Aggregation considered in Court of Appeal under the Minimum Terms and Conditions for solicitors' professional indemnity insurance

In Baines & Anor v Dixon Coles & Gill (A Firm) & Ors [2021] EWCA Civ 1211, the Court of Appeal has upheld the first instance decision and found that claims brought by clients against a law firm following the misappropriation of money by a partner of that firm over a series of years could not be aggregated. This is because an extended course of dishonest conduct committed by the same person is insufficient to satisfy the requirement that the acts or omission are "related".

Background

In early 2016, solicitors firm Dixon Coles and Gill (DCG) discovered 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.

The SRA's (Solicitors Regulation Authority) Indemnity Insurance Rules in force at the time required solicitors to take out and maintain qualifying insurance with a participating insurer that complied with the Law Society’s Minimum Terms and Conditions (MTC). DCG had a professional indemnity policy with HDI Global Specialty SE (HDI) (the Policy). The Policy had a limit of £2 million for any one claim and contained an aggregation clause which closely followed the wording of the MTC aggregation clause.

Various claims were brought against DCG from clients whose funds had been misappropriated by Mrs Box. If the clients’ claims were aggregated, the total sum would far exceed the limit of indemnity under the Policy and therefore result in significant personal liability for DCG’s remaining equity partners, Mr Gill and Mrs Wilding.

Clause 6.1 of the Policy governed the aggregation of claims and provided that:

"For the purposes of the Limit of Indemnity

(i) All Claims against anyone or more Insured arising from:

(a) one act or omission;

(b) one series of related acts or omissions;

(c) the same act or omission in a series of related matters or transactions;

(d) similar acts or omissions in a series of related matters or transactions;

and

(ii) All Claims against any one or more Insured arising from one matter or transactions;

will be regarded as one Claim."

At first instance, the High Court ruled that the claims could not be aggregated under the MTC (see our blog post here). 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.

On appeal HDI asserted that, notwithstanding that Mrs Box misappropriated funds from different parties, the various claims could be aggregated because either:

• the claims arose out of a “series of related acts or omissions” (pursuant to clause 6.1(i)(b) of the Policy); or
• the claims amounted to one "Claim" as defined in the Policy.

If either appeal was successful, HDI's liability would be capped at £2 million pursuant to the Policy. The claimants, however, asserted that the claims by each separate client should be treated as separate claims such that each had the benefit of a £2 million limit.

Decision

"Series of related acts or omissions”

HDI argued that each of the thefts committed by Mrs Box constituted "one series of related acts or omissions" because "they all formed part of an extended course of dishonest conduct on multiple occasions over many years". HDI accepted that whether there is "one series of related acts or omissions" will be a fact sensitive question and argued that in the present case there was nothing to show a break in the dishonest conduct of Mrs Box.

The Court of Appeal rejected this argument relying on the reasoning given by Lord Hoffman in the House of Lords in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] UKHL 24. Consistent with the conclusions given by Lord Hoffman in Lloyds TSB, the Court of Appeal found that for a series of acts or omissions to be "related", a unifying factor must be identified, expressly or impliedly, in the wording of the clause. The Court of Appeal identified that the unifying factor in Clause 6.1 of Policy was that the claims had to "arise from" one series of related acts or omissions:

“If there is a series of acts A, B and C, it is not enough that act A causes claim A, act B causes claim B and act C causes claim C. What is required is that claim A is caused by the series of acts A, B and C; claim B is also caused by the same series of acts; and claim C too”.

The fact that the dishonest partner stole from client X and then from client Y did not mean that the corresponding claims arose from a sufficiently unified “series of related acts”. Instead, it would have been necessary for the claims to arise from a combination of both thefts, before aggregation would occur. As the Court of Appeal explained:

"It is not enough that claims A, B and C result from acts A, B and C respectively and that the acts are related; what needs to be shown is that claims A, B and C each result from the series of acts A, B and C.”

The Court of Appeal left open the possibility that the decision might have been different if it had been shown that all the thefts had come from the firm's client account (which was not the case here).

One Claim

The Court of Appeal dealt with this aspect of the appeal briefly. The definition of 'Claim' in the Policy included "an obligation on an Insured Firm...to remedy a breach of the Solicitors' Accounts Rules 1998". HDI relied on this to argue that when DCG notified HDI of the shortfall in its client account as a result of Mrs Box's thefts, this was a 'Claim' and, having recovered the limit of indemnity in respect of this 'Claim', DCG could not extend its protection by treating subsequent claims as separate claims.

The Court of Appeal disagreed noting that the same set of facts may sometimes enable two or more claims to be made by an insured. In this case, Mrs Box's thefts gave rise both to the right of DCG to claim the amount needed to remedy the shortfall in the client account and to a separate claim to indemnify it against liability to third parties, namely its clients. Whether DCG had a right to indemnity for the latter turned on whether those claims were to be aggregated either with each other or with other claims which had already been paid out. The fact that DCG might have received payment in respect of a deemed claim for the shortfall in client account was irrelevant.

Comment

While some may view this decision as part of a trend towards a narrow interpretation of the MTC aggregation clause (as seen, for example, in AIG Europe Limited v Woodman and others [2017] - see our blog post here), it is important to remember, as the Court of Appeal stressed in this case, that applying aggregation language is a fact sensitive matter. It is a reminder to all parties to an insurance contract of the importance of choosing the most appropriate aggregation wording.