insurer entitled to decline cover where undertaking given
outside the normal course of business
The High Court has recently upheld a decision that
insurers were entitled to refuse cover where a firm of solicitors
had acted dishonestly in providing an undertaking which, in any
event, was outside the normal course of a solicitor's business. Our
Professional
Negligence team reviews this decision.
summary of facts
NES Solicitors (NES) brought a claim against
its professional indemnity solicitors, Quinn Direct Insurance Ltd
(Quinn), for a declaration that it must indemnify NES in respect of
a claim brought by Halliwells for the enforcement of an
undertaking. Earlier, Halliwells had obtained judgment on its claim
for enforcement of the undertaking by NES to pay it £1.5 million on
or before March 2009. NES was a two-partner firm, with a turnover
of £84,259.
NES provided the undertaking to Halliwells on
behalf of a client, Dr Hassan, as part of a purported transaction
to purchase shares in a company. As security, Dr Hassan deposited
"gold certificates" with NES purportedly worth $10 million. He also
paid a cheque to NES' bank account for £1.5 million. Before the
cheque had cleared, and knowing that it had not, NES provided the
undertaking to Halliwells. The undertaking confirmed to Halliwells
that NES was holding funds of £1.5 million from its client. The
cheque subsequently bounced and the gold certificates were found to
be worthless. NES was to receive a fee of £15,000 from Dr Hassan
for providing the undertaking.
insurers decline professional indemnity cover
Quinn declined to afford cover for the claim
against NES on the grounds that:
- The claim arose from the dishonesty committed or condoned by
both partners in NES
- The undertaking was not given in the ordinary course of
business because NES was only retained to give the undertaking and
not to act in the underlying transaction. The claim did not
therefore arise from the provision of solicitorial services in
accordance with the terms of the policy, and
- The claim was excluded under the terms of the policy because
NES had provided the undertaking for its benefit (i.e. in return
for the fee of £15,000).
decision
The court found that Quinn was entitled to
decline cover on all three grounds alleged.
In assessing dishonesty, the judge applied the
decision in Starglade Properties Ltd v Roland Nash [2010]
EWCA Civ 1314. The relevant standard, by which to judge
the partners' actual mental state, was the ordinary standard of
honest behaviour as determined by the court. In light of the
circumstances of the case, the judge found that the partners could
not and did not honestly believe that they were holding cleared
funds at the time of giving the undertaking. The judge also had no
hesitation in finding that, in any event, each of the partners was
condoning the dishonesty of each other as well of their client. The
partners both acted in a manner which they knew was wrong and
dishonest and in which no honest solicitors would have acted.
In assessing whether the undertaking was given
in the normal course of business of a solicitor, the judge followed
the Court of Appeal's decision in JJ Coughlan Limited v
Ruparelia [2003] EWCA Civ 1057. To answer this question, an
enquiry into the substance of the transaction was required to see
whether, viewed fairly and properly, it is the kind of transaction
which forms part of the ordinary business of a solicitor. In light
of the circumstances of the case, where the partners had only
enquired into a fragment of the underlying commercial transaction
before giving the undertaking, the judge was satisfied that NES was
only retained for, and only acted on, the provision of the
undertaking for Dr Hassan, and for no other purpose. Accordingly,
the claim against NES did not arise from the provision by it of
services in private legal practice as solicitors and thus fell
outside the terms of the policy.
Finally, in light of his findings of
dishonesty, the judge was also satisfied that the claim fell within
an exclusion of the policy because NES had provided the undertaking
for its own benefit.
comment
The case highlights the importance of ensuring
that undertakings are given in the context of the provision of
wider legal advice or services, and not simply as a "service" on
its own. Although the facts are extreme, this decision is a
reminder of the care that needs to be taken when giving
undertakings to ensure that firms do not expose themselves to risk,
particularly were that risk will fall outside the terms of
indemnity insurance cover.
For insurers, the decision is a useful and
welcome restatement of the law on civil dishonesty: insureds'
actions will be judged in the light of the knowledge and qualities
possessed by them, but assessed objectively by reference to the
standard of honesty as determined by the court.
