In this blog post, I consider the recent decision of the Commercial Court in AIG Europe Ltd v OC320301 LLP. The case concerned a claim brought by AIG (a qualified insurer within the Solicitors’ Professional Indemnity market) against its insured for a declaration that its liability was limited to £3 million in the context of an £11 million claim. The decision is the first case to reach trial on the current wording of the SRA’s Minimum Terms of Cover.
As these are ongoing proceedings in which I am involved, there will be certain aspects of the case and the decision on which I will be unable to pass comment. The views expressed are my own and not those of my firm or its clients. I hope, however, that practitioners will find an outline of the facts and issues informative.
Background
Every year the SRA issues rules, on behalf of the Law Society, under section 37 of the Solicitors Act 1974. These rules require that solicitors take out insurance from a market consisting of “Qualifying Insurers”. These insurers qualify to participate in the market by offering policies which have certain minimum terms of cover set by the SRA through delegated legislation. The current Minimum Terms of Cover (MTC) have been in effect since 2005.
One of the less understood provisions of the MTC is clause 2.5, which reads:
“2.5 The insurance may provide that, when considering what may be regarded as one claim for the purposes of the limits contemplated by clauses 2.1 and 2.3:
(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.”
This clause has the effect of allowing insurers to aggregate certain claims made against their policies by the insured firm of solicitors if the claims happen to arise from the same or similar act or omission in a series of related matters of transactions.
The current wording used by the SRA had its genesis in the 12 months following the House of Lords decision in Lloyds TSB General Insurance Holdings v Lloyds Banking Group Insurance Company where, to the surprise of everyone at the time, the House of Lords found that the then wording of the MTC had a far more restricted application than had been appreciated. Documents obtained by us from the Law Society under a Freedom of Information request showed that qualifying insurers lobbied the Law Society incredibly hard following this decision, under threat of raising premiums or withdrawing from the market altogether, with the particular objective of having a wider “originating cause” aggregation provision incorporated into the MTC. The Law Society rejected this, but compromised by taking up wording that was proposed by Lord Lloyd of Berwick and which was to be found in similar mandatory PII policies issued by the Legal Practitioners’ Liability Committee in the State of Victoria, Australia.
It was common between the parties that the proper construction of the wording found in clause 2.5 of the MTC had never been decided by a court in either the United Kingdom or Australia.
The facts
In 2013, my firm brought two claims on behalf of 214 holiday home investors against the defunct firm The International Law Partnership (TILP), its partners and employees for breach of contract, professional negligence and breach of fiduciary duties. The majority of investors were ordinary people who in 2006/2008 wanted to buy holiday homes in Turkey and Morocco from a company called Midas International Property Developments Plc.
In simple terms, depending on which country they were buying in, they paid the purchase price over to one of two trusts run by TILP. Payments were made under conditions that their money would not be released until certificates were issued by TILP confirming that there was adequate security over the land on which the holiday homes would be built to cover the investments (the cover test). Each investor had their own individually executed legal documentation and was not ostensively a client of TILP, but rather an escrow party and beneficiary of one of the two trusts. On the trustees’ case, not only was the local security obtained by TILP inadequate, in many cases money was also released to Midas without even applying the cover test. Midas failed and entered insolvency in 2009, followed by TILP in 2010. Overall, the investors lost about £11.1 million, causing individual financial problems and profound personal distress.
The insurer’s case
In 2014, AIG Europe Ltd brought a claim against TILP (which we had restored to the register of companies) seeking a declaration that its liability under the PII policy was limited to £3 million. AIG argued that the proper construction of clause 2.5 was that the 214 claims brought by the beneficiaries arose from the same or similar act or omission in a series of related matters or transactions and should be aggregated into a single claim.
On the first limb, same or similar act or omission, AIG argued that irrespective of how the beneficiaries had pleaded their cases, the claims arose from TILP acting for Midas and failing to properly apply the cover test required by the escrow contracts each beneficiary had with TILP and Midas (the terms of these instruments being in common).
On the second limb, series of related matters or transactions, AIG argued that this meant matters or transactions (those terms having the meaning commonly understood by solicitors) which were sufficiently similar in nature to each other. AIG offered a series of high level factors which connected the transactions together, such as the fact that all the 214 beneficiaries were investing in a Midas product of one kind or another, that in every case money paid by investors was to be used to generate “seed corn” capital to fund the developments, that security was promised over foreign land, etc…
In addition, AIG also argued that, although the MTC represented delegated legislation, the court was not entitled to construe those terms in line with public policy or public protection because the SRA’s intention had been that the MTC would stand alone and contain express terms which provided sufficient public protection.
The trustees’ case
The trustees were joined to the action that AIG brought against TILP as representatives for the beneficiaries who were the true interested party to the PII policy. Our case was that the 214 claims brought by individuals could not be aggregated into one claim under the MTC. Moreover, AIG’s case would give rise to asymmetrical aggregation that, in this case, would entirely favour the insurer at the expense of those for whom the benefit of the insurance was ultimately intended. Our primary case was that these claims should not be aggregated at all, but in the alterative, they could at best only be aggregated on a per development basis because of fundamental differences between the two cases against TILP (the similar acts or omissions limb).
In support of this, we argued that the claims were not similar because they were based on different causes of action for each class of beneficiary (some were purchasers, some were lenders, others still were purchasers in one development who had their funds switched to the other because of planning delays), which differed across the two development schemes and even differed on the facts of each individual’s claim. These were not, therefore, 214 claims which all arose from the same or even similar acts or omission.
Secondly, we argued that for there to be a series of related matters or transactions, there had to be more than the high level relatedness which AIG argued was the correct test. The transactions had to follow each other, or be in temporal succession, or be connected in a real and meaningful way. Clause 2.5 does not allow insurers to aggregate claims in almost every multiple claim case and, therefore, to undermine the public policy purpose of having mandatory insurance in the first place. In short, there had to be a lower level of relatedness between the transactions, so as to contrast between truly independent matters/transactions and matters/transactions which were interdependent and, therefore, closely related to each other.
We also argued that the court was entitled to construe the MTC wording to give it a meaning which reflected the purpose of the delegated legislation, being to protect members of the public from negligent or dishonest solicitors.
The trustees’ case was broadly supported by the SRA in the written submissions to the court.
The decision
Teare J is the first judge to construe the MTC wording in a reported case and, as such, previous authority on this precise wording was not available to him (though he was taken to decisions on the component words). He found that the MTC formed a “package” that resulted from the SRAs consultation with the insurance market and should therefore be construed neutrally, favouring neither the public nor the insurer (paragraph 27).
In regard to the similarity of acts or omissions, he decided that it was not open to him to add words which were not found in clause 2.5 (iv) to clarify the degree of similarity required, but that it should be read as requiring “a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree…” (paragraph 30). Applying this principle, he found that all claims were predicated in some way on the failure by TILP to properly apply the “cover test”, and this was a real and substantial similarity.
As to the meaning of series of related matters or transactions, Teare J found that the intention of this second limb “serves to limit the scope of the aggregation clause which would otherwise be very wide” and that “The phrase embodies the unifying factor (or an important part thereof) which makes it appropriate to aggregate claims” (paragraph 32).
Teare J posited three possible meanings (paragraph 37):
- A series of transactions which are related by reason of being dependent on each other (the trustee’s principle case).
- A series of independent transactions which are related because they are investments in one particular development (the trustee’s alternative case).
- A series of transactions which are related because they are of a sufficiently similar kind (AIG’s case).
The judge rejected AIG’s argument that a sufficient degree of similarity or connectedness is implied by the second limb of the wording. He reasoned that “this is 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” (paragraph 38) . He was not assisted by AIG’s submissions as to what the test of sufficiency entailed, nor could he be guided by any words in the MTC. He thought a test of sufficiency was “vague, uncertain and soft edged” and “a reasonable man would expect an aggregation clause to be certain in its scope” (ibid).
He preferred the first of the above meanings because the concept of dependency by comparison is clear and readily comprehensible. He also found it “difficult to talk of transactions being related unless their terms are in some way inter-connected” (paragraph 40). Furthermore, this meaning was to him the most natural that could be given to series of related matters or transactions in the context of a solicitor’s indemnity insurance policy.
The judge refused to make the declaration sought by the claimant because the claims did not arise from similar acts or omissions in a series of related matters or transactions.
Teare J granted AIG permission to appeal, though it remains to be seen if they will do so.
Impact and next steps
This decision is important mainly because it is the first recorded decision on the construction of clause 2.5 in the 10 years since the SRA adopted the MTC. The reason for this is that usually PII policies contain mandatory arbitration provisions that result in these claims never coming before a court. The consequence of the decision was that the trustees’ primary case succeeded and there is to be no aggregation between these claims.
If this first instance decision could be widely applied, it might be considered to have as significant an impact on the insurance industry as the Lloyds TSB decision, with the insurance industry again lobbying the SRA for a change of terms that benefits them.
However, as far as we are aware the wording used in clause 2.5 is not in wide use and is particular to legal professional indemnity policies. In addition, as in most aggregation cases, the application of the wording to claims is highly fact sensitive. Here, we have a case involving a complex property development funding scheme which went terribly wrong for fundamentally different reasons in two different jurisdictions, and where the clients, or those who relied on solicitors’ work, were not related to each other in any meaningful sense. Only at the highest level could these schemes be considered similar, or the beneficiaries deemed related, but it was nevertheless that extreme position which AIG sought to argue as being the proper construction of the policy.
That is not to say that the decision is limited in its application only to the Midas trusts. The court’s construction of the first and second limb of clause 2.5 (iv) and, in particular, the test of dependency is, for the time being, the definitive interpretation and clarifies what was previously a murky and insubstantial concept. The decision must, therefore, undermine insurers’ customary tactical use of aggregation to avoid or mitigate claims and professional negligence practitioners can expect them to seek to distinguish the case wherever possible.
The decision should act as a useful precedent to those acting for groups of consumers and clients who have suffered losses as a result of negligence by legal professionals. It should also stand as a salutary warning to insurers that they should not rely on aggregation provisions in their policies to support extreme positions adopted for tactical gain.
David A Bowman is a member of the successful trustees’ legal team and continues to act for the trustees and beneficiaries in their claims.
