Aggregation clauses: Court of Appeal rules on the meaning of "…a series of related…transactions" in solicitors' PI policy
AIG Europe Ltd v OC320301 LLP  EWCA Civ 367
This decision has since been appealed and judgment given by the Supreme Court on 22 March 2017. See our update on the Supreme Court decision.
On 14 April 2016, the Court of Appeal handed down its judgment on the true construction of an aggregation clause contained at 2.5(a)(iv) of the Law Society Minimum Terms and Conditions (MTC) required to be incorporated into solicitors' professional indemnity policies.
In the context of insurance policies, aggregation clauses allow two or more claims to be treated as a single claim where the claims are sufficiently connected by a unifying factor.
Aggregation can work in favour of the insurer or the policyholder depending on the nature of the claim(s), the size of the losses and wording of the cover. On the one hand, it may be advantageous to a policyholder if multiple claims are treated as a single claim where a threshold value is required before an insurer will pay out (a deductible). On the other hand, where an upper limit of cover is imposed on a per claim basis, it may be in the policyholder's interest if claims are not allowed to proceed on a stand-alone basis.
AIG Europe Ltd v OC320301 LLP concerned losses by 214 investors (the Underlying Claims) suffered when two property developments (in Turkey and Morocco) collapsed following the property developer's failure to complete purchases of the land. The Underlying Claims, in excess of £10million, were brought against a firm of solicitors, which had allegedly released funds from an escrow account, without having adequate security in place.
The solicitors were insured under a PI policy with AIG with a limit of cover of £3million per claim. AIG sought a declaration from the Court that the Underlying Claims could be aggregated (treated as a single claim) which would reduce AIG's potential liability from £10million to £3million. In doing so, AIG proposed that the claims arose from "similar acts or omissions in a series of related matters or transactions" pursuant to 2.5(a)(iv) of the MTC.
Intrinsic relationship required, dependency not necessary
At first instance, the Commercial Court refused to grant the declaration for AIG, finding that "a series of related matters or transactions" requires the related matters or transactions to be somehow dependent on each other.
However, the Court of Appeal disagreed. Implying that transactions must be "dependent on each other" before aggregation could occur was a step too far. The Court held that inter-connection is required, but this is less than dependency. The resulting conclusion was that aggregation may occur when where transactions have an intrinsic relationship with each other, but not an extrinsic relationship with a third factor.
What does this mean for policyholders?
The decision is clearly of importance to both solicitors and their PI insurers, but it should also be of wider interest to policyholders in general. The Court's interpretation of the aggregation clause within the MTC is likely to have some influence on aggregation clauses on a wider scale and it serves as a reminder to policyholders to ensure their level of cover is adequate. If the policyholder's business is such that multiple high value claims with a unifying factor are likely to arise, policyholders should ensure they do not have an unduly restrictive cap per claim. Similarly, if multiple lower value connected claims are more likely to occur for a given business, they should seek to negotiate a lower level deductible. In many circumstances, the nature of claims may be impossible to predict but it is crucial that policyholders understand their cover.