A dishonesty exclusion in a professional indemnity policy is a serious thing. If it removed cover from a whole firm whenever one person acted fraudulently, a single rogue solicitor could take an entire partnership down and leave the firm's clients uncompensated. The Solicitors Regulation Authority's Minimum Terms and Conditions prevent that outcome. The MTC allows an insurer to exclude the dishonest insured, but requires that innocent insureds remain covered. This carve-back is one of the most important protections in the compulsory regime.
The permitted dishonesty exclusion operates against the individual who was dishonest, not against those who were not party to the dishonesty and did not condone it. So where one partner defrauds a client, the firm and its innocent principals retain cover, and the client's claim is met. The insurer's exclusion bites only on the wrongdoer. In practice this means the insurer pays the client, protects the innocent partners, and looks to recover from the dishonest individual where it can.
The protection depends on the innocence of the other insureds. An individual who knew of the dishonesty and condoned it, or who was party to it, does not benefit from the carve-back. The line is drawn around genuine innocence, not mere lack of direct involvement. Firms should understand that turning a blind eye is not the same as being innocent, and supervisory failings can have consequences even where they fall short of dishonesty.
The carve-back is what makes it safe to practise in partnership at all. Without it, every principal would carry the risk of every colleague's potential dishonesty with no insurance backstop. Because the MTC protects the innocent, a firm can absorb the discovery of fraud by one individual without the cover collapsing for everyone. This is a structural reason the compulsory solicitors' regime supports the traditional partnership model, and it is more protective than the dishonesty wordings some other professions accept in the open market.
Meeting the client's claim does not let the dishonest individual off the hook. The insurer will generally pursue recovery against the person whose fraud caused the loss, and the MTC preserves that route while shutting off recovery against the innocent. The result is a sensible allocation: the client is paid, the innocent are protected, and the wrongdoer bears the cost. Accountants face comparable questions about fraud and audit failure - our accountants' PI guide covers that ground. For the solicitors' regime as a whole, see the solicitors' PI insurance guide.
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.