England & Wales: AIG Europe Limited v Woodman and others [2017] UKSC 18

In the most important decision to date regarding the aggregation of solicitors’ professional indemnity insurance claims, the Supreme Court has overturned the Court of Appeal in AIG Europe-v-Woodman.

The policy provision in issue was clause 2.5 (a)(iv) of the Law Society Minimum Terms and Conditions for solicitors’ PI insurance, namely: “similar acts or omissions in a series of related matters or transactions.....will be regarded as one Claim”, for the purposes of applying the policy limit.

It was accepted (on agreed facts, the claims against the solicitors not having yet been tried) that the 214 underlying claims by disappointed investors against their (insured) firm of solicitors all arose from “similar acts or omissions”, the dispute being focused on the rest of the clause, i.e. the meaning of “a series of related matters or transactions...”. The investors had suffered loss when their solicitors released their monies to holiday resort developers, from a designated escrow account, without adequate security having been put in place beforehand. There were two resorts, one in Turkey, one in Morocco. The claims totalled more than £10 million, and the policy limit per claim was £3 million. The insurer argued that all claims should be aggregated, with the application of one £3 million policy limit. The investors (through their trustees) argued for no aggregation of claims. However, each mounted an alternative case that claims for one development should be aggregated, whereas claims for one development could not be aggregated with claims from the other.

At first instance (see the article in our Insurance Bulletin of 24 September 20151) the Judge had ruled that for there to be “a series of related matters or transactions” the transactions had, by their terms, to be conditional or dependent on each other, which they were not. On appeal, at the behest of the Law Society as an intervener, the Court thought this too restrictive an interpretation of the relevant aggregation provision, which had been introduced following the narrow interpretation of another provision in Lloyds TSB [2003] 4 All ER 43. The Court of Appeal ruled instead that there must be an “intrinsic” relationship between the transactions, rather than a relationship with some outside connecting factor, even if that factor was common to all transactions (see the article in our Insurance Bulletin of 14 April 20162). In the Supreme Court, the insurers argued that this introduced an unwarranted additional qualification into the policy language, whereas the investors (through their trustees) and the Law Society supported the Court of Appeal’s interpretation.

Lord Toulson (with whom Lords Mance, Clarke, Sumption and Reed agreed), said the Court of Appeal’s formulation was not “necessary or satisfactory”, since “intrinsic” was too elusive a term when used to describe a relationship between two transactions. He said that aggregation provisions can operate in favour of either insured or insurer on given facts, and are not to be approached with any predisposition towards either a broad or narrow construction. However, the Appeal Court had taken too narrow a view of the transactions in describing them as the “payment of money out of an escrow account which should not have been paid out” and he looked to the wider transaction to apply the test.

He said that determining whether transactions are related is “an acutely fact sensitive exercise” and that, in this case, a “transaction involved an investment in a particular development scheme under a contractual arrangement, of which the trust deed and escrow agreement were part and parcel, being the means designed to provide the investor with security for his investment. The transaction was principally bilateral [between investor and developer], but it had an important trilateral component by reason of the solicitors’ role both as escrow agents and as trustees, and the trust deed created a multilateral element by reason of the investors being co-beneficiaries.” The transactions regarding the Turkey scheme were connected in significant ways, and likewise those regarding the Morocco scheme. Applying the aggregation clause objectively, taking the transactions (on agreed facts) in the round, the Supreme Court ruled there were two separate aggregated claims, one for each development – the transactions “fitted together” in sharing the same common underlying objective of the execution of a particular development project, and they fitted together legally through the trusts under which the investors were co-beneficiaries. Although the claims relating to each separate development bore a striking similarity, that was insufficient for them to be aggregated as one claim: they had two sets of underlying transactions, which were not sufficiently related, since they related to different sites, different groups of investors with different deeds of trust over different assets. They should not be aggregated. (There remains a possible issue about a special class of investors who “crossed over” from one development to the other, and a possibility of further argument of fact.)

This important decision recognises the fact-sensitive nature of applying policy tests for claims aggregation, sets out a clear illustration of how the test should be applied to the (agreed) facts of the case, and strikes a balance between the two primary arguments of the insured and the insurer. In doing so, it provides much-needed clarity.