The fraud and dishonesty exclusion is one of the oldest and most consistently applied exclusions in professional indemnity insurance. It reflects a basic principle of English insurance law: a person should not be indemnified against the consequences of their own deliberate wrongdoing. How the exclusion is drafted, and how it interacts with claims made by innocent clients against a firm that includes a dishonest individual, varies materially between standard commercial PI wordings and the Solicitors Regulation Authority Minimum Terms and Conditions. The difference is often decisive between a firm surviving a dishonesty event and being wound up.
A typical commercial PI wording excludes liability arising from the fraud, dishonesty, or criminal or malicious act of the insured. The exclusion is usually severable: it applies to any insured person who committed the wrongful act, but preserves cover for other insureds who did not participate in and had no knowledge of it. This drafting reflects the courts' reluctance to strip innocent parties of cover where the policy is written on a joint-insureds basis.
The Insurance Companies Act 1982 section 55 preserved the common-law position that an insured cannot recover for loss caused by their own wilful misconduct, and that principle continues to inform how modern wordings are construed. The Insurance Act 2015 did not disturb it.
Solicitors' PI in England and Wales is written on the Minimum Terms and Conditions. Clause 2.7 gives the fraud exclusion its narrowest permissible scope. Cover is preserved for the firm and for any partner, member, or employee who did not commit and had no knowledge of the dishonest act. Where one partner steals from clients, the firm and the innocent partners remain insured against the client's claim. The insurer must respond, and its recovery lies against the dishonest individual personally, not against the innocent insureds.
Client protection is prioritised over insurer recovery, and the innocent partners are shielded from personal ruin arising from a colleague's misconduct.
An insurer seeking to rely on the fraud exclusion must prove dishonesty on the balance of probabilities, though the courts have consistently held that the more serious the allegation, the stronger the evidence required. In Direct Line Insurance plc v Fox [2010] EWHC 1258 (Comm) the court reinforced that fraud exclusions are construed strictly against the insurer and that the burden sits squarely on the party asserting fraud.
The test for dishonesty itself was clarified by the Supreme Court in Ivey v Genting Casinos [2017] UKSC 67. The court must first ascertain the individual's actual state of knowledge or belief as to the facts, and then decide whether their conduct was dishonest by the standards of ordinary decent people. The subjective element matters; the objective element is judged externally. A negligent misstatement, an error of judgement, or a genuine but mistaken belief will not trigger the exclusion.
Where the insurer pays a claim in circumstances covered by the innocent-partner carve-out, it retains full subrogation rights against the dishonest individual personally. The insurer stands in the client's shoes and can pursue the wrongdoer for the amount paid out. Recovery is often partial — dishonest partners rarely have the assets to meet a six or seven-figure claim — but the right exists and is regularly exercised.
This is an illustrative scenario, not a real case. A three-partner solicitors' firm holds SRA MTC-compliant PI cover. In 2022 one partner misappropriates £600,000 of client money over an eighteen-month period. The theft is discovered on an audit and reported to the SRA. Clients make claims against the firm for the missing funds.
Under MTC clause 2.7 the firm and the two innocent partners retain cover. The insurer accepts the claim, indemnifies the client losses up to the MTC limit, and then exercises subrogation against the dishonest partner personally. The innocent partners are protected from personal liability for their colleague's theft.
Parallel proceedings run in the background. The SRA opens intervention proceedings, taking control of the firm's client account and files. Where client losses exceed the MTC limit, the SRA Compensation Fund may top up. The dishonest partner faces criminal prosecution and striking-off. The firm — provided it can demonstrate that supervision failings did not amount to complicity — may continue to trade, though its next renewal will be materially more expensive.
Where a firm suspects internal dishonesty, the sequence matters. Apex Insurance Brokers works with clients to notify the insurer promptly under the claims and circumstances provisions, engage forensic accountants to establish the scope of the loss, liaise with the SRA or other relevant regulator, and isolate the culpable individual from client-facing work pending investigation. Recording clearly which partners had knowledge and which did not is central to preserving the innocent-partner cover. Rushed statements or informal admissions early in an investigation can prejudice that position.
For a broader view of how solicitors' cover is structured see the solicitors PI pillar. Accountants face parallel but differently-drafted exclusions — see the accountants PI pillar. The architects PI pillar and IFA PI pillar offer useful comparison of how other professions treat dishonesty.
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.