AIG Europe Limited v Woodman is the first judicial consideration of the proper construction of the aggregation clause in the Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors and Registered European Lawyers in England and Wales (MTC). The Supreme Court handed down its decision today (22 March 2017). It will be of interest primarily for those dealing with solicitor’s negligence claims but adds to the body of law on the approach to aggregation.
Each year the Law Society makes rules under s.37 of the Solicitors Act 1974 requiring solicitors to arrange professional indemnity insurance with “Qualifying Insurers”. Such policies must comply with the MTC. The MTC are, in effect, incorporated into the policies issued by the Qualifying Insurers and their meaning therefore relevant to all insured solicitors.
The underlying disputes
The law firm ILP was instructed by Midas International Property Development (Midas). Midas planned to build holiday resorts in Turkey and Morocco. ILP devised a scheme to encourage investors. Under the scheme, each investor became party to an escrow agreement with ILP as well as a beneficiary of a deed of trust (where the trust was to hold security over the land to be purchased). There were different trusts and escrows for the two developments. The idea was that the investor monies held on escrow by ILP were not to be paid over to Midas until a promised level of security was in place. The deed of trust contained an express test which the original trustees had to apply prior to the release of any money from the escrow account, known as the ‘cover test’. If the cover test was met, the trustees were entitled to authorise the release of monies from the escrow account for the purchase of land or to finance the development generally.
Both the Turkey and Morocco developments failed and Midas was wound up. In addition, all of the invested monies placed into escrow had been paid out. The trustees, representing 214 investors, commenced proceedings against ILP in relation to both the Turkish and Moroccan developments. The investors’ case was that had ILP put in place an effective form of security and/or applied the cover test properly, the investments would have been protected or would not have been released from the escrow account. ILP sought indemnity from its insurer, AIG.
Aggregation under the insurance policy
ILP’s professional indemnity insurance policy incorporated the MTC. Under the policy, the maximum sum insured for any one claim was £3 million. The aggregation clause in the MTC was entitled ‘One Claim’ and provided that:
“(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
will be regarded as One Claim.”
AIG submitted that the claims brought by the investors arose from “similar acts or omissions in a series of related matters or transactions” and were to be treated as one claim under clause (a)(iv), with the result that AIG’s limit of liability was £3 million. The insureds’ case was that the claims could not be so aggregated, with the result that the losses could be recovered in full.
The Commercial Court decision
At first instance, Mr Justice Teare accepted that all the claims arose from similar acts or omissions but he rejected the argument that they were in “a series of related matters or transactions”. He interpreted those words as referring to transactions which were related in the sense that, by reason of their terms, they were in some way dependent on each other. Since the transactions entered into between Midas and each investor were not mutually dependent, the claims of each investor did not fall to be aggregated with one another.
The Court of Appeal decision
The Court of Appeal concluded that Teare J had gone too far in finding that the transactions had to be dependent on each other. Overturning the first instance decision, it held that the true construction of the words “in a series of related matters or transactions” was that the matters or transactions had to have an “intrinsic” relationship with each other, rather than just an external common factor. An external common factor would be the transactions being conducted by the same solicitor or relating to the same geographical area. AIG appealed because it thought the Court was incorrect to add the need for an “intrinsic” relationship.
The Supreme Court decision
The Supreme Court unanimously allowed AIG’s appeal. Lord Toulson, giving the leading judgment, stated that he did not consider the Court of Appeal’s formulation of the aggregation test to be “necessary or satisfactory”. His difficulty was with the word “intrinsic” and what that meant in the context of a relationship between two transactions. Lord Toulson recognised that the use of the word “related” in the clause implied that there must be some interconnection between the matters or transactions. However, he did not think there was a limitation to the meaning of the word – the Law Society had not seen fit, after negotiation with the market, to circumscribe the phrase “a series of related matters or transactions” by any additional or qualifying criteria, such as “intrinsic”.
In considering the application of the aggregation clause, Lord Toulson stated that the question should not be viewed from the perspective of one party to the insurance but should be objectively considered “in the round”. Against that background it was necessary to identify the relevant “matters or transactions”. The transactions in this case involved an investment in a particular development scheme under a contractual arrangement that was principally bilateral but that had an important trilateral component by reason of ILP’s role both as escrow agent and trustee. The transactions entered into in respect of each development were connected in significant ways. Each set of investors invested in a common development, they were participants in a standard scheme and co-beneficiaries under a common trust.
These connecting factors, it was held, led to the conclusion that the claims of each group of investors arose from similar acts or omissions in a series of related transactions. The transactions “fitted together” in that they shared the common underlying objective of a particular development project, and they also fitted together legally through the trusts under which the investors were co-beneficiaries.
The transactions entered into by the investors in the Turkey development could not, however, be said to be “related” to those entered into by the investors in the Morocco development within the meaning of the policy. The transactions concerned different sites, had different groups of investors and were protected by different deeds of trust over different assets. It was held, therefore, that they should not be aggregated together.
It is clear, as the Supreme Court itself noted, that although the test to be applied for aggregation will always be a matter of the policy wording first, how that wording is applied, in this case to determine whether transactions are related, is an acutely fact sensitive exercise. That has clarified the position for the MTC.
The Court also made clear, though, that in making its assessment it will adopt a common sense approach, viewing the transactions objectively and in the round.
All that said, this may not be the end of the litigation, since the case proceeded on the basis of assumed facts and will be remitted either to the Commercial Court or Chancery Division of the High Court to be determined in accordance with the Supreme Court’s judgment. It is, however, now clear that the concept of “related matters or transactions” should not be qualified by any requirement for there to be an “intrinsic” relationship between those matters or transactions.