In AIG Europe Ltd v OC320301 LLP [2015], Insurers applied for a declaration that claims brought by investors and lenders against a firm of solicitors could be aggregated under that firm’s professional indemnity insurance policy. Such aggregation would have allowed Insurers to apply a £3 million policy limit to 214 claims, together amounting to around £10 million. 

The applicable aggregation clause considered by the Court in its recent judgment was clause 2.5 of the SRA Minimum Terms and Conditions of Professional Indemnity Insurance (“MTCs”). 

Background

A UK developer offered investors the opportunity to purchase holiday homes on land to be developed in Turkey and Morocco or to lend money to the developer. The investors became party to an escrow agreement with the solicitors acting as escrow agents and also became beneficiaries of a Deed of Trust. The trusts (one for each of the two property developments) were to hold security over the land to be purchased and the money received from investors was not to be released from the escrow accounts to the local development company until certain security was in place. In fact, the development companies were unable to complete the contracts for the purchase of the land, leading to the failure of both proposed developments and the collapse of the UK parent. The investors’ money, however, had already all been paid to the developers, despite defects in the security provided. 

Aggregation Issues

Investors relied on several causes of action against the solicitors, including negligence, breach of fiduciary duty, misrepresentation and the breach of the escrow agreements. Insurers argued that the key unifying element in the complaints was a failure to apply the proper test for the provision of security, with the result that the escrow funds were released without adequate security in place. 

Because of the MTCs wording, the court had to decide whether the claims arose from “similar acts or omissions in a series of related matters or transactions”, which was the sub-clause in 2.5 that Insurers sought to rely on. 

Insurers argued that the claims were all related because they were all made pursuant to the “modus operandi” of the developer. The opposing view was that the transactions – which related to different developments, defects in security and types of investment – were separate claims under the MTCs clause. 

The Court’s Decision

The Court referred to the policy reasons behind the MTCs, namely that solicitors should be financially able to compensate clients where claims are made against them, but declined to decide the issue simplistically on the basis of the legislators’ objective. The matter was to be decided neutrally on a construction of the MTCs wording. 

On “similarity”, the Court decided that for claims to be sufficiently similar for aggregation under the MTCs wording, there must be “a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity”. The Court held this element was met in this case. 

With regard to a “series of related matters or transactions”, however, the Court decided that Insurers’ interpretation would make the test of relatedness “vague, uncertain and soft-edged”. The Court found that in the context of a solicitor’s professional indemnity policy, a series of related matters or transactions had to be “conditional or dependent upon each other”, rather than encompassing independent transactions. Here, they did not have that connection. For that reason, the Court refused to make the declaration sought by Insurers that the claims could be aggregated. 

Conclusion

This is the first decision on the meaning of the specific language in clause 2.5 of the MTCs. Mr Justice Teare was careful to stress that the policy wording had to be construed in its particular context. The requirement for dependency between transactions for aggregation has the potential to favour Insurers or favour their insured firms, depending on the quantum of claims, policy limits and excess limits (each and every and annual aggregate). 

It remains to be seen whether potential consequences of this decision – such as increases in premiums (because Insurers face the possibility of separate policy limits applying in more cases where multiple claims arise) and/or changes to the MTCs – come to fruition. Those consequences are possibly more likely because of the public nature of the judgment and Insurers being able to point to it, whereas it has been common for aggregation disputes to he heard in confidential arbitrations. 

Although the MTCs apply to solicitors’ compulsory layer of PI insurance, Insurers might review their aggregation language in other policies in light of this decision. 

It is possible that insurers will appeal. 

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