Court of Appeal construes aggregation provision in minimum terms and conditions of professional indemnity insurance

The Court of Appeal has varied the decision of the High Court in AIG Europe Limited v OC320301 LLP and Others [2015] EWHC 2398 (Comm) and provided further guidance on the construction of the aggregation clause contained in the Minimum Terms and Conditions of Professional Indemnity Insurance (as published by the Solicitors' Regulation Authority) required to be incorporated into compulsory liability insurance for solicitors. At the first instance decision, Teare J held that, in order to form a "series of related matters or transactions", the relevant transactions had to be dependent on each other. The Court of Appeal held that the appropriate test was whether the transactions had an intrinsic relationship with each other, not an extrinsic relationship with a third factor. The case has been remitted to the Commercial Court to be determined on the facts in accordance with the guidance given by the Court of Appeal.

Tom Leech QC, of the Herbert Smith Freehills advocacy unit, appeared for the Trustees.

Background

The dispute relates to underlying claims arising out of services provided by a solicitors' firm, The International Law Partnership ("ILP"), which had insurance cover with AIG Europe Limited ("AIG"). ILP was engaged by a UK property development company, Midas International Property Development ("Midas"), in connection with two developments of holiday homes in Turkey and Morocco. ILP held funds on behalf of investors, who upon release of the funds became beneficiaries under a trust which was intended to hold security over the land to be purchased. Before the release of funds from the escrow to the local Midas developer the trustees (who were also members of the firm) had to satisfy the Cover Test. On various occasions ILP authorised the release of monies out of the escrow. However, the local Midas companies were unable to complete the contracts for the purchase of the land in Turkey or in Morocco which led to the failure of the two developments. Midas entered liquidation and it was found that all the investment monies held in escrow had been paid out.

214 investors have brought claims alleging that ILP committed breaches of the escrow agreements and failed to apply the Cover Test correctly when releasing the investment funds, with the consequence that the investors have lost over £10 million. The investors allege, inter alia, breach of contract, negligence, breach of fiduciary duty and misrepresentation against ILP. A trial date is set for late 2017. 

The MTC Aggregation Clause

ILP's cover with AIG has a limit of liability of £3 million per claim and incorporates the aggregation clause contained in clause 2.5 of the Minimum Terms and Conditions (MTC), entitled "One Claim", which provides that:

"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

and

(b) all Claims against one or more Insured arising from one matter or transaction will be regarded as One Claim."

AIG sought a declaration that the 214 claims were to be considered "One Claim" for the purpose of the MTC aggregation clause, because the transactions at issue arose from "similar acts or omissions in a series of related matters or transactions". If this is correct, AIG's liability would be limited to £3 million. In the absence of such declaration AIG was potentially liable to indemnify ILP for the full amount of the claims.

First Instance

The High Court refused to grant AIG the declaration sought. Teare J accepted that the claims arose from "similar acts or omissions" on the part of ILP but he did not find that the similar acts or omissions occurred in a "series of related matters or transactions".

It was common ground on the pleadings that the transactions were not conditional or dependent upon each other and Teare J found that "the most natural meaning of the phrase "a series of related matters or transactions" in the context of a solicitors' insurance policy is, in my judgment, a series of matters or transactions that are in some way dependent on each other. It is difficult to talk of transactions being related unless their terms are in some way inter-connected".

There was no previous authority on the interpretation of the MTC aggregation clause. Permission was given to appeal.

For full discussion of the first instance decision, please see our earlier e-bulletin, here.

Appeal
 
The parties' contentions

AIG submitted that there was no justification for Teare J's finding that "a series of related matters or transactions" required the transactions to be dependent on each other. It further contended that the only possible construction of the phrase was that there was only one claim.

The Trustees (of the trusts that are subject to the underlying claims) supported the judgment of Teare J.

Given the importance to the legal profession of the construction of the aggregation clause in solicitors' professional indemnity insurance, the Solicitors' Regulation Authority ("SRA") was granted permission to intervene. The SRA argued that the MTC required a relationship between the matters or transactions. Inter-dependence would satisfy that requirement but there was also room for a wider interpretation, based on at least some "intrinsic connection" between the relevant matters or transactions, not merely a connection with some external common factor.

Decision

The Court of Appeal held that the critical question was whether the negligence or breach of duty occurred "in a series of related … transactions". Longmore LJ considered that the word "series" itself usually implies some connection between the events or concepts which constitute the series but the question then was how that connection or relationship was to be established. There must be an intrinsic rather than a remote relation i.e. a relationship of some kind between the transactions relied on rather than a relationship with some outside connecting factor, even if that extrinsic relationship was connected to the transactions. The Court of Appeal concluded, therefore, that the judge went rather too far when he said that the transactions had to be "dependent on each other" before aggregation could occur and did not think that the terms of the policy require the degree of closeness contemplated by "dependence".

In construing the critical words of the MTC aggregation clause, the Court of Appeal had regard to the background knowledge of the availability of wide aggregation clauses as well as narrow ones. The fact that the aggregation clause contained in the MTC was not formulated in the widest form of aggregation clause indicated that it cannot, therefore, have been intended to have the same width as clauses drafted in such terms. In this regard, the Court of Appeal held that as the express language of the aggregation clause ("a related… transaction") is both imprecise and deliberately avoids the available wide formulations, it was necessary to imply the unifying factor from the general context. It was for this reason that it concluded that the relationship must be an intrinsic relationship between the relevant transactions.

The Court of Appeal also had regard to the published history of the origin of the aggregation clause which, in its judgment, gives some support to the argument that it was not intended that the phrase "a series of related transactions" be interpreted in such a manner that any relation, however loose, will suffice. It held that there must be some restriction on the concept of relatedness and the most satisfactory approach was that the relation must be an intrinsic not an extrinsic one.

The Court of Appeal was not in a position to make findings of fact for the purposes of the aggregation clause. It considered that there might be the necessary intrinsic relationship if the escrow accounts or contracts of the investors referred to each other. On the other hand, if there was no such reference then the requisite intrinsic relationship might not arise. The case was therefore remitted to the Commercial Court to determine the facts.

Comment
 
Prior to the first instance decision in this case, there was no authority on the construction of the aggregation clause in the MTC. The test applied by the High Court in construing the phrase "a series of related matters or transactions" went too far in requiring that the matters or transactions had to be dependent on each other. In the Court of Appeal's judgment the question is whether the matters or transactions have an intrinsic relationship with each other, not an extrinsic relationship with a third factor. This in turn will depend upon the findings of fact. The case also reinforces that, given the availability of wide aggregation clauses, where the parties have chosen a narrower aggregation clause, the court will give effect to that decision.

Professional indemnity insurers and solicitors will wish to consider the implications of the Court of Appeal's decision in the context of aggregation of claims. Given that the decision focused heavily on the wording in the MTC aggregation clause it may be that it will have limited application outside the realm of solicitors' professional indemnity insurance.

While the Court of Appeal's decision provides greater scope for aggregation of claims than the first instance decision where there is an intrinsic relationship between the relevant matters or transactions, there is likely to remain room for argument on the facts on whether or not the relevant intrinsic relationships exists. What is clear, however, is that the relevant matters or transactions need not be inter-dependent, but conversely a relationship with some outside connecting factor (such as commonality of geography) will not be sufficient for them to be aggregated.