AIG Europe Ltd v OC320301 LLP & Ors [2015]

In a judgment dated 14 August 2015, Mr Justice Teare has held that clause 2.5 of the Minimum Terms and Conditions of the Professional Indemnity Insurance for Solicitors and Registered European Lawyers in England and Wales (“MTC”) did not permit AIG to aggregate claims brought by investors against a firm of solicitors (“TILP”).

Background

TILP was retained by a property developer (“Midas”) to advise it in relation to property developments in Turkey and Morocco. Investors paid monies to TILP as escrow agents and became beneficiaries under two separate deeds of trust, one established for the Turkey development and the other for the development in Morocco. Each trust was to hold security over the land to be purchased. Investors’ monies would only be paid over to the local Midas company once adequate security was in place and an express provision in the trust deed, known as the “cover test”, had been met.

Unfortunately for the investors, the local Midas companies were unable to complete the contracts for the purchase of the land in Turkey and the purchase of shares in the local property-owning company in Morocco, and this led to the failure of both developments and the eventual liquidation of Midas. The security for each development was then found to be defective. Investors claimed that monies had been paid to Midas without satisfying the “cover test” and sought to reclaim losses in excess of £10 million. AIG sought to limit its liability to £3 million on the basis that the investors’ claims could be aggregated under the aggregation clause and that, consequently, there was only one “Claim” under its policy.

The aggregation clause

TILP’s insurance policy with AIG limited liability for “any one Claim” at £3 million. It was common ground that the applicable aggregation clause was that contained in clause 2.5 of the MTC, the relevant part of which provided as follows:

“The insurance may provide that, when considering what may be regarded as one Claim for the purposes of the limits [set out in the insuring clauses]: 

(a) all Claims against any one or more Insured arising from:

… 

 (iv) similar acts or omissions in a series of related matters or transactions will be regarded as One Claim.”

AIG argued that the investors’ claims arose from similar acts or omissions in a series of related matters or transactions which limited their liability to £3 million. The defendant trustees (who represented the investors in the underlying proceedings) contended that the losses should not be aggregated in this way. Alternatively, they argued that there were two Claims for £3 million, one relating to the Turkey development and the other relating to the development in Morocco.

Ironically, clause 2.5 of the MTC was rewritten following the House of Lords’ decision on aggregation in Lloyds TSB General Insurance Holdings Ltd & Others v Lloyds Bank Group Insurance Co Ltd [2003], which meant that there was no authority on the construction of the revised clause 2.5.

Mr Justice Teare made it clear that, when construing the MTC, he was entitled to have regard to the policy underlying the legislation which gave rise to the MTC (ie the policy which requires solicitors to insure against their professional liability so that they are able to compensate clients when claims are made against them). However, that did not mean that he was required to construe the MTC in a way which afforded the public the greatest level of protection. The Court should construe the MTC in a neutral manner with a view to identifying the meaning of the aggregation clause in its proper context.

“Similar acts or omissions…”

Mr Justice Teare held that there must be a real or substantial degree of similarity in the acts or omissions giving rise to the investors’ claims. The claims arose because Midas had failed to pay the vendors, and the security was defective because the cover test had been improperly applied. As a result, investors had been exposed to loss on the improper release of investment funds. The judge therefore found that the acts or omissions were similar to each other, even though the reasons for the failure of the security were different.

“…in a series of related matters or transactions”

Mr Justice Teare found that this phrase served to limit the scope of the aggregation clause which otherwise would be very wide. He also determined that the word “series” took its meaning from its context. After considering three possible meanings the judge held that the most natural meaning of the phrase, in the context of a solicitors’ professional indemnity insurance policy, was a series of matters or transactions that are in some way dependent on each other.

Accordingly, even though the acts or omissions were held to be similar, the judge refused to grant the declaration sought by AIG because the individual transactions were not dependent on each other.

Implications

The lesson to be learned from this judgment, like many other judgments on aggregation clauses, is that the interpretation of aggregation clauses is highly contextual, clause-specific and fact sensitive. Even though clause 2.5 had been redrafted following the House of Lords decision referred to above, that decision was of limited assistance to the construction of clause 2.5 of the MTC, given the different wording used in that clause and the different context in which the aggregation clause was being considered. 

Insurers should therefore exercise great care in their choice of the words when drafting aggregation clauses. In particular, much careful thought needs to be given to identifying the unifying factor which defines the scope of an aggregation clause.