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First case decided on PII aggregation clauses

Insurers often bundle together claims in order to limit the level of liability. A recent decision has thrown this practice into question, while providing some important guidance for insurers and which could herald a change in the way that claims against solicitors are handled.

When deciding whether claims can be aggregated, insurers will need to scrutinise the relationship between the claims more closely. The frequency of successful aggregations, negatively impacting on claims brought by lenders, may be reduced as a result.

We look at how the claims came about and the judge’s decision-making process. We also consider the implications for insurers and for future decisions on the application of clause 2.5 of the MTC.

Background

In a recent case, AIG v OC320301 LLP and others [2015] EWHC 2398 (Comm) (AIG v OC320301), the Commercial court considered the scope and construction of clause 2.5 of the MTC.

The 214 claimants in the underlying claims were investors in a UK company, Midas International Property Development PLC (“Midas”). Midas wished to develop holiday homes in Turkey and Morocco.

Between April 2006 and August 2009, the claimants invested directly in holiday homes or indirectly by way of interest bearing loans.

An English law firm, John Howell & Co., subsequently the International Law Partnership (“TILP”) was engaged by Midas in respect of both developments. TILP advised Midas on all aspects of the property transactions.

The claimants were assured of their security in the investments. They were appointed as escrow agents to whom investors’ money was paid and beneficiaries of a Deed of Trust. The trust held security over the land to be purchased.

The claimants were informed that funds would not be released until the promised level of security was in place (“the cover test”).

TILP failed to apply the cover test properly. Purchase of the land/shares in land fell through. The promised security was not in place but investors’ funds had already been paid out.

By November 2009 Midas was wound up. This meant that the claimants’ only possible avenue for redress was from TILP.

Could the claims be aggregated?

The underlying claims are based on TILP’s failure to protect the investors’ funds with effective security. TILP’s alleged negligence arose from releasing funds too early. Arguably, they should not have released the funds at all.

The underlying claims collectively totalled over £10 million. However, TILP’s level of indemnity, through its PI insurer, AIG Europe Limited (“AIG”), was £3 million for any one claim.

The aggregation of claims, and thus the sum insured for any one claim, was ultimately governed by clause 2.5 of the MTC.

Under clause 2.5 of the MTC all claims can be aggregated, against any one or more insured, if they arise from:

  • one act or omission; 
  • one series of related acts or omissions; 
  • the same act or omission in a series of related matter or transactions; 
  • similar acts or omissions in a series of related matters or transactions

The claimants argued that the aggregation clause should be construed to give the public the greatest level of protection. The reason being that it is mandatory for solicitors to hold PI insurance to cover any potential claims from clients.

Mr Justice Teare rejected this argument as being too simplistic. His view was that the court should construe “the MTC, and in particular the aggregation clause…in a neutral manner, neither predisposed to assist the public nor predisposed to assist the insurer”.

In order to try to limit its ultimate liability to £3 million, AIG argued that sub-clause (iv) of the MTC applied ie that the 214 claimants’ claims arose from “similar acts of omissions in a series of related matters or transactions”.

Mr Justice Teare went on to consider the meaning of sub-clause (iv):

“Similar acts or omissions”

The question to be determined was whether the claims arose from “similar acts or omissions”.

The judge asked himself “at what level should one judge similarity?” He noted that the aim or object of the clause is to limit the insurers’ liability by permitting claims to be aggregated. However, he construed the adjective “similar” and concluded that “the requisite degree of similarity must be a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity.”

Mr Justice Teare decided that, in relation to the Turkish and Moroccan developments, TILP failed to provide effective security (in one case over land and the other in shares) so that the investors were exposed to loss in the event that the developments failed, as happened. The claims were therefore deemed to have arisen from similar acts or omissions, which were neither fanciful nor insubstantial.

“In a series of related matters or transactions”

Mr Justice Teare concluded that the words used here had at least three possible meanings: 

  • firstly, the claimants’ primary case, denoting “a series of transactions which are related by reason of being dependent on each other”; 
  • secondly, the claimants’ alternative case, “a series of independent transactions which are related because they are investments in one particular development”; or
  • thirdly, as favoured by AIG, “a series of independent transactions which are related because they are of a similar kind”.

The court favoured the first two possible meanings, rejecting the third. The judge thought the third was “unlikely to have been the intended meaning. If it were correct, the scope of the unifying factor and hence of the aggregation clause would be very wide with no clear limit. Claims would be aggregated where they arose out of similar acts or omissions in matters or transactions which are sufficiently similar and/or connected with another. But such test is vague, uncertain and soft-edged. AIG offered no assistance as to how one judged whether transactions were “sufficiently” similar and/or connected”.

In respect of the second meaning, the Turkish development would be seen as a series of related matters or transactions and the Moroccan developments would be seen as another. This would have the effect of limiting AIG’s liability to £3 million per development (ie £6 million in total). The judge did not rest here.
In considering only Australian authority, the court finally decided that the “natural meaning, or…the most natural meaning, of the phrase “a series of related matters or transactions” in the context of a solicitors' insurance policy is…a series of matters or transactions that are in some way dependent on each other”.

The judge did not consider the 214 transactions to be dependent on any of the others. It was therefore held that there should be no aggregation. This leaves AIG potentially liable for the entire sum claimed - over £10 million.

Comment

This is the first authority on the application of clause 2.5 of the MTC, given that coverage disputes would usually be resolved via arbitration.

Whilst claims will remain fact specific, this case can be considered a victory for claimants. Insurers will need to demonstrate interconnectedness/interdependence between the transactions (involving different claimants) in order to aggregate claims.

This is not the end of the matter. It is understood that Mr Justice Teare has granted AIG permission to appeal.

For more information contact Peter Richards-Gaskin, partner in TLT’s Banking and Financial Services Litigation team on +44 (0)333 006 0310 peter.richards-gaskin@TLTsolicitors.com.

Contributor: Catherine Zakarias-Welch 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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