Aggregation clauses allow insurers to limit their potential liability for claims arising from the same or related matters or transactions. In the case of AIG Europe Ltd -v- Woodman and others  UKSC 18, the Supreme Court was asked to consider the interpretation of ‘related’ for the purposes of aggregation. Christopher Stanton takes a look at the Supreme Court decision and what it means for solicitor indemnity policies.
Midas, an international property development company, sought investors to fund the development of two holiday resorts in Turkey and Morocco. Midas instructed solicitors (ILP) to create a mechanism for financing the two developments. A trust was created for each development to hold security for the investors over the development land. The trust also held the investors’ funds in an escrow account. The solicitors were the initial trustees.
Midas failed to complete the purchase of the two sites and the developers became insolvent. The developments were not finished. The investors’ funds were released by the trustees without adequate security.
Legal proceedings were brought by 214 investors against ILP, claiming £10m. It was alleged that ILP failed to properly apply the cover test before releasing funds to the developers, resulting in the investors having inadequate security.
The legal proceedings
ILP had professional indemnity insurance with AIG. The policy was limited to £3m cover for each and every claim, as defined by the minimum terms and conditions (MTC). AIG sought a declaration that the investors’ claims all arose from ‘similar acts or omissions in a series of related matters of transactions’, within the meaning of the MTC, and therefore fell as one claim under the policy.
AIG’s fall-back position was that the investments in the two developments in Turkey and Morocco constituted two separate claims, each with a single limit of indemnity.
At first instance, Teare J rejected the argument that all the claims arose from similar acts or omissions. He applied a test that the transactions must be conditional or dependent upon one another in order for the claims to be aggregated. AIG appealed.
The Court of Appeal rejected the contention that the transactions had to be dependent upon one another to be aggregated. It introduced the test that there must be an intrinsic relationship between the transactions; rather than an extrinsic relationship with a third factor. AIG appealed.
The Supreme Court’s judgment
AIG accepted that for matters or transactions to be related, there must be some identifiable substantive link or connection between them, and that mere similarity was not enough.
In the lead judgment, with which the other Lord Justices agreed, Toulson LJ confirmed that a neutral approach to the aggregation clause was required, and that the scope for aggregation was limited to situations where there was a ‘real connection’ between the transactions, rather than simply a similar type of act or omission.
Toulson LJ accepted that determining whether transactions are related is acutely fact sensitive. The starting point is to identify the relevant matter or transactions. Toulson LJ rejected the concept of an intrinsic relationship as unnecessary and unsatisfactory. Instead, he described the test of whether they were ‘related’ as requiring ‘some inter-connection between the matters or transactions, or in other words they must in some way fit together’.
Applying this principle to the facts, Toulson LJ found that the transactions arising from the Turkish development were connected because:
- the common underlying objective was to execute a specific development project in Turkey
- a common trust was established to provide funding for the Turkish development
- the investors were all investing in a standard scheme, and
- the investors were all co-beneficiaries under a common trust.
The claims arising from the Turkish development were therefore ‘related’.
Toulson LJ found that the same principles applied to the Moroccan development.
The Court then looked at whether the two developments themselves were related. Toulson LJ viewed the two developments as being very similar. The two development companies were related and the legal structure of the two development projects was similar. However, that was not sufficient.
Toulson LJ found that the two development projects were separate and unconnected, relating to different sites in different countries, different groups of investors, different deeds of trust, and different assets. It was held that the two developments could not be described as ‘related’.
The Supreme Court held that the claims arising from the Turkish development constituted one claim and those arising from the Moroccan development a second claim. Each claim has a separate £3m limit of indemnity. In effect, the Supreme Court has upheld AIG’s fall-back position of two claims.
The Supreme Court has removed the concept of an intrinsic relationship, which was confusing to insurers and policyholders alike.
The Court has held that aggregation requires some interconnection between the matters or transactions which are the subject of the claim. In order to aggregate, the matters or transactions must ‘fit together’ in some way.
The Supreme Court has recognised that each case must be determined on its own facts. However, the decision has provided welcome clarity for insurers, brokers and policyholders on the aggregation test. Fitting together is an easier test to understand and apply than an intrinsic or extrinsic relationship.