Introduction

In AIG Europe v OC320301 (formerly the International Law Partnership LLP),1 England’s Commercial Court considered the standard aggregate claims provision contained within English and Welsh solicitors’ professional indemnity insurance policies.

The court declined to allow a number of claims (lodged by hundreds of investors who lost money due to a failed system devised by the defendant law firm) to be treated as one claim. The claims were said to be separate on the basis that the claims were not dependent on one another and therefore not a ‘series of related transactions or matters’ as required by the policy.

The significance of this decision lies in the far reaching application of this standard aggregation clause. Insurers and insureds should consider their respective liability when confronted with multiple claims of a similar nature.

Background

The defendant law firm (Firm) was retained by Midas International Development PLC (Midas) to advise on international property law aspects of Midas’ plan to develop holiday homes in Turkey and Morocco.

The Firm devised an elaborate scheme which aimed to protect investors by not allowing their money to be released to the local development companies until the promised levels of securities were achieved.

Midas attempted to acquire land in both site locations, however were unable to complete the contracts for the purchase of the land which caused both the developments to fail and the local Midas company to be wound up.

Prior to the insolvency of Midas, investors’ money had been paid out to the local Midas companies and was unrecoverable. The scheme implemented for investor security had failed and the investors claimed to have lost in excess of £10 million.

Actions were brought by a total of 214 individual investors and beneficiaries against the Firm in negligence and for breach of fiduciary duty for the monies lost in the Turkey and Morocco developments.

The insurer was of the view the claims brought by the investors arose from ‘similar acts or omissions in a series of related matters or transactions’ as defined in the policy and should be treated as one ‘claim’ for policy purposes. The investors’ case was that the claims did not arise from similar acts or omissions in a series of related matters or transactions, or alternatively the similar acts or omissions in a series of related matters or transactions were in respect of the Turkish development and the Moroccan development independently.

Whether there were one or multiple claims was important because the policy limit was £3 million per claim, and with the Firm no longer practicing, the investors were relying on the insurance policy to meet any compensation award, which if the investors were successful, would likely significantly exceed the policy limit for one claim.

Insurance clause

The relevant aggregation clause in this case was as follows:

‘The insurance may provide that, when considering what may be regarded as one Claim for the purposes of the limits contemplated by clauses 2.1 and 2.3:

a. All Claims against any one or more Insured arising from:

     i. one act or omission;

     ii. one series of related acts or omissions;

     iii. the same act or omission in a series of related matters or transactions;

     iv. similar acts or omissions in a series of related matters or transactions; and

b. all Claims against one or more Insured arising from one matter or transaction will be regarded as one Claim.’

Application

The court was tasked with considering the meaning of the two elements of the clause the insurer sought to rely on.

Similar act or omission

In construing what is ‘similar’, the court ruled the requisite degree of similarity must be appropriate having regard to the object of the clause, which was to permit claims to be aggregated for the purpose of applying the limit of the insurer’s liability per claim. In light of this, the court required the requisite degree of similarity to be a real or substantial degree of similarity as opposed to being fanciful or insubstantial.

All the claims in this case involved the local development company failing to pay the vendors of the respective land, the investors’ monies being released and exposed to losses in the event that the developments failed, and the Firm’s scheme failing to provide security for the investors.

Justice Teare found there to be a real and substantial degree of similarity in the failures which was neither fanciful nor insubstantial, and for the purposes of the policy there were ‘similar acts or omissions’.

In ‘a series of related matters or transactions

The court ruled the meaning of this phrase requires the transactions alleged to be a series of related matters or transactions, to be dependent on each other. In applying that definition to the present case, the court held it was common ground that the individual transactions were not conditional or dependent upon each other.

The court again considered the context of the clause, namely, an aggregation clause in a solicitors’ insurance. With this in mind, the natural meaning of ‘a series of related matters or transactions’ was found to sensibly be a series of matters or transactions that are in some way dependent on each other.

Judgment

The court therefore found the claims were not to be aggregated, because although they did arise out of similar acts or omissions, they did not also meet the additional requirement of being in a series of related transactions, because the terms of the transactions were not conditional or dependent upon each other.

Previous decisions

The often cited case of Haydon & Ors v Lo & Lo (a firm) & Anor2 considered the perpetration of fraud by a clerk employed in the insured law firm over two estates, which involved a number of fraudulent transactions over a number of years.

In that case there were two estates being defrauded, the Tang estate which involved 43 separate thefts, affected through four different methods but having the same end result, and the Tso estate, which was advised to bring the action against the 14 companies whose shares had been stolen and transferred to other owners.

The aggregation clause in that case differed to the present case, in that it did not have the qualification ‘in a series of related matters or transactions’. Instead, to be treated as one claim, the policy only required the claims against the insured to arise from the same act or omission.

In regards to the Tang estate, the court found that although there were 43 separate claims, the reality was there was only one demand, namely the demand made by the Tang estate on Lo & Lo for restitution of the loss caused by a dishonest employee of the firm.

The Tso estate was also found to be only one claim despite the complicating fact that proceedings were brought against 14 different entities. The underlying facts were, in all significant respects the same as the Tang case. The court held that while the claim by the third party is a good starting point for determining whether there is one or more claim, it cannot in all circumstances be decisive. Ultimately there was only one plaintiff (the Tso estate) in all the multifarious proceedings.

While not directly citing Lo & Lo, the court in the present case has used similar reasoning to come to the conclusion that the claims were at least ‘similar’, in that the practical reality was the investors’ money was lost due to the failure of the scheme devised by the defendant law firm. This is not unlike the approach in Lo & Lo which found that despite the timing and methods of the thefts, the loss was still occasioned by the theft of the fraudulent employee.

Conclusion

The effect of this recent decision is that the insurer was unable to aggregate the claims as one, and unable to limit their liability to the £3 million policy limit.

This decision is highly relevant to insurers in the United Kingdom professional indemnity market, and to any policies where the aggregation clause has the additional requirement for any similar acts or omissions to also be ‘in a series of related matters or transactions’. Had this additional requirement not been present in this case, the insurer would have been able to successfully aggregate the claims to be subject to one policy limit.