Aggregation – a series of impossible missions?

A decision on the interpretation of the aggregation clause in the SRA minimum terms and conditions (MTC) has just been handed down by Mr Justice Teare in the Commercial Court, AIG Europe Ltd v OC320301 LLP.

Background

The issue arises from purchases of holiday homes in two developments: one just outside Marrakesh in Morocco and another, Peninsula Village, in Turkey. Purchasers deposited money in an escrow account held by the solicitor defendants in the underlying professional negligence litigation.

The purchasers’ claim against the solicitors is that they released the money from the escrow account to the companies responsible for the Marrakesh and Peninsula Village developments contrary to the terms on which they held the escrow account and with inadequate security. The money seems to have been released on a number of occasions between April 2007 and October 2008.

The purchasers’ claim against the solicitors totals £10 million and has yet to be determined. The defendant solicitors’ limit of indemnity under their professional indemnity insurance is £3 million any one claim. Their self-insured excess is £7,500 each and every claim subject to an overall aggregate limit of £22,500. All of the claims seem to fall in a single indemnity year.

The insurers argued that the purchasers’ claims should all be aggregated under the terms of the aggregate clause permitted (but not required) by the SRA’s MTC because they all arose from “similar acts or omissions in a series of related matters or transactions”. The result would be that the purchasers’ would recover £3 million subject to the aggregate limit of £22,500 but the remainder of their claim, £6,977,500 odd, would be uninsured (and probably irrecoverable).

In contrast, the purchaser claimants’ primary case was that their claims did not arise from a “series of related matters or transactions”, so that each purchaser fell to indemnified individually. The result would be that, subject only to the aggregate excess of £22,500, each claimant would make a full recovery. Their secondary case was that the Marrakesh and Peninsula Village transactions should be treated as separate transactions so that the claimants would receive an indemnity of £3 million for each transaction or £6 million in total (again subject to the aggregate excess of £22,500).

The decision

It seems to have been conceded by the insurer that the claims all arose from “similar acts or omissions” in releasing money from the escrow account held by the solicitors so that argument centred on the question whether the payments from the escrow account should be treated as a “series of related matters or transactions”.

The meaning of a “series” was the focus of intense scrutiny. Teare J considered Australian and English authority (Distillers v Ajax Insurance and Countrywide Assured v Marshall) but they concerned different policy wordings and were of limited assistance. He concluded that events, in this case payments from the escrow account, did not occur in a sequence simply because they happened one after another. To constitute a “series”, there had to be some connection linking occurrences which would otherwise be separate. In this case there was no such connection: the transactions were not interdependent and there was no connection between the purchasers beyond the fact that, in some cases, they were husband and wife.

Conclusion

The decision, the first on construction of the aggregation clause in the MTC, is surprising because the MTC’s aggregation clause was specifically drafted to ensure the opposite outcome following the House of Lords’ decision in a pension transfer case, Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Co Ltd.

We anticipate that this may not be the end of the story and, if so, it will remain to be seen whether the Court of Appeal imposes a more purposive construction on the MTC’s aggregation provision. Whatever the outcome, there are implications:

• Aggregation is highly fact sensitive and dependent on policy wording. Also, from an insurer’s point of view, there are cases where, if the claims were lower than in this case and/or the excess higher, it will be in the insurer’s interest to “disaggregate” – not unusual in group litigation cases where individual claims may be very modest. 
• Conversely, aggregation will be in the insurer’s interest if – as is the case here – the individual claims are large. No doubt solicitors’ insurers will anxiously review their exposure to group claims in the current renewal season including their reserves for existing group claims and their insureds’ exposure to such claims in the future. That may make this year’s renewal season more tense than usual – any decision from the Court of Appeal will not appear until long after 1 October 2015.
• In most group litigation cases, it is difficult to see how insurers will be able to demonstrate the necessary connection between individual claims. That is bound to have an effect on premiums for firms with exposure to group claims.
• Policy construction is unpredictable and its outcome uncertain. In the light of this decision, it is difficult to envisage circumstances where aggregation will apply where the insurer faces claims by multiple claimants/investors/purchasers.

It will be interesting to see how matters develop.