Insurance: Supreme Court ruling on aggregation

United Kingdom

The Supreme Court has handed down the long awaited final decision in the case of AIG v Woodman & others. The Supreme Court was asked to consider the meaning of the phrase “related matters or transactions in the aggregation wording permitted in the Minimum Terms and Conditions for Solicitors professional indemnity insurance (MTC) (the phrase appears in clause 2.5(a)(iii) and (iv)).  

Unanimously allowing Insurers’ appeal, the Supreme Court rejected the Court of Appeal’s interpretation of the phrase as requiring that matters or transactions must have an ‘intrinsic’ relationship with each other.   The Supreme Court acknowledged that determining what is ‘related’ is “an acutely fact sensitive exercise”.  The starting point was to identify the relevant matters or transactions and then to analyse the factors connecting them.  Any analysis must be approached objectively.  It is clear that for claims to aggregate under the MTC sub-clause (a)(iv), more is required than a similarity in the acts or omissions; there must be an “inter-connection” between the matters or transactions; they must in some way “fit together”.

Background

In 2013, 214 claimants brought two separate professional negligence actions against a firm of solicitors (and its successor practice) insured by AIG.   The solicitors had been engaged by a property developer in connection with two holiday resorts that it was developing, one in Turkey and one in Marrakech. The claimants were the private investors in those developments.  The solicitors devised a mechanism for the financing of the developments.  A trust was established for each development – the trust held a charge over the development land; the investors paid the amounts invested to the solicitors; the monies invested would be held in an escrow account; and the investors became beneficiaries of the trust. The monies invested were to be held in the escrow account until a 'cover test' had been met which prohibited the monies being paid out of the escrow account until the value of the assets held by the trust was sufficient to cover the investment to be protected. 

Neither of the developments were completed and, in 2009, the developer was wound up.  It was discovered that all the monies in the escrow accounts had been paid out.  The claimant investors make several claims against the solicitors including breach of trust, negligence, misrepresentation allegations.  At the heart of the claims is the solicitors’ failure to properly apply the cover test before paying away the monies.  The claims are due to be heard later this year. 

The insurance action

The solicitors had professional indemnity insurance with AIG, with a limit of £3 million each claim. The investors’ claims were greater than £10 million in total.  In 2015, AIG sought a declaration that the claims brought by the investors were to be considered as a single Claim for the purposes of the aggregation provision in the MTC:

“The insurance may provide that, when considering what may be regarded as one Claim …

(a)   all Claims against any one or more Insured arising from …

(iv) similar acts or omissions in a series of related matters or transactions …

will be regarded as one Claim.”

The parties’ positions were as follows:-

1.      AIG’s primary position– the investors’ claims should be treated as “one Claim” for policy purposes because the claims arose from “similar acts or omissions in a series of related matters or transactions” with the effect that a single limit of indemnity of £3 million would apply. 

2.      AIG’s secondary position – the claims by the investors in the Turkey development would aggregate and be regarded as one claim for policy purposes and the claims by the investors in the Marrakech development would aggregate and be regarded as one claim for policy purposes, with the effect that two limits of indemnity totalling £6 million could be recovered by the investors.

3.      Investors’ position – none of the investors’ claims should aggregate with each other with the effect that each claim would attract its own £3 million limit of indemnity. They did not accept AIG’s secondary position.

At first instance, the Commercial Court held that all of the investors’ claims arose from “similar acts or omissions” but refused to accept that they were in “a series of related matters or transactions” because the transactions were not “conditional or dependent upon one another”.   The effect of the first instance decision was that the investors’ claims did not aggregate and each claim attracted its own limit of indemnity; an outcome which favoured the investors.

AIG appealed and the Law Society was granted permission to intervene.  The Court of Appeal did not agree with the Commercial Court’s view that the matters or transactions had to be dependent on each other.  It accepted the Law Society’s submission that in order to be ‘related’ the matters or transactions in question must have an “intrinsic” relationship with one another, as opposed to being related by each having an extrinsic relationship with some outside connecting factor. The Court of Appeal did not apply its interpretation to the facts of the case and instead remitted the question of aggregation back to the Commercial Court for determination against the background of its guidance. 

Supreme Court’s judgment

AIG appealed and criticised the Court of Appeal for introducing the qualification that matters or transactions must be intrinsically related.  The investors and the Law Society both supported the Court of Appeal’s decision.

The Supreme Court criticised the use of the word ‘intrinsic’ by the Court of Appeal, which it found to be an “elusive” term in the context of describing a relationship between transactions.  It found support in the fact that when introducing the phrase into the MTC, the Law Society saw fit not to add any qualification to the term “related”.

The Supreme Court held that clause 2.5(a)(iv) had to be taken in two parts; first, there was the requirement that the acts or omissions giving rise to the claims should be similar and, second, there was a requirement that the acts and omissions were in a series of matters or transactions which were related.  Any analysis of those requirements had to be looked at objectively, and not from the perspective of any particular party.  The Supreme Court found that the word ‘related’ implied that there was some “inter-connection” between matters or transactions and suggested that the matters or transactions should “in some way fit together”.  The Supreme Court accepted that whether matters or transactions are ‘related’ will inevitably be an acutely fact sensitive exercise given the very wide range of transactions in which solicitors can be involved.

On the facts of the investors’ claims (as identified in the parties' agreed statement as to the underlying facts), the Supreme Court agreed that the investors’ claims arose from “similar acts or omissions” and found that those acts or omissions were in a series of transactions that were related.  It held that the transactions entered into by the investors in the Turkish development were connected and, similarly, the transactions entered into by the investors in the Marrakesh development were connected.  It found that the investors in each development were “connected in significant ways” because:-

  • the investors were investing in the same development;
  • the monies advanced by the investors had the same purpose to provide the developers with the necessary capital to build the development;

  • the investors were all participants in what was a standard scheme; and

  • the investors were all co-beneficiaries under a common trust. 

The Supreme Court found that the investors’ claims in the Turkish development should be treated as one claim for policy purposes and investors’ claims in the Marrakesh development should also be treated as one claim for policy purposes, with the effect that a single limit of indemnity of £3 million would apply to meet any successful claims by the investors in the Turkish development and a separate limit of £3 million would apply to satisfy any successful claim by the investors in the Marrakesh development.  The Supreme Court was not willing to aggregate the claims of the investors in both developments because it observed that they related to different sites, with protection by different deeds of trusts in relation to different assets.

The Supreme Court made these findings on the facts presented to them by the parties in their agreed statement.  Permission was granted for either party to argue that, on a fuller analysis of the facts, the characterisation of the transactions should be different to the conclusion reached in the judgment, and the case may be remitted to the Commercial Court for that purpose.

Comment

The Supreme Court’s decision and analysis will be welcomed.  It is straightforward and its application to the facts in the case is sensible and produced what appears on the limited facts that have been made available in the reported judgments to be the right decision.  It has long been known that aggregation is a fact-sensitive exercise, and interpreting the word ‘related’ will remain an exercise of judgement.  

Further reading: AIG v Woodman & Others [2017] UKSC 18