214 claims or one claim: The Court of Appeal of England and Wales reviews aggregation – AIG Europe Ltd v Oc320301 LLP & Ors [2016] EWCA Civ 367

This appeal involved the construction of an aggregation clause contained within a solicitors' indemnity policy issued by AIG Europe Limited (AIG) to the law firm The International Law Partnership LLP (ILP). The relevant aggregation clause was contained in the Minimum Terms and Conditions (MTC) which were incorporated into the AIG policy (the policy) as required under the Solicitors' Act 1974 (UK).

The Underlying Claims

ILP had been retained by a UK property development company, Midas International Property Development Plc (Midas), to devise a mechanism whereby Midas could solicit investments in the development of holiday resorts in a number of foreign locations, including the Peninsula Village near Izmir in Turkey and Al Johara near Marrakech in Morocco (either by way of loans bearing interest at attractive rates or by way of direct purchase of holiday homes) and those investments could then be held on some form of security for the investors.

ILP devised a scheme whereby the investment funds were held in an escrow account with ILP as the escrow agents who received the funds. A deed of trust was also granted in favour of the investors as beneficiaries, holding security over the land to be purchased. There was one trust for Peninsula Village and another trust for Al Johara. ILP was not to release the funds from the escrow account to the local Midas developer until the value of the security held in the trust was at least the same as the total amount of the investments to be protected (Cover Test). Once the Cover Test was met, ILP was entitled to release monies from the escrow account for the purchase of a holiday home or for the purpose of generally financing the development.

The developments in the Peninsula Village and Al Johara ultimately failed. By November 2009, Midas had entered liquidation. All the invested monies held in the escrow accounts had been paid out. As a result, 214 investors brought claims against ILP alleging inter alia, that ILP had failed to apply the Cover Test properly when electing to release the investment funds from the escrow account, with the consequence that the investors lost over £10 million. The principal causes of action against ILP were in negligence, breach of fiduciary duty, misrepresentation and breach of the escrow agreements (Underlying Claims).

The insurance policy

ILP had insurance cover with AIG. The AIG cover had a limit of indemnity of £3 million and an excess clause of £7,500, subject to an overall aggregate limit of £22,500. Clause 2.5 of the MTC (as incorporated in the policy) entitled 'One Claim' provided as follows:

Clause 2.5(a)(iv) was the applicable phrase under consideration.

First instance decision

AIG sought a declaration from the Commercial Court, a sub-division of the Queens Bench Division of the High Court of Justice (the Commercial Court), that the Underlying Claims were to be considered 'One Claim' for the purposes of the aggregation clause. At first instance, the primary judge held that all the claims arose out of similar acts or omissions for the purpose of the aggregation clause but refused to grant AIG the declaration it sought, stating that:

While the primary judge plainly thought that there were 214 claims, he did not incorporate that conclusion in his formal order. His Honour granted AIG permission to appeal and also granted the trustees permission to argue on the appeal that there were two claims, one relating to Peninsula Village and the other to Al Johara.

On appeal, AIG contended that ILP's acts or omissions constituted 'similar acts or omissions in a series of related matters or transactions' and should be aggregated such that the limit of liability under the policy in relation to the claims by the 214 investors was capped at £3 million. AIG submitted that there was no justification for reading into the phrase 'a series of related matters or transactions' a requirement that they be dependent upon one another (as stated by the primary judge) for the purposes of the aggregation clause. AIG contended that the only possible construction of the phrase led to the conclusion that there was one claim.

On the other hand, the trustees supported the judgment and referred to AG v Cohen [1937] 1 KB 478 in which the Court had said that the word 'series' means 'something of which it can be said that there is some integral relationship between its parts'.

The Court of Appeal of England and Wales gave the Solicitors' Regulatory Authority (SRA) permission to intervene and make oral submissions. The SRA submitted that there had to be at least some intrinsic connection between the relevant matters or transactions, not merely a connection with some external common factor such as that the transactions or matters were conducted by the same solicitor or both related to the same geographical area.

The Court of Appeal unanimously adopted the construction of the phrase 'in a series of related matters or transactions' put forth by the SRA and remitted the entire case to the Commercial Court to make the factual findings in accordance with the guidance on construction provided by the Court of Appeal.

The Court of Appeal stated that the starting point in construing an aggregation clause is to ascertain the literal or natural meaning of the aggregation clause. The construction exercise must be approached neutrally without any assumptions in favour of the insurer or the insured.

In the present case, the liability arose from negligence in relation to a transaction since the making of the contracts and the setting up of and the transfer of money from an escrow account were essentially 'transactions' rather than 'matters'. The critical question was whether the negligence or breach of duty occurred 'in a series of related…transactions'.

The Court of Appeal said that the word 'series' itself usually implies some connection between the events or concepts which constitute the series. Interestingly, the Court of Appeal noted that the word 'series' was derived from the Latin 'serere' which means to connect. As used in the phrase 'in a series of related … transactions' it was obvious that there has to be a connection since the transactions have to be 'related' and that could only mean related to one another. The question then was, what degree of connection or relation was required for the purpose of the aggregation clause.

The Court of Appeal held that in order for the claims to be aggregated, the degree of connection or relation required between the transactions was that there must be an intrinsic rather than a remote relationship with some outside connecting factor, even if that extrinsic relationship was common to the transactions.

As such, the Court of Appeal concluded that the primary judge went too far when his Honour said that the transactions had to be 'dependent on each other' before aggregation could occur, as the terms of the policy did not require the degree of closeness contemplated by 'dependence'. However, the Court of Appeal agreed with the primary judge's comment that the transactions could not be related unless they were in some way inter-connected.

The Court of Appeal also emphasised that the traditional and well-known way in which to formulate an extremely wide aggregation clause is to use words such as 'any claim or claims arising out of all occurrences…consequent on or attributable to one source or original cause' or 'arising from one originating cause or series of events or occurrences attributable to one originating cause (or related causes)'. As the aggregation clause in the present case was clearly not formulated in this way, it cannot therefore have been intended to have the same width as clauses drafted in such terms. The Court of Appeal also canvassed several key UK decisions which had considered various wide and narrow aggregation wordings to show the importance of construing the critical words of an insurance policy against the background of knowledge of the availability of wide and narrow aggregation clauses. If the widest form of the clause has not been chosen by the parties to the policy, the parties' choice must be respected.

Finally, the Court of Appeal also held that the published history of the origin of the aggregation clause here, in the Law Society Gazette for 27 January 2005, was a legitimate aid to construction. It gave support to the argument that it was not intended that the phrase 'in a series of related…transactions' was to be interpreted in such a manner that any relation, however loose, would suffice. In light of the origin and wording of the aggregation clause, the most satisfactory approach in restricting the concept of relatedness was that the relation must be an intrinsic relationship, not an extrinsic one.

The purpose of an aggregation clause is to enable two or more claims covered by a policy to be treated as a single claim when they are linked by a unifying factor of some kind. Depending on the circumstances of each case, an insured and the insurer may or may not wish to aggregate the claims. In the present case, it was in the professional indemnity insurer's interest to aggregate the claims of the 214 investors in order to rely on the overall limit in the policy (£3 million) as the total quantum claimed was £10 million. On the other hand, it was in the insured's interest not to aggregate the claims so as to ensure all the losses were covered. Also, the applicable excess was relatively low at £7,500 and subject to an overall aggregate limit of £22,500.

The Court of Appeal's approach to construing an aggregation clause is instructive. It is important to keep in mind that courts will approach the construction of aggregation clauses neutrally without any assumptions in favour of the insurer or the insured. Aggregation clauses in insurance policies are open to negotiation between the insurer and insured prior to the inception of cover and should be the subject of careful negotiation. The choice of language by which the parties designate the unifying factor in an aggregation clause (wide or narrow) is of critical importance. The courts will try to ascertain and respect the intentions of the parties to the insurance contract.