A Solicitor has failed in her attempt to force an insurer to pay out a £4.65m professional indemnity insurance claim, following a mortgage fraud.  The court found that the solicitor had acted dishonestly which prevented her from pursuing a claim against Arch Insurance.

The Solicitors Regulation Authority’s (SRA) Minimum Terms and Conditions of professional indemnity insurance state that where a fraud has been committed by a partner of a firm, that the insurer does not have to pay out to the guilty partner.  The insurers must, however, indemnify any partners who are innocent of the fraud.

Shirin Rahim, was a recently qualified solicitor who worked for a law firm, O’Sullivan Last & Co.  The firm’s principal, Shariful Islam, had been committing mortgage fraud by misleading lenders into making inflated mortgage loans by overstating the sale price of properties.  He was found guilty of the offences and jailed for four years.

The lenders, Barclays and Heritable Bank pursued Ms Rahim, who had been positioned as a partner of O’Sullivan Last & Co, for £4.65m.  She said she was an innocent party to the fraud and made a claim against the firm’s professional indemnity insurer, Arch, for the loss.  Arch declined to pay on the grounds that Ms Rahim had been aware of the fraud and had committed dishonest and fraudulent acts.

Ms Rahim took out proceedings to force Arch to indemnify her for the losses.  At trial the Judge, Justice Waksman concluded that even though Ms Rahim did not benefit from Mr Shariful’s dishonesty, she had been aware that there was mortgage fraud at the firm.  She had also acted in cases where there were discrepancies in the sale price of house purchases reported to lenders.  He ruled that Arch could deny cover to Ms Rahim.

Whilst there are personal aspects to this case which provoke sympathy, Insurers will be reassured that their right to deny cover for fraudulent behaviour is intact, even where the fraud is turning a blind eye under duress.” said James Burgoyne, Director – Claims & Technical, Brunel Professions.  “Fraud cases can be very expensive for insurers, so this ruling is important as it will help them to reduce losses, which could otherwise feed through into insurance premium increases for honest firms.”

Reports on the case have been published by the Law Society Gazette and Legal Futures, and by law firms Clyde & Co and DWF.

Brunel Professions is a leading provider of PII insurance broking to the legal profession. To find out more call James Page on +44 (0)117 325 0947.