Consideration of aggregation of claims clause in minimum terms and conditions of solicitors' professional indemnity policy
AIG Europe Ltd v The International Law Partnership & Ors
High Court (Comm)
14 August 2015
On 14 August 2015 Mr Justice Teare handed down judgment in the Commercial Court in relation to a declaration sought by AIG concerning the clause in the Minimum Terms and Conditions of Professional Indemnity Insurance for solicitors in England and Wales (“MTC”) relating to the aggregation of claims for the purpose of the Limit of Indemnity. The particular clause (2.5 MTC) provides:
“The insurance may provide that, when considering what may be regarded as One Claim for the purposes of the limits …..
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
b) all Claims against one or more Insured arising from one matter or transaction will be regarded as one claim” .
This is the first judicial decision in relation to this clause and therefore of relevance to Insurers’ consideration of the issues surrounding aggregation of claims albeit that these are fact specific and fact sensitive. It will be recalled that the clause was introduced (along with an increase in the indemnity limit from £1 million to £2 million) in 2006 following Insurers’ concerns about the narrow approach to aggregation adopted in the decision in Lloyds TSB General Insurance v Lloyds Bank Group Insurance.
In the present case, around 214 claimants had issued proceedings in relation to investments in property abroad claiming around £10 million against a firm of solicitors through two trustees in two actions in the Chancery Division (“the underlying claims”). Those underlying claims have yet to be decided and so the allegations made in them were presumed to be true. AIG sought a declaration that the underlying claims should be aggregated and constitute a single claim under the solicitors professional indemnity policy for the purposes of the application of the Limit of Indemnity. The SRA intervened in the proceedings only for the purposes of providing submissions as to how the clause should be construed. The Judge declined to grant the declaration holding instead that each claim by each investor was a separate claim for the purpose of the policy limit.
Background to underlying claims
Between 2006 and 2009 Midas International Property Development PLC (“Midas”), a UK company, offered investors the opportunity to invest in holiday home developments in two locations: Peninsula Village, Turkey, and Al Johara, Morocco. Midas engaged The International Law Partnership LLP (“TILP”) to advise on the international property law aspects of the transactions. It was intended that investors in the Turkish properties would obtain security over the land and investors in the Moroccan properties would obtain a shareholding in a local company which owned the land.
TILP devised a mechanism to protect investors’ interests in the schemes, whereby contributors would sign an Escrow Agreement with TILP as the named escrow agents. TILP were bound by the terms of the loan agreements not to release funds in the escrow account to local development companies unless a predetermined level of security was in place, thereby ensuring that investors had peace of mind.
The investors would also become beneficiaries under one of two trusts (one for each location), whose aim was to hold security over the land purchased and realise the assets for investors if the developments failed. The Deed of Trust defined the so-called “cover test” that had to be satisfied before TILP released monies from the escrow account for the purchase of land, or to finance the development generally, designed to protect trust funds.
Unfortunately for the investors, the local development companies were unable to complete the contracts for the purchase of the sites, which led to the failure of both developments. By 2009 Midas had been wound up, and allegedly all of the money paid in to the scheme had been paid out to the local development companies.
The trusts were unable to realise the assets. The mortgage established over Peninsula Village in Turkey had a defect; while the security over Al Johara in Morocco had limited value because the trust had taken only a 16.5% share in the local company that owned the land, that was in any event subject to prior pledges in favour of other shareholders.
The Rival Arguments
The arguments centred around limb a) (iv) of clause 2.5 MTC above. AIG argued that the underlying claims arose from similar acts or omissions in a series of related matters or transactions with the result that AIG’s exposure was confined to one limit of indemnity of £3 million. The Trustees’ argument on behalf of the investors was that they did not, so that AIG’s exposure was for the full amount of £10 million. The Trustees’ secondary position was that two limits of indemnity were available: one in relation to the Turkish development and one in relation to the Moroccan development. The Trustees argued that the alleged acts or omissions in the underlying claims were not similar (except at what was described as a very high level of abstraction), that the transactions were not a series as they did not follow each other in time or logical order and that they were not related because the individual investors were not connected and the individual transactions were not dependent on each other.
The Judge’s analysis
The Judge decided that as there was no reported authority on the precise wording of limb a) (iv) he would not take any of the legal authorities he was referred to into account and instead would just construe the words in the clause using their normal meaning and in a neutral manner not favouring Insurer or claimant. He found that all the claims arose out of similar acts and omissions using the test of “similarity to a real and substantial degree“. He moved on to the phrase “in a series of related matters or transactions“ which he described as the unifying words in the clause . He proposed at least three possible meanings:
A series of transactions which are related by reason of being dependent on each other.
A series of independent transactions which are related because they are investments in one development.
A series of independent transactions which are related because they are of a similar kind (in this case there was the same security structure with Midas at the hub). This was the argument favoured by AIG.
The Judge dismissed the third option as being too “vague, uncertain and soft edged” meaning that claims would too readily aggregate. He was of the view that an aggregation clause should be reasonably certain. He thought that both options 1 and 2 (the Trustees arguments) were “clear and readily comprehensible.” He elected to make his decision that the underlying claims did not aggregate on the basis that, although they arose out of similar acts or omissions, the acts or omissions were not in a series of related transactions because the “terms of the transactions” in this case were not “conditional or dependent on each other“. He did not consider at all whether “matters” might be related.
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