English Court of Appeal offers welcome guidance on aggregation for South African insurers

Aggregation clauses in insurance policies permit two or more claims to be treated as a single claim where they are linked by a unifying factor of some kind.  The choice of language used to express that unifying factor is of great importance.

The aggregation of claims cuts both ways and may work in favour of or against an insurer.  For example, it may determine how many deductibles are payable, or could cause numerous losses to be regarded as a single loss under a limit of indemnity.

Cases dealing with the interpretation of aggregation clauses do not come along all that often, so the recent decision of the English Court of Appeal in AIG Europe v OC320301 sheds some welcome light.

The court had to assess the true construction of an aggregation clause applicable to all solicitors' indemnity policies pursuant to the requirement in the UK Solicitors' Act for compulsory liability insurance. 

The case was about two property developments by a UK-based property developer in Turkey and Morocco. The developments collapsed after the developer failed to complete purchases of the required land in both countries, leaving some 214 investors out of pocket. 

The investors sued the developer's firm of solicitors, alleging that they had wrongly released funds from an escrow account without taking adequate security to protect the investments.  The value of the individual claims collectively amounted to more than £10 million.  AIG sought to aggregate the claims because the underlying PI policy had an indemnity limit of £3 million for any one claim.

AIG brought proceedings in the Commercial Court for a declaration that the underlying claims be aggregated as one claim, on the basis that all the claims arose from "similar acts or omissions in a series of related matters or transactions".

The Commercial Court rejected the claim for aggregation by AIG, interpreting the clause to mean that the transactions were inter-connected, conditional or dependent on one another.

The issue of aggregation in the context of solicitors' PI policies was of concern to the Law Society of England & Wales, because a narrow interpretation against aggregation of claims threatened to increase the cost of solicitors' PI insurance to unaffordable levels.

The appeal court emphasised the importance of construing the critical words of the insurance policy against the background of knowledge of the availability of wide aggregation clauses as well as narrow ones.  It would not make sense for the phrase "… a series of related matters or transactions" to be interpreted in a manner that any relation, however loose, would suffice.  To sensibly restrict the concept of relatedness, the relation must be an intrinsic relationship and not an extrinsic one with a third factor.

We think it likely that a South African court would adopt a similar interpretation, given that our courts are required to consider all the circumstances surrounding the contract to determine the parties' intention in concluding it.  Clear and unambiguous language must be given weight together with the factual matrix (or context) in which the contract was concluded.

Insurers should look carefully at their aggregation clauses to make certain that they are not cast too widely, which may operate to prevent aggregation of claims.