Legal insurer Lawcover has lost a bid to prevent court action by a lawyer after it denied his claim for professional indemnity cover. 

The NSW Supreme Court refused the request to dismiss a case brought by Jihad Shahrouk on the grounds he had no arguable claim.

Mr Shahrouk, sole principal of Berala Law Group, discovered a trust account fraud by law clerk Peter Wilson in April last year, according to court documents.

The NSW Law Society’s Legal Practitioners Fidelity Fund paid out $3 million to clients and expected to pay another $594,000.

Judge Michael Ball says the Law Society issued Mr Shahrouk with a letter of demand for $3 million.

The judge says “the basis of the Law Society’s claim is unclear” but it asserts Mr Shahrouk failed to ensure Mr Wilson complied with his legal obligations.

In January this year Mr Shahrouk notified Lawcover, his firm’s professional indemnity insurer, of a potential claim.

Lawcover denied liability. The policy excluded claims relating to fraudulent dealing with trust money. 

In August the Law Society sued Berala Law and Mr Shahrouk, seeking the appointment of receivers to the firm and freezing orders against Mr Shahrouk “apparently in aid of its claim against him personally”, Judge Ball says.

Mr Shahrouk then started legal action against Lawcover seeking a declaration that he was entitled to be indemnified under his policy.

In seeking to have the case thrown out, Lawcover said its policy did not cover his defence costs for common law proceedings, and he had no cover under the exclusion for fraud.

Judge Ball says the Law Society sought freezing orders without starting proceedings against Mr Shahrouk, and with no proceedings under way “let alone liability established”, Mr Shahrouk’s application for a declaration of indemnity might be considered premature. The Law Society’s approach compounded the difficulties.

The judge will not dismiss the case when the Law Society has not started proceedings.

“Until the claim is properly formulated, it is not possible to say what the claim arises from,” the judge said.

Read the judgment here.