Insurance: Notification of dishonest employee's activities under professional indemnity policy

In May 1985, the Plaintiff firm of estate agents employed a Mr Lancaster. He was neither qualified as a surveyor, nor as a valuer. He resigned in April 1989.

It later emerged that he had undertaken a number of valuations, without the knowledge or authority of the Plaintiff, and that these valuations had been used in substantial mortgage frauds. Six of the valuations had been undertaken for Alliance & Leicester Building Society.

The Plaintiff had no knowledge of Mr Lancaster's activities until September 1989 (some five months after his resignation), when they were asked to attend a meeting with Alliance & Leicester. Following that meeting, the Plaintiff's professional indemnity insurers were notified as a "precautionary measure" by a letter dated 9th October 1989, enclosing an attendance note of the meeting with Alliance & Leicester.

The letter was headed "Alliance & Leicester" and the attendance note solely concerned the fraudulent Alliance & Leicester valuations.

Further details of Mr Lancaster's dishonest activities emerged piecemeal over the following years, including two valuations undertaken for another lender, Mercantile Credit.

In 1992, Mr Lancaster was convicted and sentenced to 15 months imprisonment.

Both Alliance & Leicester and Mercantile Credit pursued civil claims for their losses against Mr Lancaster and the Plaintiff. Mr Lancaster was held personally liable in deceit and the Plaintiff was held to be vicariously liable on the grounds of ostensible authority.

Thereafter, the Plaintiff and its professional indemnity insurers settled the claim of Alliance & Leicester. The Plaintiff settled the claim of Mercantile Credit, but their professional indemnity insurers refused to provide an indemnity, on the ground that the claim was not encompassed within the scope of the October 1989 notification.

In the present proceedings, the Plaintiff sought a declaration against the Defendant professional indemnity insurers that it was entitled to be indemnified in respect of the Mercantile Credit claim.

The professional indemnity policy was on a claims made basis and required the Plaintiff, as a condition precedent, to give notice during the policy period of:

"(a)any circumstance of which the Assured shall first become aware which may give rise to a claim or loss against them or any of them;

(c)the discovery of or reasonable cause for suspicion of dishonesty or fraud on the part of a past or present partner, director or employee of the firm whether giving rise to a claim or loss under this policy or not."

At first instance, the Judge held that the Plaintiff's notification was limited to Alliance & Leicester. The letter of notification and the enclosed attendance note did not mention any suspicion of mis-conduct in respect of any lending institution other than Alliance & Leicester; there was nothing to show that the Plaintiff in September/October 1989 suspected Mr Lancaster's involvement in any wider pattern of frauds.

The Plaintiff appealed.

Held:

The appeal was successful.

The letter of notification and the attendance note both fell within sub-paragraph (a) and sub-paragraph (c) (as quoted above).

In relation to sub-paragraph (a), the notification was limited to circumstances which might give rise to a claim by Alliance & Leicester.

Sub-paragraph (c), however, only required notification of the discovery of or reasonable cause for suspicion of fraud or dishonesty on the part of a past employee. The notification by the Plaintiff satisfied this requirement. Sub-paragraph (c) did not require the identification of the victim of the fraud, or of the employee's associates, or of his modus operandi. Hirst LJ stated that, "in the case of a dishonest employee, it surely goes without saying that there may be further hidden ramifications beyond the original discovery of fraud".

Accordingly, the Plaintiff's notification encompassed the claim by Mercantile Credit; the Court of Appeal therefore granted the declaration requested.

Note:

• This decision will be of concern to insurers as it shows that, where an insured notifies the suspicious activities of an employee, the notification is likely to be interpreted very broadly to include all victims of the employee's dishonesty or fraud. The courts are, in practical terms, likely to be sympathetic towards an insured who makes a genuine attempt to inform insurers of a potential problem, and it will not assist insurers to adopt a narrow or technical approach to the notification (Hamptons Residential Ltd v Field & Others, CA: Judgment 22nd May 1998).