Shahrouk v Lawcover Insurance Pty Limited

Category: Principal judgment

Parties: Jihad Shahrouk (Plaintiff)
Lawcover Insurance Pty Limited (Defendant)

Representation: Counsel:
J Hewitt SC with H Fielder (Plaintiff)
A Horvath SC with ME Hall (Defendant)
Solicitors:
Bartier Perry (Plaintiff)
Sparke Helmore Lawyers (Defendant)

File Number(s): 2025/338561

Publication restriction: None

JUDGMENT

1. By a notice of motion filed on 18 September 2025, the defendant, Lawcover Insurance Pty Limited (Lawcover), seeks summary dismissal of the proceedings on the basis that they do not disclose an arguable claim. In doing so, Lawcover must persuade the Court that the claim is “so obviously untenable that it cannot possibly succeed” (to use one of the formulations approved by Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129; [1964] HCA 69 (General Steel)).

2. For the reasons that follow, the current application does not meet that requirement.

Background

3. The plaintiff, Mr Jihad Shahrouk, is the sole principal of an incorporated legal practice, BLG (NSW) Pty Ltd trading as Berala Law Group (BLG). Mr Peter Wilson was a law clerk employed by BLG. Between December 2022 and March 2024, he misappropriated clients’ funds held in BLG’s trust account. He told Mr Shahrouk of the misappropriations in April 2024, who reported the matter to the police and the Law Society of NSW. The affected clients made claims on the fidelity fund which has paid out a total amount of $3,007,370.83 in respect of Mr Wilson’s misappropriations and is likely to pay out a further $594,753.14.

4. On 24 January 2025, the Law Society, exercising rights of subrogation conferred on it by s 246 of the Legal Profession Uniform Law (NSW) 2014 (LPUL), issued a letter of demand to Mr Shahrouk seeking payment of the sum of $3,007,370.83 from him personally. The basis of the Law Society’s claim is unclear. It asserts that Mr Shahrouk failed to take steps to ensure that Mr Wilson complied with his obligations under the law and specifically his obligations under s 138 of LPUL in respect of trust accounts. However, no cause of action is identified. Presumably, what is asserted is that Mr Shahrouk personally owed clients of BLG a statutory duty or possibly a duty to take reasonable care to avoid the risk of harm that eventuated. Precisely how those duties are formulated and how Mr Shahrouk is said to have breached them remains to be seen since the Law Society has yet to commence proceedings.

5. Mr Shahrouk gave notice of the claim against him to Lawcover, which provided BLG with compulsory professional indemnity insurance. There is a question whether the claim falls within the 2023-24 or the 2024-25 policy year. Nothing turns on the answer to that question for present purposes and it will be convenient to focus on the terms of the 2023-24 policy.

6. Clause 4 of the policy provides:

“What We Insure

4. We agree to indemnify the insured against civil liability for a claim that:

(a) arises from the provision of legal services by the law practice in Australia or elsewhere; and

(b) is first made against the insured during the period of insurance or that is deemed under clause 9 to have been first made during the period of insurance.” [emphasis in original]

7. “Insured” and “claim” are defined in cl 45 of the policy in the following terms:

“45. In this Policy, unless the context otherwise requires:

(a) claim means:

(i) a demand for, or an assertion of a right to, compensation or damages; or

(ii) an intimation of an intention to seek compensation or damages; or

(iii) an order for costs made against an insured in proceedings to which that insured is not a party, an application for such an order or an intimation of an intention to seek such an order;

…

(h) insured means the law practice and the other parties referred to in clause 2 or where the context requires any one or more of the law practice and the other parties referred to in clause 2;

…”

8. Clause 2 of the policy provides:

“We also insure:

(a) a person who is or was a principal or employee of the law practice;

(b) a lawyer who is or was a shareholder of the law practice;

(c) a body corporate related to the law practice that provides or provided clerical, administrative or management services to the law practice; or

(d) the estate of each person referred to in clauses 2(a) and 2(b).” [emphasis in original]

9. Clause 10 relevantly provides:

“What We Exclude From The Insurance

10. We will not indemnify the insured under this Policy when:

(a) the claim arises from:

(i) …

…

(v) failure to pay trust money or deliver trust property, or a fraudulent dealing with trust property, where the law practice received the money or property on trust in the course of providing legal services and where the failure or fraudulent dealing arises from a dishonest act of an associate of the law practice (as defined in the Legal Profession Uniform Law (NSW) section 6(1));

…”

10. Clause 18 of the policy provides:

“We Have Conduct Of The Claim

18. The insured agree that:

(a) we have the conduct of a claim against the insured, including its investigation, defence, avoidance, reduction, or, subject to clauses 22 to 25, settlement or any appeal;

(b) we have the right to appoint lawyers to act in the conduct of the claim;

(c) we have the right to refer a claim to any dispute resolution process and, subject to clause 22, to settle it as part of that process; and

(d) we have the right to conduct the claim in the name of the insured.” [emphasis in original]

11. On 27 March 2025, Lawcover denied liability for the claim relying on cl 10(a)(v) of the policy.

12. On 7 August 2025, the Law Society commenced proceedings in the Common Law division against BLG and Mr Shahrouk (the Common Law Proceedings) seeking the appointment of receivers to BLG and freezing orders against Mr Shahrouk apparently in aid of its claim against him personally.

13. On 3 September 2025, Mr Shahrouk commenced these proceedings seeking relevantly the following declaration:

“A declaration that the Plaintiff is entitled to be indemnified by the Defendant under the contract of insurance entitled ‘Professional Indemnity Insurance (PII) Policy 2023/24’ and/or the contract of insurance entitled ‘Professional Indemnity Insurance (PII) Policy 2024/25’:

a. in respect of the ‘Fidelity Fund Claims’ (as defined in the List Statement) made against him by the Council of the Law Society of New South Wales exercising its right of subrogation on behalf of clients or former clients of Berala Law Group; and

b. in respect of any costs, expenses and liabilities incurred by the Plaintiff in relation to Supreme Court of NSW proceedings 2025/301994.”

14. Lawcover submits that this is an appropriate case for summary judgment because if granted it would dispose of the whole case, making it unnecessary to determine detailed factual questions, including whether Mr Shahrouk had any knowledge of Mr Wilson’s conduct.

15. Lawcover also submits that Mr Shahrouk’s claim has no prospects of success for two reasons. First, insofar as Mr Shahrouk seeks to recover the costs of the Common Law Proceedings, it submits that those proceedings could not result in civil liability for a claim that arises in the circumstances described in cl 4 of the policy. Second, and in any event, it contends that Mr Shahrouk’s claim for indemnity has no prospects of success because of the application of the exclusion contained in cl 10(a)(v).

Consideration

16. An unfortunate feature of the current application is the way in which the issue has arisen. In these proceedings, Mr Shahrouk seeks a declaration in circumstances where no proceedings have been commenced let alone liability established. There must be a real question whether in those circumstances the application for a declaration is premature. Those difficulties are compounded by the approach taken by the Law Society. In the normal course of events, it might have been expected that, where the Law Society proposes to commence proceedings in this jurisdiction against Mr Shahrouk and seeks a freezing order in aid of those proceedings, it would have commenced those proceedings and at the same time filed a notice of motion in those proceedings seeking those orders. Instead, it has sought freezing orders in proceedings which, although connected in a broad sense to the proceedings the Law Society proposes to commence, raise different issues against a different defendant.

17. The first of these points was not raised by the parties and can be put to one side for present purposes. The second is relevant to Lawcover’s argument that the costs of the Common Law proceedings are clearly not covered by the policy.

18. So far as that issue is concerned, there is a question whether the expression “civil liability for a claim” in cl 4 of the policy covers defence costs, which was not addressed by the parties. Even if it does not, cl 18 of the policy appears to place an obligation on Lawcover to take over conduct of a “claim against the insured”. Although cl 18 does not specifically say so, presumably that is a claim which would, if it succeeded, give rise to a liability in respect of which Lawcover was required to indemnify the insured. If that is correct, if Lawcover refuses to take over the conduct of a claim and the claim against it succeeds, it will be in breach of cl 18 and liable to pay damages, which presumably will be calculated by reference to the reasonable costs incurred in defending the claim.

19. It is at least reasonably arguable that if an application were made for freezing orders against the insured in respect of a claim that Lawcover had wrongly refused to take over the conduct of, the costs incurred in defending that application would be recoverable as damages, either because they were costs that Lawcover would have borne if it had conducted the defence or because they were costs flowing from Lawcover’s (wrongful) denial of the claim, since absent the denial, the application for a freezing order would not have been made. It is difficult to see why it matters whether the application for a freezing order is made in the proceedings in which the claim was made (which, as I have explained, would be the normal position) or in other proceedings. For those reasons alone, it could not be said that the claim for those costs is so obviously untenable that it cannot possibly succeed, although again it may be premature.

20. As to the principal issue raised by Lawcover concerning the application of the exclusion, Lawcover placed some emphasis on the following passage from the judgment of Barwick CJ in General Steel at 130 (adopted by the Court of Appeal in HNOE Limited v Angus & Julia Stone Pty Ltd [2024] NSWCA 271 at [51] (Bell CJ, Leeming and Payne JJA agreeing)):

“Although I can agree… that the defendant should be saved from the vexation of the continuance of useless and futile proceedings, in my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal. On the other hand, I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed.” [Lawcover’s emphasis]

21. That passage, however, does not undermine the point that it is not appropriate to determine debateable questions of contractual construction, particularly those that raise factual questions, on an application for summary judgment, which is the position in this case.

22. In this case, the relevant claim has not been properly formulated by the Law Society. That itself makes an application for summary judgment inappropriate. Until the claim is properly formulated, it is not possible to say what the claim arises from.

23. Lawcover submits that necessarily the claim will have as one of its ingredients the failure to pay trust money where the failure arises from dishonest acts by Mr Wilson. That much may be accepted. But that does not mean that the claim necessarily “arises from” those matters when the gravamen of the claim against Mr Shahrouk appears likely to be that he owed a personal duty to clients of BLG to properly supervise Mr Wilson and as a consequence of his failure to do so, Mr Wilson misappropriated trust funds.

24. The answer to the question whether the exclusion applies will depend on the nature of the connection required between the claim that is made and the circumstances described in cl 10(a)(v) by the words “arising from”. That answer is not obvious. It depends on a clear identification of the claim, which until proceedings are commenced is not possible. It also depends on the meaning of the words “arising from”. Those words do not have a clear and precise meaning. The nature of the connection they require will depend on the context in which they appear. The fact that they appear in an exclusion clause, the fact that the claims covered by the exclusion could extend to claims in negligence against a person not involved in the misappropriation, and the fact that other clauses of the policy express the required connection using the phrase “arises, whether directly or indirectly, from” are all matters that suggest that the words require a direct connection between the claim and the circumstances described in cl 10(a)(v). There may be others. And if that is what is required, it is reasonably arguable that the claim “arises from” the facts giving rise to the liability and not the facts that simply give rise to the loss. These are contestable issues that are not suitable for determination on an application for summary judgment.

Costs and orders

25. It follows that the notice of motion must be dismissed.

26. Lawcover submitted that costs should be costs in the cause because the costs of the motion will not be wasted. Perhaps they will not be entirely wasted. However, Mr Shahrouk has been successful. Any work that has been done for the motion is likely to be of marginal benefit at the final hearing. In those circumstances, Mr Shahrouk should have his costs of the motion.

27. Accordingly, the orders of the Court are:

28. The notice of motion filed on 18 September 2025 is dismissed with costs;

29. The matter be stood over for directions on 21 November 2025.

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