Posted on March 1, 2017
Conveyancing has always been an industry in the cross hairs of fraudsters. The large sums of money involved makes it a lucrative target. The risks we face today are nothing completely new, but as we advance into a digital age, new vulnerabilities are exposed. The list of potential exposures grows by the day, mortgage fraud is common, and impersonation of banks and identity theft are more rare, but a growing issue.
The case of Lloyds TSB Bank plc v Markandan & Uddin  EWCA Civ 65 shows the potential danger of fake law firms. In this case, the firm was held liable for breach of trust when they transferred funds to a fake law firm. The SRA, which is supposed to keep a list of all registered solicitors, has added a qualification that it cannot be relied upon. This is to prevent liability if a fraudster manages to get themselves registered on find a solicitor, as they have in the past, including the case of Schubert Murphy v The Law Society  EWHC 4561.
There is also a growing trend of fraudsters hacking into law firms’ systems and impersonating email addresses. It is not hard to find members of the profession who have at least one story relating to fraud, only for someone at the firm to spot a discrepancy at the last minute. Mention has been made of solicitors dusting off fax machines and refusing to pay anything unless verbal confirmation is obtained of the correct account details.
Dreamvar (UK) Limited v Mishcon de Reya  EWHC 3316
Mishcon have been the latest firm to suffer at the hands of fraudsters. The case has sent ripples through the legal community as Mishcon had, essentially, done nothing wrong. The judge acknowledged this in his verdict and yet they were still found liable. This is because they have caused a breach of trust. This carries absolute liability. You could act as diligently as possible and still be liable. Relief may come under s.61 of the Trustee Act if you have acted ‘honestly and reasonably’, but courts have still found firms, like Mishcon, liable. The reason being that Mishcon have the deepest pockets and are insured under their PI. The government have no wish to expose the public to the potential danger of fraud in transactions of this nature. Such an act would damage confidence in the property market.
Liability on the Seller’s Solicitor
In Mishcon’s case, the fraudsters had solicitors representing them and this was the cause of the issue. Mishcon did not make enquiries relating to the seller’s identity. The seller’s firm is rarely held at fault in these situations following the decision in P&P Property Ltd v Owen White & Catlin LLP . Seller’s solicitors are not held liable for identity theft. Practically, it would appear there was no way for Mishcon to avoid liability in these circumstances.
Insurance Solutions – PI
Mishcon were held liable because they had insurance to cover the loss (the judge made no mention of the likely excess in the policy). Every solicitor has PI insurance in place to protect them, but it is not designed for these situations. PI is supposed to react to the odd mistake, with diligent firms receiving lower premium as they will have had fewer claims. Fraud disrupts that balance. Innocent and diligent firms are just as likely to suffer a fraud. Insurers will have no option but to raise premiums across the board. The PI market is already difficult to navigate, especially for smaller firms, this will make finding appropriate insurance harder.
Insurance Solutions – Legal Indemnity
Title insurance has provided cover against fraud such as the Mishcon case for many years. The original all risk policies, which are still available from most providers, include fraud amongst a multitude of other unknown risks. However, this insurance is designed to be taken out by the client who is unlikely to want to pay a premium when they, essentially, have recourse via PI and the law firm representing them. If the judgement against Mishcon is reversed on appeal, this is likely the best route to help restore confidence for buyers who will then, ultimately, be left exposed.
Insurance Solutions – A New Approach
A third possible option is a hybrid PI/Legal Indemnity product. The policy would be annually renewable and based on the number of transactions the law firm has undertaken in previous years. Unlike PI insurance, there would be no excess, with the insurer picking up the tab for claims throughout the year. This gives the law firm confidence to continue without the spectre of the Mishcon case hanging over their head and avoids costly legal battles while blame is apportioned.
Dreamvar v Mishcon de Reya does not alter the landscape. The penalties for breach of trust have been well established and other firms have suffered from fraud. Mishcon does, however, bring home the reality that everyone is at risk. If a firm like Mishcon who acted honestly and reasonably is still held accountable for fraud then every firm is at risk. Fraud is an increasing problem in the modern world and fraudsters are often one step ahead of the authorities, finding new ways to exploit others for financial gain. Traditional insurance via PI is unsuitable, but there are solutions available for both solicitors and worried clients.
We at Pii are always happy to talk through potential solutions, so please do not hesitate to get in touch.
Adam Keith – Transactional Liability
Email: [email protected]
Tel: +44 (0) 2030 582536