The High Court has ruled for the first time on the proper construction of the aggregation clause in the Solicitors Regulation Authority’s Minimum Terms and Conditions of Professional Indemnity Insurance (the MTC).
AIG Europe Ltd v OC320301 LLP (formerly the International Law Partnership LLP) and others (AIG Europe) addresses the important question of when multiple claims against a firm of solicitors that give rise to a claim against the firm’s professional indemnity insurance policy should be aggregated (ie treated as a single claim). The effect of this is to cap the insurer’s aggregate liability by the policy’s limit of indemnity, rather than that limit applying to each claim separately.
WHY DOES AGGREGATION MATTER?
Claimants who bring high value professional negligence claims against firms of solicitors often have to rely on those firms’ professional indemnity insurance policies to pay any damages that are awarded. Each year the Law Society makes indemnity rules under section 37(2)(c) of the Solicitors Act 1974 that requires solicitors to take out policies of insurance with qualifying insurers and prescribe the minimum effects that the policies must have. The MTC are delegated legislation and tend, in effect, to be incorporated into these policies.
Pending enactment of the Third Parties (Rights Against Insurers) Act 2010, claimants have no means to ascertain whether a claim will be covered by a firm’s professional indemnity insurance until the claim has been proven and the firm has gone into insolvent liquidation. This means that potential claimants often have to assess the likelihood that a claim will be covered by reference to the MTC. Potential claimants will want to avoid incurring costs in bringing a claim to trial only to find that the defendant has become insolvent and the claim is not covered by its professional indemnity insurance.
The circumstances in which claims against a firm of solicitors may be aggregated are often an issue of contention between claimants and insurers. Aggregation will benefit claimants where it enables a number of small claims to be compounded so that only a single excess applies and a claim may be brought against the insurer for the balance of loss. Conversely, the aggregation of multiple large claims will benefit insurers where the insurers’ entitlement to aggregate those claims may substantially decrease the sum that it is liable to pay out under the policy. In such circumstances the solicitor defendant will be liable to meet the balance. Where the defendant firm becomes insolvent, claimants may be unable to recover damages beyond those paid out by the insurer.
THE RELEVANT CLAUSE
Clause 2.5 of the MTC, which sets the minimum level of cover that every solicitor’s professional indemnity insurance policy must provide, reads as follows:
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:
- all claims against any one or more insured arising from:
- one act or omission;
- one series of related acts or omissions;
- the same act or omission in a series of related matters or transactions;
- similar acts or omissions in a series of related matters or transactions
- all claims against one or more insured arising from one matter or transaction will be regarded as one claim.
AIG Europe came before the Commercial Court in July 2015. The claimant insurer (AIG) sought a declaration that claims brought by 214 individuals against the defendant firm of solicitors (TILP) should be aggregated and treated as a single claim under TILP’s professional indemnity insurance policy. AIG’s application was opposed by the fifth and sixth defendants (the trustees) who were the trustees of two trusts that were the subject matter of the underlying claims. The underlying claims were yet to be determined so for the purposes of the proceedings it was necessary to assume that the allegations against the defendant firm of solicitors were true. Those allegations are summarised as follows:
- A UK company, Midas International Property Development plc (Midas), sought to develop holiday homes in Turkey and Morocco. Midas engaged TILP to advise it on the international property law elements of the transactions. Between April 2006 and August 2009 Midas offered investors opportunities to invest in holiday homes in Turkey and Morocco by way of interest bearing loans or direct purchase.
- Each of the 214 investors paid money to TILP and became party to an escrow agreement with TILP as escrow agent. Separate trusts were established for the developments in Turkey and Morocco. Pursuant to loan and purchase agreements TILP was to apply a ‘cover test’ to determine that the required level of security was in place for each investment. Once the cover test was passed TILP was entitled to release the investment from the escrow account to the relevant local Midas company and admit the investor to the relevant trust. The object of the trusts was to realise the assets in order to repay the investors if the developments failed.
- Money was paid out of the escrow account to Midas between April 2007 and October 2008. Midas was unable to complete the contracts for the purchase of the land in Turkey and shares in the land-owning company in Morocco, leading to the failure of both developments. Midas was wound up by November 2009. The investors’ case was that TILP failed to put in place an effective form of security and failed to properly apply the cover test before paying monies out of the escrow account. The investors claimed to have lost over £10 million.
CONFLICTING CONSTRUCTIONS: THE PARTIES’ ARGUMENTS
Under TILP’s professional indemnity insurance policy, the limit of AIG’s liability for any one claim was £3 million. The policy contained an aggregation clause but it was not on the same terms as clause 2.5 of the MTC. Pursuant to clause 4.12(b) of the MTC, Minimum terms and conditions to prevail, the aggregation clause of the insurance contract was severed and rectified to comply with clause 2.5 of the MTC.
AIG’s case was that the claims brought by the 214 investors against TILP arose from similar acts or omissions in a series of related matters or transactions (MTC sub-clause 2.5(a)(iv)) and should therefore be aggregated with the result of limiting AIG’s liability to £3 million.
The trustees’ case was that the claims did not arise from similar acts or omissions in a series of related matters or transactions and should not be aggregated. Alternatively, it was submitted that the claims in respect of the development in Turkey arose from similar acts or omissions in a series of related matters or transactions, as did the claims in respect of the development in Morocco, with the effect that AIG’s liability was limited to £3 million in respect of Turkey and a further £3 million in respect of Morocco.
CONFLICTING CONSTRUCTIONS: THE COURT’S DECONSTRUCTION
Clause 2.5 was re-written following the House of Lords’ decision in Lloyds TSB General Insurance Holdings Ltd and others v Lloyds Bank Group Insurance Co Ltd, in light of insurers’ concerns that the decision would narrow the effect of clause 2.5. Sub-clauses 2.5(a)(iii), 2.5(a)(iv) and 2.5(b) of the MTC were inserted into clause 2.5. Although the Lloyds case provides some guidance on the correct interpretation of sub-sections 2.5(a)(i) and 2.5(a)(ii) there was no existing authority on the construction of sub-clause 2.5(a)(iv).
Teare J determined that the court should construe the MTC in a neutral manner without being predisposed to assist either the claimants or AIG. Section 37(2)(c), Solicitors Act 1974 is intended to protect potential claimants by ensuring that solicitors are able to compensate clients where claims are brought against them. However, the aggregation clause in the MTC means that this compensation may be less than the actual claim.
Teare J found that it would be “too simplistic” to adopt the construction that gave the public the greatest level of protection (para 27). The court’s task was to determine whether the underlying claims fell within the two elements of sub-clause 2.5(a)(iv):
- Did they arise from similar acts or omissions; and
- Did those acts or omissions occur in a series of related matters and transactions?
SIMILAR ACTS OR OMISSIONS
The first word to be construed was similar. Counsel for AIG submitted that the escrow agreements and trust documents were materially the same in each case, the cover test was not properly applied in each case and in each case TILP released money from the escrow account when it ought not to have done. In his submission these common factors amounted to similarity between the acts or omissions.
Counsel for the trustees submitted that the security taken for the development in Morocco and the security taken for the development in Turkey were defective for different reasons. It therefore followed that the acts and omissions giving rise to the claims relating to the development in Turkey were different from the acts and omissions giving rise to the claims relating to the development in Morocco.
Teare J noted that clause 2.5 did not give any express guidance to assist him to judge similarity. He had to consider what was implicit in the clause. The aim or object of the clause was to permit claims to be aggregated for the purpose of limiting the insurer’s liability per claim and “the requisite degree of similarity must be that which is appropriate having regard to that aim or object” (para 30). In Arnold v Britton and others the Supreme Court emphasised that commercial common sense cannot be used to “undervalue the importance of the language of the provision which is to be construed” (per Lord Neuberger at para 17). Teare J was careful not to rewrite clause 2.5 by adding words to it that were neither expressed nor implied.
The word similar is extremely broad; anything between the two extremes of completely identical and entirely different could be judged to be similar. By considering the wider context of clause 2.5 Teare J determined that “the requisite degree of similarity must be a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity” (para 30). Real, as opposed to fanciful, is a low threshold for similarity but substantial, as opposed to insubstantial, is significantly higher. It is not clear whether a level of similarity that was real but not substantial would have been sufficient to pass this test.
Teare J found that the features which were common to all transactions were sufficient to amount to a “real or substantial degree of similarity” (para 31). It followed that all 214 claims arose out of similar acts or omissions.
IN A SERIES OF RELATED MATTERS OR TRANSACTIONS
The second part of sub-clause 2.5(a)(iv) seeks to limit the expansive scope of the first part.
Counsel for AIG submitted that the underlying claims were in a series of related matters and transactions because they all arose out of investments in Midas’ property development business for which funds were attracted on the basis of the same escrow and trust arrangements. The fact that a group of the investors termed “crossover beneficiaries” had originally entered into loan and purchase agreements for properties in Turkey and then switched their investments to the Morocco development was evidence, he submitted, that the acts or omissions were in a series of related matters or transactions.
Counsel for the trustees submitted that the acts or omissions were not related because there was no connection between the investors and the individual transactions were not dependent on each other.
Teare J noted that series has several possible meanings: (a) matters that together form a part of a whole, (b) matters that occur one after another, and (c) matters that bear a logical relationship to each other. Teare J determined that it must take its meaning from its context, which was the remainder of the second part of sub-clause 2.5(a)(iv), related matters or transactions.
The court heard submissions proposing three possible meanings of the phrase series of related matters or transactions:
- Counsel for the trustees’ primary submission was that it meant a series of transactions that were related by reason of being dependent on each other
- Alternatively, counsel for the trustees submitted that it meant a series of independent transactions that were related because they were investments in one particular development.
- Counsel for AIG submitted that it meant matters or transactions that were related because they were of a similar kind and/or connected to each other.
Teare J found the third proposal unlikely to be the intended meaning since it would not limit the scope of the first part of sub-clause 2.5(a)(iv). Such a test would be “vague, uncertain and soft-edged” (para 38).
The first proposed meaning, a series of transactions that were related by reason of being dependent on each other, was the “most natural meaning” of the phrase in the context of a solicitors’ professional indemnity insurance policy (para 40). It also had the advantage of being clear and readily comprehensible. Teare J found it difficult to talk of transactions being related unless the terms of those transactions are somehow inter-connected or dependent on each other.
Although the underlying claims arose from similar acts or omissions they were not in a series of related matters or transactions. AIG’s application was refused.
IMPACT AND IMPLICATIONS
The aggregation of claims arising under solicitors’ professional indemnity insurance policies will continue to be a contentious issue, both in relation to small claims that do not exceed an excess and in relation to large claims that may be subject to a limitation of liability.
AIG Europe provides a logical breakdown of sub-clause 2.5(a)(iv) that will assist in applying it to other factual scenarios. It also provides helpful guidance on how the words series and related should be construed in other sub-clauses of clause 2.5. Potential claimants may take heart from Teare J’s rational and neutral approach to the clause, which upholds the underlying rationale of mandatory professional indemnity insurance for solicitors: to protect those clients unfortunate enough to suffer loss as result of their solicitors’ (in)actions.
However, insurers will no doubt already be aware that AIG has been granted permission to appeal, which highlights the importance of the issue at stake here for all concerned parties.
This article was published in Commercial Litigation Journal in November 2015.