Dishonesty exclusion

The dishonesty exclusion is a standard professional indemnity policy term that excludes cover for liability arising from the dishonest, fraudulent, criminal or malicious acts of the insured, usually subject to a 'write-back' that preserves cover for innocent partners or principals who did not condone or participate in the wrongdoing.

Definition §

The dishonesty exclusion is a standard exclusion in professional indemnity insurance policies which removes cover for any liability arising directly or indirectly from a dishonest, fraudulent, criminal or malicious act or omission committed by the insured ^[1]. Its purpose is to give effect to the underlying principle of insurance law that no person may benefit from their own wrong, and to ensure that PI cover indemnifies negligence rather than deliberate misconduct.

In modern UK PI wordings the exclusion is usually paired with a 'write-back' or 'innocent partner' clause that preserves cover for partners, members, directors or principals of the insured firm who did not commit, condone, ratify or participate in the dishonest conduct, and who did not know of and ought not reasonably to have known of it ^[1]. The write-back is fundamental to the practical operation of the exclusion, because absent the write-back a single dishonest individual could deprive an entire firm of cover even though innocent partners face the consequent claims.

For solicitors, the SRA Minimum Terms and Conditions impose specific constraints on the operation of the exclusion: insurers must respond to the claim and only afterwards exercise their rights of recovery against the dishonest individual, and the exclusion does not affect the firm's liability to the third party ^[2]. This 'pay first, recover later' regime exists to protect consumers of legal services and reflects the policy purpose of the solicitors' MTC.

The dishonesty exclusion interacts with the law of vicarious liability, the civil liability trigger and other policy exclusions in ways that require careful analysis. It is one of the most heavily litigated of PI clauses.

Legal / Regulatory basis §

The general principle that insurance does not respond to a deliberate wrong by the insured is well established in English insurance law and reflects considerations of public policy. The Marine Insurance Act 1906, although primarily concerned with marine cover, contains principles of general application, including the policy against fraudulent claims ^[3]. The Insurance Act 2015 restated and clarified the consequences of fraudulent claims in non-consumer insurance ^[4].

For solicitors, the SRA Indemnity Insurance Rules and the SRA Minimum Terms and Conditions of Professional Indemnity Insurance prescribe a narrowly drawn dishonesty exclusion. Cover must respond to claims involving dishonesty as against innocent partners and members, and the insurer is required to discharge the claim to the third party and seek recovery from the dishonest individual separately ^[2]. The MTC also include an aggregation provision and a six-year run-off requirement of relevance in this context.

The Solicitors Compensation Fund, administered by the SRA under section 36 of the Solicitors Act 1974, operates as a fund of last resort for clients of solicitors who have suffered loss as a result of dishonesty by the solicitor or by an employee ^[5]. The Fund and the PI insurer's response under the MTC together provide a two-tier safety net for consumers of solicitor services.

For insurance intermediaries, MIPRU 3 does not prescribe a specific exclusion wording, but the FCA Handbook contains broader honesty and integrity requirements (notably PRIN 1 — A firm must conduct its business with integrity) that may inform regulatory action where dishonesty arises in an authorised firm ^[6]. The Financial Services Compensation Scheme under Part XV FSMA provides defined protections to eligible claimants if an authorised firm is unable to pay claims ^[7].

The substantive definition of 'dishonesty' is informed by the test in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67, which sets a primarily objective standard with reference to the ordinary standards of reasonable and honest people. PI policies typically supplement the legal test with policy language requiring 'dishonest, fraudulent, criminal or malicious' conduct.

How it works in practice §

When a claim is notified that may engage the dishonesty exclusion, the insurer's response will normally be to reserve its position on the exclusion while continuing to investigate, and to deal with the claim on a 'without prejudice' basis until the facts are clearer. The dishonesty exclusion is not normally a tool for denying cover at the outset; it is reserved for cases where dishonesty is established or admitted.

The factual investigation is critical. Most allegations of misconduct involve elements that could be characterised either as negligence or as dishonesty. A solicitor who fails to follow money laundering procedures may be merely negligent or may be complicit in fraud, depending on the evidence. An insurance broker who places a risk on incorrect terms may have made a mistake or may have deliberately misled the insurer to secure cover. Insurers will usually want to see the outcome of any regulatory or criminal investigation before forming a final view.

The innocent partner write-back is the focus of most practical disputes. The cover analysis turns on whether each individual partner, member or principal knew of, condoned, ratified or participated in the dishonest conduct, and whether they ought to have known of it. The 'ought to have known' element is particularly fact-sensitive: passive failure to detect dishonesty by a partner may not engage the exclusion, but acquiescence in the face of obvious indicators may.

Under the SRA MTC regime, the position is materially different. The insurer's obligation is to pay the third-party claim regardless of the dishonesty, and to seek recovery from the dishonest individual through subrogation ^[2]. This protects the third party but exposes the insurer to a recovery risk against an often impecunious individual defendant. The MTC therefore have a direct effect on premium and on the dishonesty controls insurers expect to see in solicitor firms.

For PI underwriters the dishonesty exclusion is the principal protection against deliberate fraud losses. Underwriting questions on financial controls, anti-money laundering procedures, segregation of duties and management oversight are designed to inform the assessment of dishonesty risk.

Common variations §

Standard dishonesty exclusion with innocent partner write-back. The market default outside the regulated MTC regime. Excludes cover for the dishonest individual, preserves cover for innocent colleagues.

SRA MTC-compliant dishonesty wording. A narrower exclusion mandated for solicitors, requiring the insurer to pay the third party first and seek recovery against the dishonest individual ^[2]. Effectively converts the exclusion into a subrogation right.

No innocent partner write-back. Found in some older or lower-tier wordings and in sole practitioner cover where there are no other partners. Excludes cover entirely in respect of dishonest acts.

Knowledge-based write-back. A formulation under which the write-back is lost if any partner knew or condoned the dishonest act. The 'reasonably ought to have known' standard varies between wordings.

Fraud and crime carve-outs. Some wordings expressly carve out criminal fines and penalties from the cover available to innocent partners, on public policy grounds.

Allocation between covered and excluded heads. Where a single claim involves elements of negligence and dishonesty, wordings differ on how the loss should be allocated. Brokers should review the allocation language carefully at placement.

Example §

An illustrative example: a partner in a small firm of accountants enters into a fraudulent scheme with a client to inflate the client's reported revenue, with a view to obtaining bank lending. The bank advances £1.2m on the strength of the misstated accounts and suffers a loss when the client fails (illustrative only). The bank sues the firm, alleging negligence in the alternative to dishonesty. The dishonest partner is dismissed, prosecuted and convicted.

Under the dishonesty exclusion, cover is unavailable to the dishonest partner. Under a standard innocent partner write-back, the other partners are covered for the claim against them in negligence, provided they did not know of or condone the fraud and had no reason to suspect it. The factual enquiry will examine the firm's supervisory arrangements, peer review, file audits and partner oversight. If the innocent partners are entitled to the write-back, the PI insurer will indemnify the firm subject to limit and excess. The PI insurer will pursue subrogated recovery against the dismissed partner, although recovery is uncertain given the likelihood of personal insolvency. The firm's own employees may face separate consequences under the firm's employment and regulatory obligations.

See also §

• /wiki/professional-indemnity-insurance/ — parent contract
• /wiki/civil-liability/ — broader trigger
• /wiki/negligent-act-error-or-omission/ — narrower trigger
• /wiki/insolvency-exclusion/ — related exclusion
• /wiki/known-circumstances-exclusion/ — related exclusion
• /wiki/solicitors-compensation-fund/ — public safety net for solicitor dishonesty
• /wiki/insurance-act-2015/ — governing statute
• /wiki/aggregation-clause/ — combining multiple dishonest acts

References §

1. ↑ Standard market wordings; SRA Minimum Terms and Conditions of Professional Indemnity Insurance — https://www.sra.org.uk
2. ↑ SRA Indemnity Insurance Rules — https://www.sra.org.uk
3. ↑ Marine Insurance Act 1906 — https://www.legislation.gov.uk/ukpga/Edw7/6/41
4. ↑ Insurance Act 2015 — https://www.legislation.gov.uk/ukpga/2015/4
5. ↑ Solicitors Act 1974, section 36 — https://www.legislation.gov.uk/ukpga/1974/47
6. ↑ FCA Handbook, PRIN — https://www.handbook.fca.org.uk
7. ↑ Financial Services and Markets Act 2000, Part XV — https://www.legislation.gov.uk/ukpga/2000/8