The standard aggregation clause used in solicitors' professional indemnity policies was tested for the first time in the recent case of AIG Europe Limited v OC320301 LLP (formerly The International Law Partnership LLP) [2015] EWHC 2398 (Comm). Aggregation is a notoriously difficult area of insurance and yet it is essential as it determines the level of cover. In this particular case, the insurer AIG was unsuccessful in obtaining a declaration that a large number of investors' claims could be aggregated so as to limit its liability to the £3 million "any one claim" provided for in the policy.

Factual Background

The case arises out of the failure of an investment scheme established to fund the development of holiday homes in Turkey and Morocco.  Midas International Property Development PLC (Midas) offered opportunities to invest in those holiday homes either via loan or through the direct purchase of those homes. 

Investors were due to be protected under a complex set up that involved the use of a Deed of Trust and investments being held in escrow by of a firm of solicitors (Solicitors).  The Trust was expected to hold security over the land to be purchased.  Money could not be released from the escrow account to pay the local developers until the promised level of security was in place and this was subject to a test (known as the "cover test") expressly set out in the Deed of Trust.

Midas took various steps to start developing the sites locally in 2007 but the local companies were unable to complete the contracts to purchase rights to the land and this led to the failure of both developments.  By November 2009 Midas was wound up.

Payments had already been made out of the escrow accounts, causing loss to 214 investors which they claim is in excess of £10 million.  The investors argue that their investments should never have been released from the escrow account by the Solicitors, who acted as their escrow agents.

The Policy

The Solicitors had professional indemnity insurance with AIG (the Policy) which incorporated the aggregation clause from the Solicitors Regulation Authority (SRA) "Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors and Registered European Lawyers in England and Wales" (the SRA Clause):

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:

  1. one act or omission;
  2. one series of related acts or omissions;
  3. the same act or omission in a series of related matters or transactions;
  4. 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.”  

The limit of liability for any one claim in the Policy was £3 million. 

The Decision

AIG sought a declaration that the claims from the 214 investors could be aggregated on the basis that all of the underlying claims flew from the failure to apply the cover test appropriately.  They were all related because they were all made pursuant to the "Midas modus operandi".

The investors counter- argued that although there was similarity (see a(iv) above) between the acts or omission that led to the wrongful release of the monies, these were not "in a series of related matters or transactions" because the individual transactions were separate and independent of each other.  As an alternative, they contented that the transactions concerning Turkey were related to each other but not to the transactions concerning Morocco.

The Court emphasized that aggregation clauses permit two or more claims to be treated as a single claim but this is all determined by the choice of language used to express the unifying factor.  Since there is no case law on the SRA Clause, the Court proceeded to construe the words used in the clause, applying the usual test under English law, which is to identify the meaning of the words as they would be reasonably understood in the relevant context.

Similar acts or omissions

The Court commented that on one level of abstraction all the claims could be said to arise out of similar acts or omissions (e.g. the "Midas modus operandi") but not necessarily on a lower level (e.g. the individual acts).  It held that the degree of similarity had to be considered in light of the purpose of the SRA Clause, and this was to permit claims to be aggregated for the purpose of applying the limit of the insurer’s liability per claim.  This meant that the degree of similarity had to be a real or substantial as opposed to fanciful or insubstantial.  On the facts, there was a real degree of similarity between all the acts and omissions that led to the release of the funds.

In a series of related matters or transactions

The Court noted that the word "series" takes meaning from its context, in this case a PI solicitors insurance policy.  It rejected the AIG construction as unlikely to have been the intended meaning because it was too vague and it would make the scope of the unifying factor too wide.  Instead, the Court favoured the argument put forward on behalf of the investors that transactions could not be related unless they are conditional or dependent upon each other.

The Court therefore refused to grant the declaration sought by AIG that they could aggregate and limit their liability to £3 million. 

Comments

Given that the SRA Clause applies in all Solicitors PI policies, this decision will be of interest not only to the insurance specialists but also to solicitors and professional negligence practitioners.  However, this is probably not the last we will hear about it since the Court has granted leave for the decision to be appealed.

The SRA Clause was drafted after the decision in Lloyds TSB General Insurance Holdings v Lloyds Banking Group Insurance Company Limited [2003] UKHL 48, where the House of Lords found that individual claims concerning the mis-selling of financial products could not be aggregated since they arose from separate transactions, leaving the bank effectively without insurance cover because of the excess applicable under the relevant policy.  Whilst the present decision does not say, it is a fair assumption that the purpose of the SRA Clause was to allow for myriads of small claims to be aggregated for the benefit of solicitors (although it must be noted that in the Policy a different aggregation clause applied for the excess).  This case therefore illustrates the difficulty in making aggregation clauses work as intended.