Member Article

Dishonesty and Professional Indemnity Insurance

With Watson Burton LLP Law Firm

Insurance policies covering professionals will include clauses which will deny the insured cover if they act dishonestly. A recent case at the end of last year dealt with a situation where an Insurer was seeking to rely upon such a clause and raised important issues in relation to partners “condoning” dishonest acts.

Zurich v Karim [2006] EWHC 3355 (QB) involved the firm of Karim Solicitors. Two of the defendants were siblings, Imran and Saira Karim, who were the partners of the firm. The first defendant was their mother, Mrs Karim, whose practising certificate was subject to a number of restrictions. In breach of these conditions, Mrs Karim had complete control of the business, running the firm’s financial affairs and taking on overall supervision.

Claims were made against the firm by former clients for the repayment of client funds misappropriated by Mrs Karim, who had arranged for funds to be fraudulently advanced by forging signatures on mortgage deeds which were subsequently paid into one of the firm’s client accounts. Mrs Karim used the funds to deal with the firm’s financial affairs and provide income to all of the defendants. The son and daughter claimed that they were not involved and that they had not been aware of their mother’s activities and sought to claim under their professional indemnity policy.

The wording contained an exclusion from cover for claims arising: “from dishonesty or a fraudulent act or omission committed or condoned by that Insured”. Zurich sought a declaration that they were not required to indemnify the firm as the claims arose out of dishonesty committed or condoned by all three of the defendants.

Mrs Karim was found to have acted dishonestly in the management of the firm’s accounts, with those transactions leading to the claims made, and she was therefore not entitled to cover.

Imran and Saira Karim were held not to have been directly involved in any of the dishonest transactions of Mrs Karim. They were, however, held to have condoned the dishonesty in that they knew they were supposed to be in control of the firm and they were not; they divested themselves of responsibility for the running of the firm; they relied upon Mrs Karim for money and must have known that the large sums taken in drawings could not have derived from legitimate fee income. Their behaviour was held to have been consistently dishonest.

The issue was whether insurers had to show that Imran and Saira Karim had condoned specific acts of dishonesty or whether it was sufficient to show that they had condoned general dishonest conduct giving rise to the claims. It was held that it was sufficient to show that they had condoned the situation which permitted the dishonest events to occur and the insurers were able to rely upon the exclusion clause in respect of all three defendants.

The case highlights that partners in professional firms must be vigilant in monitoring the actions of their partners and of the danger of effectively condoning the dishonest acts of others.

If you have any questions in relation to this article, or any other commercial litigation matter, please contact Sara Stanwix at Watson Burton LLP (email sara.stanwix@watsonburton.com or telephone 0191 244 4444).

This was posted in Bdaily's Members' News section by Ruth Mitchell .