Aggregating again: Supreme Court rules on the meaning of "…a series of related…transactions" in solicitors' PI policy
AIG Europe Ltd (Appellant) v Woodman & Others (Respondents)  UKSC 18
Nearly a year ago we considered the Court of Appeal judgment on the 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.
Clause 2.5 of the MTC provides that:
“The insurance may provide that, when considering what may be regarded as One Claim for the purposes of the limits contemplated...
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;
…will be regarded as one claim.” (our emphasis).
The key question in AIG related to the construction of "…a series of related… transactions…" under clause 2.5(a)(iv) for the purpose of determining whether multiple claims should be aggregated. The solicitors were insured under a PI policy with AIG with a limit of cover of £3million per claim. The claims brought against the solicitors totaled more than £10million and, accordingly, aggregation would have left the insured with a significant uninsured exposure.
Recap of the Facts
The underlying claim concerned losses suffered by 214 investors in relation to two failed holiday home development projects; one near Izmir, Turkey (Peninsular Village) and the other in Marrakech, Morocco. The developer was UK property company Midas International Development Plc ("Midas").
Midas instructed the now defunct firm John Howell & Co., subsequently the International Law Partnership LLP, to devise a legal mechanism whereby private investors would have security over the development land. A trust deed was created for each development, with the solicitors acting as the initial trustees, and funds were held pursuant to an escrow agreement. Funds were not to be released unless the value of assets held by the trust was sufficient to cover the investment, known as the "cover test".
Funds were released from the escrow account in tranches in relation to each development but the developments failed as the developer was unable to complete on the purchase of the Peninsular Village site or the shares in the company that owned the Marrakech site. Claims were brought against the solicitors for failing to correctly apply the cover test before releasing investors' funds.
Commercial Court decision
AIG sought a declaration that all the investor claims fell within clause 2.5(a)(iv) in that they arose from "similar acts or omissions in a series of related matters or transactions". As such, it said, they should all be aggregated and the £3million limit applied.
AIG's claim was opposed by the trustees of the trusts in relation to each development whose primary case was that the claims should not be aggregated. The claims were not a "series" as they did not follow on from each other. They were not "related" as the individual investors were not connected and the transactions did not depend on each another. AIG should therefore be liable for the full value of the claims.
Both AIG and the trustees' secondary position was that claims should be aggregated but only in respect of each development.
Mr Justice Teare held that whilst the underlying claims did arise from "similar acts or omissions", they were not a "series of related matters or transactions" because for transactions to be a "series" and "related" they must be conditional or dependent on each other.
Accordingly, the claims could not be aggregated.
Court of Appeal decision
AIG appealed and at an expedited hearing, the Court of Appeal held that the Commercial Court had gone too far in requiring transactions to be dependent on each other. After hearing submissions from the Law Society as an intervener, the court decided that in order for there to be "a series of related matters or transactions" those matters or transactions would need to have an "intrinsic" relationship rather than just an extrinsic relationship with a third factor.
The court commented that, if the relevant transaction was the payment of money out of an escrow account, what would be "intrinsic" would depend on the circumstances of that payment.
The case was remitted to the Commercial Court to determine in accordance with the guidance in its judgment.
Supreme Court decision
AIG appealed to the Supreme Court, arguing that the "intrinsic" relationship requirement had introduced an unwarranted qualification into the concept of "related matters or transactions".
Lord Toulson agreed with AIG that the Court of Appeal's formulation was too narrow, saying it was neither necessary nor satisfactory. It was emphasised that Clause 2.5(a)(iv) had two separate limbs, each of which must be satisfied:
- Firstly, the acts or omissions giving rise to the claims should be similar; and
- Secondly, the acts or omissions must be in a series of matters or transactions which were related.
In identifying whether there was "a series of related matters or transactions" the court first identified the (matters or) transactions and then considered the links between them.
1) Identifying the transactions
Lord Toulson held that the Court of Appeal had taken a narrow view of the transaction in AIG, being the payment of money out of an escrow account. The correct and broader analysis was to view that act as part of the wider transaction: an investment in a particular development scheme under a contractual agreement.
2) Considering the links between them
When viewed objectively, taking the transactions in the round, Lord Toulson found that the claims from each group of investors (in respect of each development) arose from acts or omissions in a series of related transactions. The members of each group were investing in a common development, they were all participants in a standard scheme and were all co-beneficiaries under a trust.
Claims in respect of the Peninsular Village development were to be aggregated and claims in respect of the Marrakech development were to be aggregated but the two were not to be aggregated together – therefore £6m of cover was available.
In our article on the Court of Appeal decision, we discussed how aggregation clauses can operate for the benefit of either the policyholder by enabling the deductible to be reached or the insurer by capping the insurer's total exposure. This was observed by Lord Toulson when he determined that aggregation clauses should not be approached with a predisposition to either a broad or narrow interpretation.
A "neutral" approach to construction also balances protection of the public and the cost and availability of obtaining professional indemnity insurance which was a key consideration in Toulson's judgment.
The judgement does lay down a clear two-stage process for assessing whether there is "a series of related matters or transactions", however, at each stage of that process, a careful assessment of the relevant facts is required, meaning that the outcome will be different in each case. Naturally this leads to a lack of certainty for policyholders and insurers alike. Going forward, solicitors may wish to ensure that the precise scope of the aggregation language in their policies is spelled out more clearly.
If you have questions about aggregation clauses or insurance policies more generally, please contact our Insurance team.