Common sense prevails on aggregation

Both insurers and buyers of professional indemnity insurance will have breathed a sigh of relief when the Supreme Court handed down its judgment in AIG Europe Limited v Woodman and others [2017] UKSC 18, and the Court of Appeal’s decision, which would potentially have caused the cost of PII to rocket, was overturned.

The case concerned the development of two holiday resorts financed by private investors. Funds for each development were held in escrow by the developers’ solicitors and released to the developers as the projects progressed. However, following a prohibition preventing the developers from receiving any further investments, the purchases of the development sites could not be completed.

The investors brought two claims against the solicitors, one in relation to each site, alleging they had misapplied the criteria according to which funds could be released, resulting in funds being released without adequate security. The claims amounted to over £10m.

AIG, the solicitors’ insurers, which provided cover limited to £3m per claim, issued proceedings seeking a declaration that the investors’ claims should be considered as one claim under the aggregation provisions in its policy (and in the Minimum Terms and Conditions which govern all solicitors’ PII policies).

The claim was dismissed. The court accepted that all the claims arose from similar acts or omissions, but rejected the analysis that they were part of ‘a series of related matters or transactions’ on the basis that the transactions between the developers and each investor were not mutually dependent.

Intrinsic connection

AIG appealed, arguing there was no justification for the first instance decision that transactions needed to be interdependent in order to be considered ‘related’ for the purposes of the aggregation clause. The appeal was also the subject of an intervention by the Solicitors Regulation Authority, which argued that the clause did require some sort of intrinsic relationship between the matters or transactions.

The Court of Appeal held that the judge at first instance was wrong to conclude that the aggregation provisions required the matters or transactions in question to be dependent on each other. However, Lord Justice Longmore concluded that the express language of the provisions was not only imprecise but also deliberately avoided the wider forms of aggregation language.

He held that there must be a restriction on the concept of relatedness, which should be achieved by implying a unifying factor from the general context. The matters or transactions in question must therefore have an ‘intrinsic connection’ with each other in order to fall within the aggregation provisions. An extrinsic relationship (such as the same solicitor having undertaken each transaction) is not enough.

Although at first glance appearing to provide some relief for the insurance market, the Court of Appeal’s decision in fact created significant uncertainty. It did not fully define the ‘intrinsic connection’ requirement, and in practical terms did nothing to clarify the application of the key limbs of the aggregation provisions. Some insurers faced the prospect of extraordinarily large exposure to claims which, on any common-sense definition, appeared to be related.

Viewed objectively

AIG then appealed to the Supreme Court. Allowing the appeal, Lord Toulson held that the ‘intrinsic’ relationship formulation was not ‘necessary or satisfactory’ and rejected the use of the word ‘intrinsic’ in this context.

In relation to the two key limbs of the aggregation clause, which provides that claims may be aggregated which arise from ‘the same act or omission in a series of related matters or transactions; or… similar acts or omissions in a series of related matters or transactions’ (sub-clause 2.5(a) of the MTC), the court held:

‘Use of the word “related” implies that there must be some inter-connection between the matters or transactions…. The absence of further prescription is not particularly surprising, considering the very wide range of transactions which may involve solicitors providing professional services. Determining whether transactions are related is therefore an acutely fact sensitive exercise.’

Lord Toulson drew a key distinction between an act which gives rise to a claim (in this case, the improper payment of money out of an escrow account) and the wider transaction in which the act occurs (the investment in a particular development scheme under a transaction arrangement of which the trust deed and escrow arrangement formed part). The Court of Appeal’s formulation, which treated the ‘transaction’ as being the payment of money out of the escrow account, was too narrow.

Lord Toulson further held that the aggregation clause must be viewed objectively, ‘taking the transactions in the round’. Viewed objectively, in this case the transactions fitted together ‘in that they shared the common underlying objective of the execution of a particular development project, and they also fitted together legally through the trusts under which the investors were co-beneficiaries’. The aggregation provisions were therefore satisfied for each development.

The Supreme Court indicated, however, that it was less likely that the claims could be aggregated into one, as ‘although the development companies were related… and the legal structure of the development projects was similar, the development projects were separate and unconnected’.

However, Lord Toulson emphasised that this was his view on the facts, and that both parties had reserved their rights to analyse the issues in greater detail if the case was remitted to the lower courts.

Imprecise wording

This decision does not, and arguably could never, provide absolute clarity on when claims may be aggregated. Such cases are invariably factually complicated and it is right that each should be determined on its own facts.

However, imprecise as it may have been, both insurers and the profession are likely to welcome the overruling of the Court of Appeal’s narrow interpretation.

Both insurers and the profession will also no doubt welcome the Supreme Court’s comment that the Law Society, in setting the minimum terms of cover which solicitors must maintain, must ‘balance the need for reasonable protection of the public with considerations of the cost and availability of obtaining professional indemnity insurance’. It remains to be seen whether the Law Society will seek to clarify the imprecise wording of the aggregation provisions.

Jane Williams and Sushma MacGeoch are partners at Bond Dickinson

@Bond_Dickinson

www.bonddickinson.com