Aggregation considered under the Minimum Terms and Conditions for solicitors' professional indemnity insurance

In Baines v Dixon Coles and Gill [2020] EWHC 2809 (Ch), the High Court has ruled that a number of claims brought against a law firm following the misappropriation of money from client accounts could not be aggregated under the Minimum Terms and Conditions for solicitors professional indemnity insurance. This was on the basis that each theft resulted in separate losses and could not be linked either by the method of concealment or by an overarching motivation for the acts.

Background

Solicitors firm Dixon Coles and Gill (DCG) discovered in early 2016 that one of its equity partners, Mrs Box, had been dishonestly making unauthorised payments from client accounts. In March 2017 Mrs Box pleaded guilty to 12 offences involving the misappropriation of over £4 million and was sentenced to 7 years imprisonment.

Clause 2.1 of the Law Society’s Minimum Terms and Conditions (MTC) for solicitors’ professional indemnity insurance requires all solicitors to carry professional indemnity insurance with the minimum sum for any one claim being £2 million. In this case, various claims were brought against DCG from clients whose funds had been misappropriated by Mrs Box, and the firm’s professional indemnity insurance provided for the minimum permissible cover. This meant that, if the clients’ claims were aggregated, the total sum would far exceed the indemnity limit of DCG’s policy and therefore result in significant personal liability for DCG’s remaining equity partners, Mr Gill and Mrs Wilding.

Clause 2.5 of the MTC governs the aggregation of claims, providing 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."

In this case, the insurer asserted that, notwithstanding that Mrs Box misappropriated funds from different parties, the various claims could be aggregated as “one claim” either on the basis that the claims arose from “one act or omission” (pursuant to clause 2.5(a)(i) MTC) or that they were “one series of related acts or omissions” (pursuant to clause 2.5(a)(ii) MTC).  This would cap the insurer’s liability at £2 million pursuant to the relevant policy. The Claimants, however, asserted that  the claims by each separate client should be treated as separate claims and therefore each has the benefit of indemnity cover of £2 million.

The question for the Court was therefore whether the insurer was entitled to aggregate all the various claims for the purpose of the £2m indemnity limit under DCG’s professional indemnity insurance.

Decision

The High Court referred to Lord Toulson’s Supreme Court judgment in AIG Europe Limited v Woodman & Others to confirm that the construction of what is meant by “one claim” for the purposes of the MTC had to be “undertaken on a neutral, objective basis taking matters in the round”.

The possibility of aggregating the claims under clause 2.5(a)(i) of the MTC was quickly dismissed by the Court on the basis that the numerous thefts were against different individuals over multiple years. The Court emphasised that, even though Mrs Box’s intention may have been the same throughout, this was not enough to unify them for the purposes of becoming “one act or omission”.

The real issue that the Court had to grapple with was whether Mrs Box’s misappropriations were “related acts or omissions” that thus fell within clause 2.5(a)(ii) of the MTC.  Lord Toulson in AIG had observed that “use of the word “related” implies that there must be some interconnection” and the Court in this case examined whether there was the necessary “interconnection” here.

The Claimants argued that they each had a separate cause of action which was separate and distinct from each other.  However, the insurer argued that the way in which Mrs Box had committed the thefts, by engaging in ‘teeming and lading’ (i.e. falsifying accounting entries to hide the fraudulent removal of funds by using multiple accounts), tied the claims together as “related acts”.  Further, that Mrs Box’s dishonesty was a series of related acts because they were all part of the same fraud. The Court, however, rejected the insurer’s arguments. It found that teeming and lading was simply a way of concealing the thefts and was not the relevant act for the purpose of aggregation – what had to be related for the purpose of aggregation were the thefts themselves:

“It was not Mrs Box’s dishonesty which was the proximate cause of their loss… Dishonesty is not an act, it is a state of mind. What caused these claimants’ losses were the individual thefts from them. True it is that these were motivated by dishonesty but it is the “acts” that matter, not the motivation for the “acts”. These acts resulted in different losses to different clients. There cannot, in my view, be said to be a single loss because I am satisfied that the acts of theft were not related on a proper construction of MTC 2.5(a)(ii). Furthermore, I simply do not see that there is sufficient “interconnection” between the acts, to use the words of Lord Toulson in AIG.”

The fact that the acts were committed by the same person and concealed by the same process was not sufficient and so there could not be said to be an aggregated loss on a proper construction of MTC 2.5(a)(ii). As such, each separate claim would be subject to its own £2 million indemnity limit

Comment

The High Court’s decision in the present case demonstrates a narrow interpretation of the aggregate provision in the MTC. That said, the judgment stressed that establishing the required connection for the purposes of aggregation is a fact-sensitive matter.