidence to link Ms Usman to the second transaction or to suggest that she had benefitted directly from Mr Atikpakpa’s dishonesty or even knew that the funds had been stolen. However, Mr Atikpakpa, Ms Usman and her nephew had all engaged in mortgage frauds by making false statements in application forms, and it was implausible that Ms Usman would be involved in carrying out mortgage frauds herself but would not know Mr Atikpakpa was doing the same.
It was held that Ms Usman had committed a fraudulent act in relation to the first transaction by witnessing Mr Atikpakpa’s signature and certifying his passport, which she knew would help him obtain a mortgage by deception. The Court found that Ms Usman had also condoned his dishonest acts in respect of the second transaction, as by that time she knew he was engaged in mortgage fraud and by doing nothing about it she had allowed a situation to arise where Mr Atikpakpa was able to steal the funds. In reaching this conclusion the Court relied on the case of Zurich Professional Ltd v Karim  EWHC 3355 (QB), where it was held that if an insured condones a course of conduct which is dishonest and which leads to or permits the specific act upon which the claim is founded, then the insurer is entitled to repudiate liability.
Solicitors’ professional indemnity insurance is covered by restricted Law Society minimum terms. This gives rise to only limited situations in which cover can be denied. Cover can only be denied on a case by case basis and usually only if all directors/ partners were involved in the dishonest conduct on the particular transaction. This case highlights that in applying a “dishonesty” exclusion in solicitor professional indemnity insurance policies, the Court will look broadly at the circumstances surrounding whether all the directors/partners in the firm individually knew or ought to have known about the dishonesty of other directors/ partners. In this case, the claims failed in respect of both loans despite the lack of evidence linking Ms Usman to the second transaction, because she was aware of and failed to prevent her co-director’s dishonesty in respect of other mortgages.
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