The innocent partner defence is one of the most important protections in the professional indemnity architecture that the Solicitors Regulation Authority requires every regulated firm in England and Wales to hold. It is built into the SRA Minimum Terms and Conditions (MTC) at Schedule 1 of the SRA Indemnity Insurance Rules 2020. Without it, the dishonesty of a single partner or manager could void the firm's entire PI programme at the moment cover is most needed. The MTC does not permit that outcome.
MTC clause 2.7 preserves cover for any insured who did not commit, and had no prior knowledge of, the dishonest or fraudulent act or omission of another insured. It bites where a rogue partner, member, director or employee has behaved dishonestly, and where a commercial policy would ordinarily rely on a broad fraud exclusion to decline the whole claim. Under the MTC, the insurer must still respond to the innocent parties. The dishonest individual forfeits the benefit of cover; the innocent partners do not.
This is a substantive departure from ordinary commercial PI. Most commercial PI wordings carry a fraud exclusion that reaches every insured connected to the dishonest act, and often permits the insurer to avoid the policy for material non-disclosure. The MTC is deliberately stricter and more protective. Legal Services Act 2007 s.83 requires approved regulators to secure compensation arrangements for consumers of regulated legal services, and the MTC is the SRA's chosen mechanism.
Innocence under clause 2.7 is not a bare denial. To keep the benefit of cover, an individual insured must show no knowledge of the dishonesty and no reckless disregard of the circumstances that pointed to it. The reasoning in Zurich Professional v Karim [2006] EWHC 3355 (QB) sets out the analysis courts apply when weighing whether a partner falls the innocent or non-innocent side of the line. The test is not perfection in supervision; it is honest ignorance without wilful blindness. A partner who noticed serious red flags and chose not to look further will struggle to hold the defence.
When the SRA intervenes in a firm — typically following suspected dishonesty, serious Accounts Rules breaches, or the death or incapacity of a sole practitioner — the regulator takes control of the practice and client money. Intervention does not extinguish the PI policy. The MTC and the SRA Indemnity Insurance Rules require cover to continue to respond to claims arising from pre-intervention work, subject to policy terms and limits. Clause 2.7 continues to protect innocent partners throughout. The dishonest partner remains excluded; the firm's cover otherwise responds.
The SRA Compensation Fund, governed by the SRA Compensation Fund Rules, is a discretionary fund of last resort for clients who have suffered loss from the dishonesty of a regulated person, or from a failure to account for money, where PI is not available or is insufficient. It supplements PI; it does not replace it. Where clause 2.7 preserves cover, the firm's insurer meets the loss up to policy limits and the Fund is unlikely to be called on for the same head of loss. Where cover is properly forfeited against a wholly complicit firm, the Fund is the mechanism through which uncompensated victims may still recover.
Worked example: A five-partner solicitors firm carries the SRA MTC £2m primary limit. Over 18 months, one partner secretly diverts £2m of client money from probate estates through a shell account. The fraud is discovered, the SRA intervenes, and the beneficiaries claim against the firm. The insurer's opening position is that the loss flows from dishonesty and the fraud exclusion applies. MTC clause 2.7 requires cover to be preserved for the innocent partners. The court considers each partner individually. Three had no visibility of the file conduct and no basis to suspect it — the court finds them innocent, and cover is preserved. The fourth had seen a run of client-account reconciliation anomalies, had been told by staff of unusual authorisations, and chose not to escalate — the court finds reckless disregard, and cover is forfeited as against that partner. The firm's cover responds to the £2m claim subject to policy limits, deductibles and any aggregation.
Innocent partners protect their position by cooperating fully with the insurer and the regulator, preserving all client files and accounting records, avoiding any statement that could be read as endorsing the rogue's conduct, and taking early legal advice on their own position. Notification to the insurer should be made in accordance with the policy — usually as soon as the firm becomes aware of circumstances that may give rise to a claim. Apex works alongside the firm's compliance officer, and where appropriate the firm's own solicitors, to manage that notification.
For the wider framework see the solicitors PI insurance guide, the fraud and dishonesty exclusion note, the architects PI pillar and the accountants PI pillar. Firms operating in Scotland should also consult the LSS Master Policy note.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.