Condoning Dishonesty and Considering Aggregation in Axis Specialty Europe SE -v- Discovery Land Company LLC & Ors [2024] EWCA Civ 7

Condoning Dishonesty and Considering Aggregation in Axis Specialty Europe SE -v- Discovery Land Company LLC & Ors [2024] EWCA Civ 7 27 Feb

Professional Indemnity Insurance policies for firms of solicitors authorised by the SRA must, at a minimum, reflect the Minimum Terms and Conditions (“MTCs”) as set down by the SRA.  The MTCs have seldom changed significantly over the years but case law on their interpretation is rare, with Insurers and Policyholders tending to prefer to resolve disagreements between themselves via arbitration or another form of ADR.  Accordingly, when Judgments such as the recent Axis Specialty Europe SE -v- Discovery Land Company LLC & Ors [2024] EWCA Civ 7 are handed down, they can provide welcome clarification on clauses and it is necessary to review them and establish what changes, if any, need to be made when assessing cover.  The Axis appeal focused on the definition of ‘condoning’ a dishonest act and the test to apply when considering if acts are ‘similar’ for the purposes of aggregation.  Although no easy clear cut tests were set out by the Court for those dealing with questions of policy cover, the guidance provided does add some clarity.

Condoning Dishonesty

One of the few provisions within the MTCs which allows insurers to exclude cover gives limited scope to decline cover for claims arising from dishonesty or fraud.  The current MTCs wording is as follows:

"The insurance 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:

1. the insurance must nonetheless cover each other insured; and
2. the insurance must provide that no dishonesty, act or omission will be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of that company, or in the case of an LLP, all members of that LLP."

Accordingly, although a dishonest or fraudulent individual is not covered by the policy for a claim arising from their actions, if the claim is directed against the firm through which they acted, whether that be a Partnership or a body corporate, the policy will still cover the firm unless the dishonesty/fraud was committed or condoned by all the Partners, Directors or Members as the case may be.

The Appeal in Axis Specialty Europe SE -v- Discovery Land Company LLC & Ors [2024] EWCA Civ 7 was in relation to what constitutes ‘condoning’ a dishonest or fraudulent act.  In summary there were two Partners, one who had been dishonest, misappropriating monies.  The question was to whether the other had condoned the dishonesty.

The Court noted the word "condone" conveys acceptance or approval and does not require an overt act. The parties accepted in submissions that condoning can and often will take place silently and by conduct.

The Court then considered exactly what must be "condoned" by those who were not parties to the dishonest behaviour for the exclusion to apply. The Court held what must be condoned is the dishonest behaviour which formed an essential part of the chain of events which led to the claim being pursued against the Policyholder.

The Court agreed with the First Instance decision that this includes a situation in which someone condones another’s pattern of dishonest behaviour if the dishonest act giving rise to the claim fell within that pattern.  The Court expressed the view that if an individual condoned an established dishonest practice by another director or member they would not be able to then successfully argue that they did not condone the specific act which gave rise to the claim, even if they were unaware of that specific dishonest act.  However the Court caveated this by holding that whether or not knowledge and acceptance or approval of other acts in the same pattern amounted to condonation of the specific act or acts which gave rise to the claim would be a question of fact and degree for each individual case.

The Court also held that it was not possible to condone dishonest behaviour without having some knowledge or awareness of it but that the knowledge can be obtained and the condoning occur, after the dishonest event had taken place.  The Court stated the act of condoning could be by doing or saying something (such as assisting to cover it up, or lying about it to others) or by not taking the type of action that one would expect an honest person in their position to take. The Court commented that if a person has a duty to act on becoming aware of the behaviour in question, and fails to do so, they are more likely (but not certain) to be found to have condoned it than someone who has no such duty.

Aggregation

The Appeal Court in Axis Specialty Europe SE also considered the aggregation clause in the MTCs.  The Court cited the Supreme Court Judgment in AIG v Woodman [2017] UKSC 18 which is the leading Judgment on the interpretation of aggregation in the MTCs.

The current MTC wording provides for the aggregation of claims into one claim as follows:

a) All claims against any one or more insured arising from:

i) one act or omission;
ii) one series of related acts or omissions;
iii) the same act or omission, in a series of related matters or transactions;
iv) similar acts or omissions, in a series of related matters or transactions, and

b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.

In both AIG and Axis, the Courts were considering insurers’ submissions that the acts which gave rise to the respective claims were "similar acts or omissions, in a series of related matters or transactions" and therefore fell to be aggregated.  In Axis the Court considered both aspects of that wording , whereas, in AIG, the appeal concerned the second part of the wording, addressing the meaning of "related matters or transactions".

In AIG, the Supreme Court held that the word "related" implied that there must be some inter-connection between the matters or transactions.  Again, rather than set out a clear test, the Court held that determining whether transactions were "related" was a fact-sensitive exercise, which is an exercise of judgment. It was necessary to begin by identifying the relevant matters or transactions, and then consider whether they are related (by identifying and evaluating the nature and degree of any connecting factors).

In Axis, the Court of Appeal focused on the first half of the clause and what the test was for establishing whether acts or omissions which gave rise to claims were ‘similar’.  The Court held that to hold the acts or omissions were ‘similar’, the degree of similarity between them must be ‘real or substantial’.  As to how to establish whether there is a "real or substantial" similarity, the Court held it is necessary to consider the substance of each of the claims being made.  Again, rather than setting out a clear test, the Court also concluded that this is a fact-sensitive evaluation to be taken in each case.

In Axis, the claims against the firm both arose from the misappropriation of client money from a client account and the clients in question were closely connected entities.  However the Court agreed with the First Instance Judge that this was not enough to hold the acts were similar as it ignored the substantive differences between the acts.  One act was the straightforward misappropriation of monies which the clients had transferred to the solicitors to be held on trust by them and applied only for a specific purpose.  The other act giving rise to a claim, involved the convoluted steps of arranging a loan in a client’s name, which the client had not approved, and then misappropriating those loan monies when they were received.  The Court concluded that there was no substantial similarity between the acts giving rise to the claims.  To ascribe them as being similar just because they involved the misappropriation of client money was to incorrectly adopt a too high level approach.

Although the finding that the claims were not similar was sufficient to establish the claims did not aggregate, for completeness, the Court also considered whether the acts were “in a series of related matters or transactions” and so applied the guidance handed down by the Supreme Court in AIG mentioned above.  In Axis, the Court held that, even if they had held the acts were similar, they were not acts in a series of matters or transactions which were ‘related’, applying the Court’s guidance in AIG.  The misappropriation of the Client money and the subsequent arrangement of a loan and the misappropriation of those loan monies, were not part of a sequence of transactions in which one was dependent on or part of the other.  Therefore the claims would still not have aggregated as there was not a relevant degree of connection.

It is clear from the Axis and AIG decisions that decisions of policy response on these clauses need to be carefully considered on a case by case basis and it remains that there is no simple binary test for concluding whether someone has condoned dishonesty or whether claims aggregate.  However the Court of Appeal Judgment does provide additional clarity for those considering coverage as to how they should approach these questions.