Will PII prices soar post-Mishcon de Reya?

Rarely does a lawsuit against a firm of solicitors garner widespread media attention. The story of Dreamvar (UK) Limited v Mishcon de Reya has everything, however. An imposter selling a house that isn’t his own, money disappearing into Chinese bank accounts, a buyer left out of pocket to the tune of £1.1m (with no house to show for it), and lawyers shouldering the blame, despite their honest actions.

No doubt the case is sensational, but is the dramatic impact predicted for solicitors’ professional indemnity insurance accurate or overblown? The Times, for example, declared that ‘insurance rates for deal-making lawyers could soar’, but experience suggests Mishcon is unlikely to substantially affect premiums in the PII market, and certainly not to the degree commentators appear to fear.

The details of the case have been widely reported. Deputy High Court judge David Railton found that at least one of the law firms involved in the fraudulent property deal acted honestly and innocently. That makes it seem, at first glance at least, unfair that the firm – or rather its insurer – should be found liable to foot the bill.

It may also seem unjust that the firm found in breach of trust was Mishcon de Reya, the buyer’s solicitors, rather than Mary Monson Solicitors, which acted for the bogus seller – especially since the latter admitted negligence in accepting the fraudster’s certified proof-of-identity documents at face value.

In practice, however, the decision is nothing new, as many a cautious PII underwriter could tell you. The Mishcon case has several precedents and, behind the scenes, various claims are moving towards swift settlements. For example, in last year’s case of Purrunsing v A’Court & Co and HOC, His Honour Judge Pelling QC found conveyancers liable in a similar fraud involving a property vendor who was not its owner.

In both cases the judges referred to the legal profession’s responsibility to protect buyers. In both cases they found that insured firms should foot the bill for a sum lost through fraud that was intended for a property purchase. Judge Railton, in Mishcon, went as far as saying that ‘it is common ground that [the firm] is insured… sufficient[ly] to cover in full the loss suffered’.

While Mishcon has been high profile, the decision is not a game-changer. It is true that the section 61 of the Trustee Act is often invoked when solicitors, as trustees of clients’ monies, have acted ‘honestly and reasonably’. However, it is also true that judges have not always excused solicitors under this law – and it was true before Mishcon.

Insurance underwriters are already aware of past cases, like A’Court, which place liability on the shoulders of solicitors. Several have occurred in recent years, but similar frauds and findings of liability have no doubt existed as long as lawyers and courts themselves. The fact of the matter is that such occasional claims are already priced into the cost of PII cover and underwriters are conducting business as usual. So, far from agreeing that PII prices will ‘soar’ as a direct result of this case, we do not expect it to lead to a rise in premiums.

Ben Waterton is executive director of financial and professional risks at insurance broker Arthur J. Gallagher

@AJG_Intl www.ajginternational.com