Employee engaged in mortgage fraud – Inflated valuations of hotels prepared for lenders – Former employer notifying professional indemnity insurers at first knowledge of fraud – Lenders successfully claiming against fraudster and former employer – Insurers meeting claim in respect of one lender only – Former employer seeking indemnity in respect of claim by second lender – Construction of insurance policy
L was employed by the plaintiffs between May 1985 and April 1989 as a land buyer. During that time, without the consent, knowledge or authority of the plaintiffs, L carried out a number of valuations for lending institutions purported to be made on behalf of the plaintiffs. Valuations produced by L in relation to eight properties were the subject of proceedings in the Chancery Division. Each of the eight valuations was fraudulent and was used to defraud the lending institution. In relation to six of the properties, the lender was Alliance & Leicester Building Society, and in two the lender was Mercantile Credit Company Ltd. L left the plaintiffs at the end of April 1989 taking with him his files. The plaintiffs had no knowledge of his activities until September 1989 when they were first put on notice of the fraud against the society. No claim or notice of intention to claim had been made at that stage. As a “precautionary measure” their insurers were notified by letter dated October 9 1989 (the letter) enclosing a minute of a meeting which had taken place on September 25 (the minute). The minute referred to problems arising in connection with L’s valuations prepared for the society and listed nine separate properties. In April 1992 L was convicted and sentenced to 15 months’ imprisonment.
In 1994 the Chancery Division judge found L personally liable to the lenders in deceit and held that the plaintiffs were liable for L’s acts on the basis that he had ostensible authority: [1994] 2 EGLR 229. In 1995 the plaintiffs and their professional indemnity insurers, the defendants, settled the society’s claim and the plaintiffs made an interim payment to Mercantile of £1,806,123. The defendants refused to indemnify the plaintiffs in relation to the Mercantile claim and in August 1993 the plaintiffs sought declarations to establish their entitlement to be indemnified. General condition 2 of the policy, a claims made policy, required the assured to give notice as soon as possible during the policy period of: (a) any circumstance which might give rise to a claim; or (b) receipt of notice of an intention to make a claim; or (c) “the discovery or reasonable cause for suspicion of dishonesty or fraud on the part of a past . . . employee of the firm whether giving rise to a claim or loss under this policy”. The judge held, inter alia, that the notification given was limited to claims only by the society. The plaintiffs appealed.
Held The appeal was allowed.
It was common ground that the notification contained in the letter and minute came within (a) and (c) of general condition 2. The question was therefore the scope of the notification under (c) in the letter and minute. On the proper construction of the claims policy, (c) contained a simple requirement to notify and there was no need to identify the person suspected of dishonest conduct nor to give details. The fact that the letter was headed Alliance & Leicester and that the minute spelt out the Alliance & Leicester fraud was immaterial as such details fell outside the scope of the requirements of (c). The judge had been wrong to concentrate on the focus of the letter and minute rather than considering (c) as a discreet requirement and asking what it was that (c) required and whether the letter and minute gave those requirements.
Christopher Symons QC and Rory Phillips (instructed by Eversheds, of Bristol) appeared for the appellants; Colin Edelman QC (instructed by Reynolds Porter Chamberlain) appeared for the respondents.
