The UK Supreme Court has handed down its decision in AIG Europe Limited v Woodman and others [2017] UKSC 18. In doing so, the Supreme Court reversed the decision of the Court of Appeal.

It found, broadly, for the insurer (AIG) in its interpretation of the meaning of the words “a series of related matters or transactions” in the relevant aggregation clause, but in practice this should not mean that policyholders should fear the worst.

While this dispute concerns a clause in a solicitors’ professional indemnity policy (the Policy), it has wider implications for other liability insurance contracts.

Background

The insurance dispute arose out of two sets of claims brought against two now-defunct firms of solicitors in relation to separate holiday-resort development schemes in Turkey and Morocco.

The underlying claimants were investors in the schemes, as part of which their investment funds were to be held in escrow by the solicitors. The solicitors acted as trustees of two trusts that had been established to own (or hold a charge over) the development property as security for the investors. The idea was that the solicitors would hold the funds until such time as certain ‘cover tests’ (relating to the value of the trust assets) were met. The funds could then be released to the scheme developers.

The developers were subsequently wound up, however, following an FSA prohibition on them receiving further investments in relation to the developments. Unfortunately, it became apparent that the money held in escrow had been paid out prematurely.

The investors therefore sued the solicitors, alleging breaches of contract, trust and fiduciary duty, misrepresentation and negligence. The total claims were for over £10 million.

The Policy

The limit of liability in each Policy was identified as £3 million in respect of any one claim.

AIG commenced proceedings, seeking a declaration that the two sets of claims against the solicitors should be construed as a single claim under the Law Society’s ‘Minimum Terms and Conditions of Solicitors’ Professional Indemnity Insurance’ (MTC), which in each case were incorporated into the Policy.

The MTC (and therefore the Policy) included an aggregation clause, the relevant part of which for the purpose of the insurance dispute was:

“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 …

(iv) similar acts or omissions in a series of related matters or transactions …

will be regarded as One Claim.”

Arguments before the Court

At first instance, sub-clause (iv) was divided into two for the purpose of legal argument.

  1. In support of AIG, the Court found a common thread running through all the investor claims was the solicitors’ failure to apply the cover tests appropriately prior to releasing the monies. There was therefore a “real” and “substantial” degree of similarity between the claims, justifying AIG’s argument that all the claims arose from “similar acts or omissions” (which was not challenged in the Supreme Court).
  2. Mr Justice Teare nonetheless rejected the proposition that the claims were “in a series of related matters or transactions”, on the basis that the transactions entered into between the developers and each investor were not “conditional” or “dependent” upon one another.

On an expedited appeal relating to the second limb above, the Court of Appeal (endorsing the submissions of the Law Society as intervening party) held that the “matters or transactions have to have an intrinsic relationship with each other, not an extrinsic relationship with a third factor” [emphasis added]. Further, this was held to be the case even if the outside connecting factor was common to all of the transactions.

AIG was permitted to appeal to the Supreme Court, again on an expedited basis. AIG challenged what it viewed as the Court of Appeal’s unreasonable and unwarranted qualification to the concept of “a series of related matters or transactions”. It argued that the clause may fall to be interpreted in a wide variety of factual scenarios and that it was wrong for the Supreme Court to seek to impose a greater degree of certainty than the natural meaning that those words permitted.

Lord Toulson, handing down the unanimous Supreme Court judgment, supported AIG in that regard. He found particular difficulty in the Court of Appeal’s introduction of the “elusive” term ‘intrinsic’ when assessing the relationship between two transactions and determined that such a formulation was not necessary or satisfactory.

Instead, the relevant transactions must be assessed objectively and “in the round”, i.e., not from the viewpoint of any particular party. There “must be some inter-connection between the matters or transactions, or in other words … they must in some way fit together”.

On the assumed facts before it, the Supreme Court also took, significantly, a different view from the Court of Appeal regarding the identity of the relevant matter or transaction. The Court of Appeal had held that the relevant transaction in each case was the payment of money out of an escrow account when it should not have been released. The Supreme Court considered this to be too narrow; such an act might have given rise to a claim, but it had occurred in the context of a wider transaction – the investment under contractual arrangements that included the trust and escrow agreements.

The Supreme Court therefore found that:

  • The transactions entered into by the investors in Turkey were connected in significant ways
  • The transactions entered into by the investors in Morocco were similarly connected
  • The claims of each of those groups of investors arose from acts or omissions in a series of related transactions

Nonetheless, the Supreme Court was not prepared to aggregate the Turkish and Moroccan claims, even though the alleged acts or omissions on the part of the solicitors were similar (or even, strikingly similar).

While the development companies for the two schemes were related and the legal structures for the development projects were similar, the projects themselves were not connected.

There were, therefore, two claims for the purpose of the Policy.

Implications for policyholders

The Supreme Court reached the conclusion that the process of determining whether a series of matters or transactions are related is “an acutely fact sensitive exercise”.

This lack of certainty may disappoint many interested parties who were hoping for clarity.

Equally, the financial effects of aggregation clauses (and the impact of the Supreme Court’s decision in the case before it) cannot be viewed from only one perspective. At times, a fluid interpretation of an aggregation clause – whether it relates to the indemnity limit in the policy or the limit of the policy excess – may turn out on the facts to be to the advantage of policyholders.

In any given case, one person’s uncertainty is another person’s flexibility.