To Aggregate or Not to Aggregate – Unlimited Exposure For Insurers?

Some useful legal insights from Christopher Stanton, Member of the Forum of Insurance Lawyers and Partner of Keoghs LLP and Elaine Ibbotson, Senior Solicitor at Keoghs LLP;

The Court of Appeal’s judgment in Discovery Land¹ has limited the scope of some aggregation clauses and raised concern amongst solicitors’ PII insurers that they may be exposed to unlimited liabilities which they previously assumed would aggregate as one claim. In this article we consider developments in case law, the constraints imposed by statute and the SRA’s Minimum Terms and Conditions (‘MTC’) and the consequences for insurers.

The MTC Aggregation Clause

The Law Society is empowered by statute² to make rules requiring solicitors to maintain professional indemnity insurance and to specify the terms of cover. The overriding purpose of the MTC is to protect the public and premium-paying solicitors.

Clause 2.5 of the MTC provides that:

All Claims against:

1. any one or more Insured arising from:

1. one act or omission; and/or

2. a series of related acts or omissions; and/or

3. the same act or omission in a series of related matters or transactions; and/or

4. similar acts or omissions in a series of related matters or transactions; and/or

2. one or more insured arising from one matter or transaction

will be regarded as one Claim

Limbs 3 and 4 were added following a House of Lords judgment³ which caused similar concerns for insurers because it restricted the application of Limb 2. The new clauses cover multiple claims arising from the same (Limb 3) or similar (Limb 4) acts or omissions in a series of related matters or transactions. Arising from remains a key requirement.

The Supreme Court’s judgment in AIG⁴ provided welcome clarity on the application of Limb 3, which requires a real connection between the transactions, rather than merely a similarity in the type of act or omission⁵, in order for claims to aggregate. As Lord Toulson explained, the word ’related’ requires an inter-connection between the matters or transactions i.e. they must in some way fit together⁶.

There are relatively few reported decisions providing guidance on the interpretation of the aggregation clause in the MTC, as most disputes are resolved through arbitration. However, two recent decisions in cases involving the theft of client funds⁷ have restricted the scope of aggregation clauses.

Baines

The insurers in Baines argued that a partner’s theft of £4m over many years from more than 70 clients formed a series of related acts; and that the resulting claims should aggregate, capping their liability at the limit of indemnity for one claim.

However, the Court of Appeal held that two or more claims would not arise from a series of related acts or omissions if they arose from different acts or omissions within the identified series⁸. The fact that the thefts all arose from the solicitor’s dishonesty was not enough for them to aggregate as one claim.

Discovery Land

Discovery Land considered whether the misappropriation of client funds from a property transaction and the subsequent use of the property as security for a loan, without authority, were related transactions. The Court of Appeal, applying Baines, held that the same series of acts did not cause the two claims as the thefts arose from separate acts that were not inter-connected. The two claims were substantially different; did not fit together; and therefore, did not aggregate.

Write In Haste; Repent At Leisure

The application of aggregation clauses is fact sensitive. However, the Court has undoubtedly narrowed the circumstances in which claims aggregate. Insurers, who had previously assumed that claims arising from a series of related acts, omissions or thefts would aggregate, are having to reconsider their approach to claims handling and underwriting.

Solicitors’ PII insurers cannot simply amend the policy wording because of the overriding obligation to protect the public. Due diligence remains critical for underwriters. Failing to carry out a proper risk assessment before offering terms can have very serious consequences for insurers. One rogue policyholder could affect the profitability of an entire book of business.