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Solicitors' professional indemnity - revisiting the "dishonesty exclusion"

Rahim v Arch Insurance Co (Europe) Ltd [2016] EWHC 2967 (Comm)
(22 November 2016)

A common scenario facing the professional indemnity insurers of solicitors is where fraud has been committed by one partner, giving rise to a claim against the Insured firm, but the other partner or partners plead innocence or ignorance and must be indemnified. We report on a case in which the judge took a robust approach to what constitutes dishonesty by a partner in the context of a firm which practised large scale mortgage fraud. The case represented a welcome opportunity to have the issues tested in public by a court as such issues are more often than not determined by Arbitration.


In a Commercial Court judgment dated 22 November 2016, HHJ Waksman has made several interesting observations on the application of what he termed the "dishonesty exclusion" in the SRA Minimum Terms and Conditions of professional indemnity insurance for solicitors.

The current applicable Minimum Terms provide at clause 6.8 that a policy may exclude liability of the insurer to indemnify:

"any particular person to the extent that any civil liability or related defence costs arise from dishonesty or a fraudulent act or omission committed or condoned by that person, except that: (a) the insurance must nonetheless cover each other insured…"

The policy considered in the judgment was issued by Arch Insurance Co. (Europe) Ltd to a law firm known as O'Sullivan Last & Co and later O'Sullivan Law, which according to the judgment excluded cover for:

1.             5.6 Fraud or dishonesty

any Insured to the extent that any civil liability or related Defence Costs arise from dishonesty or a fraudulent act or omission committed or condoned by The Insured except that:

2.         (a) We shall nonetheless cover each other Insured."

Although the wording of the policy in question does not use quite the same language as that used in the Minimum Terms, nevertheless the same principal issues will arise i.e.

  1. Has an individual insured committed or condoned a fraudulent act or omission?

  2. If so, is there nevertheless another individual insured who must be indemnified because they have not committed or condoned a fraudulent act or omission?

In this case, the firm in question was a partnership between Mr Mohammed Shariful Islam and Ms Shirin Rahim.

The balance of power in the partnership was clearly in favour of Mr Islam. Ms Rahim was only admitted as a solicitor in December 2004 and recruited to work for Mr Islam that same month.

She was told by Mr Islam that she was a partner in the firm in around February 2005, although her terms and conditions did not change. She was held out as a partner on the firm's headed notepaper from February 2005 to May 2005, and then again from December 2005 to June 2007.

The judge observed that it was common ground that there had been a very substantial amount of mortgage fraud going on at O'Sullivan Solicitors presided over by Mr Islam.

The firm had been subject to an SRA investigation commencing on 17 May 2007, which eventually culminated in a prosecution of Mr Islam and Ms Rahim before the Solicitors Disciplinary Tribunal in November 2011 and a judgment dated 19 January 2012 in which Mr Islam was struck off for dishonesty but Ms Rahim was fined for breaches of the Solicitors Practice Rules (chiefly that she had signed certificates of title without knowing whether they were true or not; failed to disclose relevant information to lender clients; failed to act in her lender clients' best interests; failed or delayed to comply with undertakings in the certificates of title; and allowed the firm's client account to be used as a banking facility).

Mr Islam had subsequently been convicted of fraud in the Crown Court and sentenced to four years in prison.

One of the defrauded lenders Barclays had obtained judgments against the firm in 2012 in the total sum of £4,349,517.94.

Ms Rahim sought indemnity against these judgments and other claims from the firm's professional indemnity insurer, Arch. She had not been involved in the transactions in relation to which judgments had been obtained but eleven other conveyancing cases in which she had been involved were used as examples of her conduct.

Arch declined cover on the basis of the "dishonesty exclusion" and also refused to fund her defence costs. Ms Rahim applied to the SRA to direct Arch to advance defence costs, but the SRA declined to make such a direction on the grounds that she did not have a reasonable prospect of winning against Arch on the dishonesty issue.

Ms Rahim issued proceedings against Arch for an indemnity and other relief, which resulted in the judgment of HHJ Waksman.


The judge found that the test for dishonesty was as set out in the opinion of Lord Hoffmann in Barlow Clowes v Eurotrust [2006] 1 WLR 1476 i.e. although a dishonest state of mind is a subjective mental state, the standard by which it is determined whether it is dishonest is objective. If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards.

Taking into account all the evidence, which included the transcripts of Ms Rahim's  interviews with the SRA, the SRA Forensic Investigation Report, the SDT judgment and the judgments of the SRA at first instance and on appeal in respect of the costs direction application, as well as two days of cross examination before him, HHJ Waksman concluded that:

  1. Ms Rahim knew perfectly well that she owed a duty to the lender as a client along with the buyer, to report among other things, any discrepancy in price whether apparent on its face or by operation of a discount bonus or allowance. She was also aware of the risk of mortgage fraud and how it might occur. Accordingly, if she did not report such a discrepancy to the lender she knew that she was in breach of duty, that the lender would be misled and that she was facilitating, albeit not instigating, a mortgage fraud.

  2. Her assertion that she was acting at the behest of Mr Islam, or that she had made no personal gain, did not prevent the conclusion being reached that she had acted dishonestly in relation to ten sample transactions.

  3. Although she had not been involved with the transactions which gave rise to the claims by Barclays, following the principles in the cases of Zurich v Karim [2006] EWHC 3355 and Goldsmith Williams v Travelers Insurance [2010] EWHC 26, she knew perfectly well that she was part of a significant and systematic mortgage fraud being perpetrated at the firm and hence had condoned it generally.

  4. Arch could therefore rely on the dishonesty exclusion to decline cover for her.

  5. As to whether she was a partner at the relevant times and therefore jointly and severally liable with Mr Islam to Barclays, the judge did not need to decide the issue but held that she had been held out as a partner and in any event all the parties (including Ms Rahim) had proceeded on the basis she was an actual partner in the firm at the relevant times.

  6. As to whether Ms Rahim had dishonestly allowed herself to be held out as a partner, this was not an issue that needed to be decided, but the judge did observe that the only reason why Mr Islam would have wanted Ms Rahim to be seen as a partner was so that the firm could act for those lenders who generally would not deal with sole practitioners.


This judgment is obviously helpful to insurers of solicitors in confirming the applicable standard for determining honesty is the objective one referred to in Barlow Clowes. Also, it seems that the protestations of a minority partner that he or she was compelled by economic or other circumstances to play along with a fraud or to turn a blind eye to it, and he or she made no personal gain, will not prevent a finding that cover can be declined under the dishonesty exclusion.

It will also be encouraging to insurers who wish to rely on the dishonesty exclusion, even where the SRA has seen fit not to prosecute an individual insured before the SDT for dishonesty and/or where no finding of dishonesty has been made against that individual.

As to the specific circumstances of this case, the mortgage fraud involved in the sample cases examined often involved the over-statement of the purchase price by artificial means (such as developer funded or gifted deposits, or discounts). We have seen many instances of solicitors involved in these kinds of transactions asserting that they do not constitute fraud, or alternatively that in the last property boom "everyone was doing it, so it must be alright". This judgment shows that this kind of misstatement of purchase prices to lenders is fraud and to be involved in such misstatements is dishonest.

The important issues of whether Ms Rahim had allowed herself to be dishonestly held out as a partner and whether the claims made in cases of dishonesty aggregate under the policy wording did not need to be decided but both are highly relevant issues to the professional indemnity insurers of solicitors and, although fact specific, it is to be hoped will be determined in a future case. 


For further information please contact Steve Rogers, Senior Associate on 020 7280 8828 or at steve.rogers@dwf.law or Sheona Wood, Partner on 020 7280 8804 or at sheona.wood@dwf.law.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.