The dishonesty exception

Professional indemnity policies written for firms of professionals are typically written on a composite basis, so that each individual member of the firm is protected in respect of his or her own acts as long as they are not fraudulent, and the fraud of other members of the firm leaves claims unaffected. In Goldsmith Williams v Travelers Insurance Co Ltd [2010] EWHC 26 (QB) the court was required to construe a policy issued to a firm of solicitors, which removed cover if all of the directors of the firm were guilty of or had condoned fraud. The most important issue before Wyn Williams J was whether a general condonation of fraud was sufficient, or whether knowledge had to relate to the specific fraud which had occurred. The learned judge preferred the former, wider, construction of the fraud exclusion.

Goldsmith Williams: the facts

JULS traded as solicitors from about 1999. It took corporate form in 2001. Its directors were Mr A and Ms U, and Mr A was married to Ms U’s sister, Ms E. On 2 November 2001 Mr A applied to Mortgages plc for a loan of £541,579.70 to purchase a house in Poplar, London. The loan was to be secured by a mortgage over the property. A stated in his application that he owned 80% of the shares in JULS and that the balance of the purchase price – £155,000 – would come from his savings. Both statements were false, but the loan was nevertheless offered. The claimants, GW, were instructed to act for a subsidiary of Mortgages plc, Mortgages 5, in respect of the loan, and JULS acted for Mr A. GW sought various documents as a condition for the release of the loan, and these were provided: the relevant document was signed by Mr A and witnessed by Ms U. On 7 January 2002 GW transferred to JULS the sum of £507,941.32. However, Mr A did not use the money to purchase the house; instead, he stole the money.