The double-edged sword of aggregation

On 14 April 2016, the Court of Appeal handed down its judgment in the case of AIG Europe Ltd v OC320301 LLP (formerly the International Law Partnership LLP) and others [2016] EWCA Civ 367.

The case is of particular interest to solicitors and their insurers since it concerns the construction of the aggregation provisions contained in the minimum
terms and conditions (MTC) incorporated into all solicitors' indemnity policies. However,
the decision will also interest
any party to an insurance contract containing similar aggregation terms.The key points are:

• The true construction of the words 'in a series of matters or transactions' is that the matters or transactions must have an intrinsic relationship with each other;

• The matters or transactions need not be dependent on each other; and

• The aggregation clause must be approached neutrally without any assumption in favour of the insurers or the insured.

The case concerned investments in holiday home developments based in Turkey and Morocco. The investments were effected via an escrow account held with the International Law Partnership (ILP) and two trusts.

Monies were only to be released by ILP if adequate security had been obtained. However, monies were apparently paid out without adequate security. When both developments failed, the investors sustained alleged
losses of more than £10m.

Proceedings were issued against ILP by the trustees on behalf of 214 investors. ILP claimed under its professional indemnity policy with AIG.

Clause 2.5 of the MTC provides: '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

(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; and (b)
all claims against one or more insured arising from one matter or transaction will be regarded as one claim.'

AIG sought a declaration that the claims fell to be aggregated for the purpose of the policy's £3m indemnity limit, thus reducing AIG's exposure by £7m. The trustees opposed AIG's claim.

'Intrinsic relationship'

At first instance, Mr Justice Teare refused to grant the declaration on the ground that 'related transactions' must be dependent on one another, which the parties had agreed was not the case.

The Court of Appeal's judgment, delivered by Lord Justice Longmore, considered that the word 'series' implies some connection between the concepts which constitute the series. The question then was how that connection was to be established. The court found that it had to be 'an intrinsic rather than a remote relationship… a relationship of some kind between the transactions relied on rather than a relationship with some outside connecting factor, even if that extrinsic relationship is common to the transactions'.

Longmore LJ said transactions that all take place with reference to one large area of land in a particular country might be 'related transactions' if they refer to or perhaps envisage one another; however, the mere geographical relationship would be insufficient.

The traditional way of formulating a 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)'.

Clause 2.5 is not formulated this way and the court considered that it was not intended to have the same breadth. Longmore LJ noted the importance of construing the critical words of the policy against the background of the availability of the wide aggregation clauses as well as narrow ones. If the widest form of the clause has not been chosen, then the parties' choice must be respected.

The court also held that the word 'related' in clause 2.5 does not have the same connotations as it does in the phrase 'related series of acts or omissions'. Acts or omissions could be related by one unifying cause, but to say that a series of transactions are caused by the decision of the parties to enter into them says nothing about whether the transactions are related or not.

The Court of Appeal made no findings of fact for the purpose of the aggregation clause, remitting the case to the Commercial Court. Meantime, its decision may prompt case handlers to review their positions in any live matters involving similar aggregation clauses and dissuade insurers from taking part in the solicitors' professional indemnity insurance market; indeed, it could conceivably lead to further review of the MTC. That being said, the effect of aggregation remains double-edged, depending on its application to the excess or the limit.

James Denison, pictured, and Matthew Line are members of the professional indemnity sector focus team at the Forum of Insurance Lawyers (FOIL) and associates at Weightmans @FOILlaw www.foil.org.uk