The Supreme Court has allowed the appeal by the insurer AIG in respect of the interpretation of the phrase 'similar acts or omissions in a series of related matters or transactions' in the aggregation provision of the Solicitors Regulation Authority's Minimum Terms and Conditions for professional indemnity insurance.
All solicitors are required to hold professional indemnity insurance, with a firm chosen from the Solicitors Regulation Authority's (the SRA) list of 'Qualifying Insurers', and with a limit 'per claim' of £2m or £3m depending on the nature of the firm. In addition to this, and in common with other professional bodies, the SRA also requires that this insurance is on terms no less favourable than those specified in its Minimum Terms & Conditions (the MTC).
The International Law Partnership LLP (ILP) had been engaged by Midas International Property Development Plc to devise an investment scheme to help Midas obtain investment for the construction of holiday properties in each of Turkey and Morocco. The scheme attracted many investors but local companies were unable to complete the contracts to purchase rights to the land and this led to the failure of both developments. Escrow accounts had been set up to protect the investments. However, ILP had already made payments out of the accounts, causing loss to 214 investors.
AIG provided professional indemnity insurance to ILP, with a limit per claim of £3m. It was common ground between the parties that the aggregation clause in the AIG policy was not drafted in the same terms as that contained in the MTC and, consequently, the aggregation clause at 2.5 of the MTC was instead the relevant wording to consider. Clause 2.5(a)(iv) of the MTC aggregation clause states that all claims against the insured arising from an act or omission, or 'similar acts or omissions in a series of related matters or transactions' would be regarded as 'one claim'.
The First Instance Decision
At first instance AIG sought a declaration that the investors' claims were one claim for the purposes of clause 2.5, thus limiting their liability to £3m. The High Court refused the declaration and found that the natural meaning of a 'series of related matters or transactions' in the context of a solicitor's insurance policy was a series of matters or transactions that were dependent on each other or inter-connected.
The Court of Appeal Decision
The Court of Appeal (CoA) held that Mr Justice Teare had been wrong to find that the transactions had to be 'dependent' on each other before aggregation could occur. However, he had been right to find that there had to be 'inter-connection' between the transactions. The CoA agreed with the submissions of the SRA (intervening) that there must be an "intrinsic" rather than a "remote" relationship, describing this as a relationship between the transactions, rather than a relationship with an outside connecting factor.
The Supreme Court Decision
In a Judgment handed down this week, the Supreme Court unanimously allowed AIG's appeal as to how the aggregation language should be construed.
Lord Toulson agreed that the use of the term 'related' implied an inter-connection between the 'matters or transactions'. However, he found the CoA's use of the term 'intrinsic' to describe the required relationship between those matters or transactions neither "necessary" nor "satisfactory" because of its "elusive" nature in that context.
In considering the application of the relevant phrase, Lord Toulson highlighted the importance of identifying the relevant matter or transaction. He went on to say that the clause should also be applied objectively, taking the transactions in the round, and that it would be acutely fact sensitive in each case.
Lord Toulson was concerned primarily with the appeal as to the proper interpretation of the clause and was careful to note that the parties should have the opportunity to address the facts in more detail before a relevant lower court should they believe that on a fuller examination the characterisation in his Judgment was defective. However, it is instructive to look at how he applied the clause on the basis of the facts that were before him.
Lord Toulson had no difficulty with the aggregation of the transactions entered into by the investors in the Turkish project and similarly, but separately, with the aggregation of the transactions entered into by the investors in the Moroccan project. Whilst there were individual variations between investors, in respect of each project they were participants in a common scheme and co-beneficiaries under a common trust.
However, he considered the case for aggregating the claims of the investors in the Turkish project with those of the investors in the Moroccan project "much weaker". Whilst there were related companies and similarities in the legal structure, the developments were "separate and unconnected": "they related to different sites, and the different groups of investors were protected by different deeds of trust over different assets". Where some investors crossed-over from one scheme to another, Lord Toulson considered that this did not impact on the position of all investors. Instead, he considered that for those investors any claim in respect of their first transaction should be aggregated with the claims from other investors in that group and a claim in respect of the second transaction would fall to be aggregated with their first claim.
Aggregation is an important consideration for all insurance contracts and clauses have the capacity to operate either in favour of the insurer or the insured. This decision is of particular interest because of the broad range of matters with which firms of solicitors may become involved and because the MTC aggregation clause is relevant to all solicitors' professional indemnity policies.
Aggregation will also be relevant to claimant investors considering group actions – and the third party funders who often facilitate such claims - as aggregation provisions are critical to the recovery that may ultimately be made from insurance policies held by professional advisors.
Perhaps the most interesting parts of this Judgment are the fact specific nature of the application of aggregation language in each case, and the guidance that can be drawn from the way in which Lord Toulson approached the facts before him.
Our previous e-alert in relation to the Court of Appeal's Judgment can be found here.