The Court of Appeal has ruled on the proper construction of the aggregation clause in the Solicitors’ Regulation Authority’s Minimum Terms and Conditions of Professional Indemnity Insurance (MTC).
In AIG Europe Ltd v OC320301 LLP & Others, the Court of Appeal considered when multiple claims against a firm of solicitors can be aggregated under the professional indemnity insurance (PII). Where claims are aggregated, they are treated as a single claim for the purposes both of the PII policy’s deductible (or excess) and limit of indemnity, so capping the insurer’s liability.
The MTC are the result of delegated legislation designed to protect the public against loss sustained as a result of a solicitor’s advice. By aggregating claims, the insurers limit (and sometimes deny) individual claimants’ recovery, which cuts directly across the purpose of the MTC.
WHY DOES AGGREGATION MATTER?
As we set out in our December 2015 article, multiple claimants who bring high value professional negligence claims against firms of solicitors often rely on those firms’ PII policies to pay any damages that are awarded.
Until the Third Parties (Rights Against Insurers) Act 2010 comes into force, claimants can only establish whether a claim will be covered by a firm’s professional indemnity insurance once the claim has been proven. This is clearly a risky and potentially expensive business: no potential claimant wants to bring a claim to trial only to find that the defendant firm is insolvent and the claim is not covered by its PII policy. Potential claimants therefore often need to assess at an early stage whether a claim is likely to be covered by reference to the MTC.
Unsurprisingly, claimants and insurers often disagree over the circumstances in which multiple claims should be aggregated. Claimants may argue for aggregation where it enables a number of small claims to be compounded so that only a single deductible applies and a claim may be brought against the insurer for the balance of loss. Conversely, insurers will seek the aggregation of multiple large claims in order to decrease the sum they are liable to pay out. In such circumstances the defendant firm will be liable to pay the balance, assuming of course that it is solvent. Where the defendant firm is insolvent, claimants will be unable to recover damages beyond those paid out by the insurer.
In this case the claimant insurer (AIG) sought a declaration that claims brought by 214 individuals against the defendant firm of solicitors, The International Law Partnership LLP (ILP), should be aggregated and treated as a single claim under ILP’s PII 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 are due to be determined in Spring 2017, so for the purpose of the proceedings it was necessary to assume that the allegations against the defendant firm 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 ILP to advise on 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 ILP and became party to an escrow agreement with ILP as escrow agent. Separate trusts were established for the developments in Turkey and Morocco to provide security for the investors in the event that the developments failed. Pursuant to loan and purchase agreements ILP was to apply a ‘cover test’ to determine that the required level of security was in place in the relevant trust for each investment. Once the cover test was passed ILP was entitled to release the investment from the escrow account and admit the investor to that trust.
- Money was paid out of the escrow account 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 is that ILP 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 claim to have lost over £10 million.
THE RELEVANT CLAUSE
Under ILP’s PII 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 (clause 2.5). 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.
Clause 2.5, which sets the minimum level of cover that every solicitor’s PII 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:
(a) all claims against any one or more insured arising from:
(i) one act or omission;
(ii) one series of related acts or omissions;
(iii) the same act or omission in a series of related matters or transactions;
(iv) similar acts or omissions in a series of related matters or transactions
(b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.’
FIRST INSTANCE DECISION IN THE COMMERCIAL COURT
It was common ground that the relevant sub-clause was 2.5(a)(iv). Teare J considered whether the underlying claims fell within its two elements:First instance decision in the Commercial Court
- Did they arise from ‘similar acts or omissions’; and
- Did those acts or omissions occur ‘in a series of related matters or transactions’?
The judge found that all 214 claims arose from ‘similar acts or omissions’. However, he held that in order for the relevant transactions to be related they must be dependent on each other. He said (paragraph 40): “… the most natural meaning of the phrase ‘a series of related matters or transactions’ in the context of solicitors’ insurance policy is, in my judgment, a series of matters or transactions that are in some way dependent on each other.” (Our emphasis)
The claims arose out of transactions that were not dependent on each other and, therefore, not related. AIG’s application was accordingly refused. AIG was granted permission to appeal and an expedited hearing on issues of principle only, came before the Court of Appeal in April 2016.
THE ARGUMENTS BEFORE THE COURT OF APPEAL
The question before the court was whether the acts of negligence or breach of duty that resulted in the 214 claims occurred in a series of related transactions. Because of the SRA’s interest in the construction of the aggregation clause in the MTC, and the importance of the issue generally, the court gave the SRA permission to intervene and make oral submissions.
- AIG’s case was that the judge had been wrong to infer in the phrase ‘a series of related matters or transactions’ a requirement that the transactions must be dependent on each other. Rather, AIG submitted, any degree of relatedness was sufficient.
- The trustees, on behalf of the 214 claimants to the main claim, supported the first instance judgment.
- The SRA submitted that the phrase ‘a series of related matters or transactions’ did require some relationship between the transactions. Inter-dependence would satisfy that requirement but the sub-clause could also be interpreted more widely. The relationship should be at least an intrinsic connection rather than a connection through an external common factor.
THE COURT OF APPEAL’S CONSTRUCTION
The court held that the word ‘series’ implies some connection between the transactions that constitute that series. Those familiar with the works of Jane Austen may enjoy the illustration that Lord Justice Longmore drew from the novel Emma (paragraph 17): ‘When the mortified Mr Elton left Highbury “after a series of what had appeared to him strong encouragement” it was the same lady who had, in his optimistic opinion, given him that strong encouragement (Emma, volume 2, chapter 4)’.
The question was then, what degree of connection was required?
An intrinsic connection
The court preferred the construction submitted by the SRA. It said (paragraph 19): “In our view it must … be an intrinsic rather than a remote relationship. That means that there must be a relationship of some kind between the transactions relied upon rather than a relationship with some outside connecting factor, even if that extrinsic relationship is common to the transactions.” (Our emphasis)
The judge at first instance had therefore gone too far when he implied the word ‘dependent’ into the phrase series of ‘related matters or transactions’, for “there can be degrees of connection (or inter-connection) which are less than ‘dependence’” (paragraph 20).
Availability of wide aggregation clauses
The court recognised that it was replacing the word inferred by the judge, ‘dependent’, with another inference, ‘intrinsic’. However, the court found it necessary to qualify the degree to which the transactions in the series must be related because the case put forward by AIG, that any degree of relatedness would do, would make the aggregation clause “impossibly wide” (paragraph 21) which would result in it becoming almost meaningless. The court found it was necessary to imply the unifying factor from the general context rather than the express language in the clause because that language was both imprecise and deliberately avoided the wider language that could have been used.
It was important to construe the critical words in the clause against the background of the availability of well-known wider aggregation clauses. The judgment includes long citations from the decision of the House of Lords in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd . The Lloyds judgment sets out this background and includes examples of the language used in very wide aggregation clauses, such as:
- “any claim or claims arising from one originating cause” (AXA Reinsurance (UK) v Field ); and
- “arising out of all occurrences of a series consequent on or attributable to one source or original cause” (Municipal Mutual Insurance Ltd v Sea Insurance Co Ltd ).
Clauses such as these may enable acts or omissions to be related by virtue of the fact that they are all attributable to a particular originating cause; in other words, because they all have the same ‘parent’. Then the connection between the acts or omissions is extrinsic rather than intrinsic. However, the clause in the Lloyds case, which referred to claims resulting from ‘any single act or omission (or related series of acts or omissions)’, and also clause 2.5 of the MTC, are narrower.
History of the clause
The Lloyds judgment caused concern among the insurance market for solicitors’ PII because it narrowed the effect of Clause 2.5, as it was then drafted, with the effect that fewer claims would be aggregated and insurers would face larger and more frequent liabilities. The court was referred to an article in the Law Society Gazette dated 27 January 2005 that succinctly summarises the position following the Lloyds judgment (paragraph 29): “The qualifying insurers had assumed that the wording of clause 2.5 would enable them to treat as one claim multiple claims arising not only from a series of related acts but also from a series of similar acts. The House of Lords’ decision …has established that the qualifying insurers’ assumption was wrong.” (Our emphasis)
There was concern that insurers would withdraw from the market leading to an increase in rates for solicitors. In response to insurers’ requests that clause 2.5 be amended and in consultation with its external advisors, the Law Society Council therefore agreed that it be revised to the current wording.
AIG submitted that this history of clause 2.5 indicated that the judge at first instance’s construction of the clause was too narrow because it was too similar to that adopted by the House of Lords in the Lloyds case. The trustees, on the other hand, submitted that it demonstrated that the council and the qualifying insurers could have selected broader language, but chose not to. The court recognised the merit in both arguments but was persuaded that the council and the insurers did not intend that any degree of relatedness would be sufficient.
Referral back to the Commercial Court
The court did not review the evidence or receive submissions on fact so it was not in a position to make findings of fact or to apply the facts to its preferred construction. The court therefore remitted the entire case back to the Commercial Court, where it is to be determined in accordance with the guidance in the appeal judgment, in particular the court’s conclusion that (paragraph 31(1)): “the true construction of the words ‘in a series of matters or transactions’ is that the matters or transactions have to have an intrinsic relationship with each other, not an extrinsic relationship with a third factor”. (Our emphasis)
Although the court was not in a position to make findings of fact, it did provide two hypothetical scenarios by way of guidance as to what an intrinsic relationship between transactions might look like in practice (paragraph 31): “If the contracts or the escrow account in respect of one investor referred to the contract or the escrow accounts of the other investors, there might be the relevant intrinsic relationship; if they do not, there might not be”, and “if there was a specific requirement that investors’ funds were to be held in a separate designated account for each investor that might militate against a finding that there was an intrinsic relationship.”
The Court of Appeal has confirmed that the true construction of clause 2.5 is marginally broader than the construction favoured by the court at first instance. However, potential claimants will take comfort from the court’s inference of the word ‘intrinsic’, which upholds the underlying rationale of mandatory PII for solicitors: to protect those clients unfortunate enough to suffer loss as result of their solicitors’ acts of negligence or breach of duty.
All eyes are now back on the Commercial Court, to see what ‘an intrinsic relationship’ between matters or transactions will look like in practice.
This article was co-written by David Niven and trainee solicitor Elisabeth Mason, and published in Commercial Litigation Journal in June 2016.