An insurer’s attempt to aggregate £10 million in claims, and thereby cap its pay-out to £3 million, has been rejected by the Commercial Court in the case of AIG Europe v OC320301 LLP  EWHC 2398 (Comm).
The decision turned on the interpretation of the aggregation clause and, more specifically, the court asked: did the claims in question arise out of “similar acts or omissions in a series of related matters or transactions”? If so, the claims would be aggregated and the insurer’s liability capped to £3 million; if not, the insured would be able to make separate claims with the result that the insurer would be liable to pay up to £10 million.
It was ultimately decided that whilst the claims did arise out of “similar acts or omissions”, the acts or omissions in question did not occur in a way that constituted a “series of related matters or transactions” and, as such, the losses could be claimed separately by the insured.
A firm of solicitors, The International Law Partnership LLP (“TILP”), was acting for a property developer, Midas ( the “Developer”), in connection with the development of two holiday complexes; one in Turkey and one in Morocco. 214 investors (the “Investors”) placed their money into an escrow account, for which TILP acted as escrow agents.
With a view to offering the Investors protection, two trusts were established under which the Investors were named beneficiaries and representatives of TILP as the “Trustees”. One trust would hold security over the land to be developed in Turkey, (the “Turkish Trust”), and the other over shares in the company which owned the land to be developed in Morocco, (the “Moroccan Trust”). The idea being that, in the event that the Developer ran into difficulty, there would be some recompense for any capital investment loss. The trust deeds included a provision that a certain level of security must be attained before the Trustees were authorised to release funds from the escrow account.
In the event, both securities failed and, notably, they failed for different reasons; the Turkish Trust failed because the mortgage was defective; but the Moroccan Trust failed because there had been a prior pledge of those shares to another party.
The Trustees should not have authorised the release of money from the escrow account without sufficient security over the land and shares, but, in the event, they did. The result being that when the developments failed and the Developer was wound up, the Investors were left without any compensation for their loss.
The dispute and legal analysis
The contention in this case stems from the subsequent claim made to AIG, (the “Insurer”). The dispute, in insurance terms, arose from a disagreement over the interpretation of clause 2.5 of the Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors and Registered European Lawyers in England and Wales, (the “MTC”).
The clause in question read as follows:
“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 […] all Claims against any one or more Insured arising from […] similar acts or omissions in a series of related matters or transactions […] will be regarded as one Claim.”
This wording was redrafted in light of the House of Lords decision in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd  Lloyd’s Rep. I.R. 623. Whereas the aggregation clause in the Lloyds case provided that aggregation would occur where the claims resulted from “any single act or omission (or related series of acts or omissions)”, the AIG wording provided a nuance with the effect that claims would only be aggregated where they arose from “similar acts or omissions [and occurred] in a series of related matters or transactions” (Emphases added).
This alteration to the wording actually rendered the Lloyds case less relevant in the AIG decision; the court distinguished AIG on the basis that the clauses were expressed differently and so the prior decision was of “very limited assistance”. In practical terms, this meant that there was no authority to rely on vis-à-vis clause 2.5 of the MTC.
Returning to the arguments proposed in AIG, the Trustees claimed that the losses arose from separate acts and should be treated separately, whereas the Insurer claimed that the losses arose in the same or similar way and, as such, should be aggregated under the insurance contract. If it could be said that both claims arose from the similar act or omission in a series of related matters or transactions, then the claims would be aggregated with the effect of limiting the insurer’s liability to £3million. If however, it could be established that the claims arose from separate causal incidents, then their liability would be up to £10 million in separate claims.
As such, the case turned on the Court’s interpretation of two phrases:
- (i) “similar acts or omissions”; and
- (ii) “in a series of related matters or transactions”.
The Court’s decision
With regards to (i), the Court held:
“[T]he defendants failed to provide effective security […] Thus, after the Investors’ monies had been released, the Investors were exposed to loss in the event that the development failed. In my judgment this is a real and substantial degree of similarity.”
However, the Court determined that the second part of the phrase “serves to limit the scope of the aggregation clause which would otherwise be very wide.”
Regarding (ii), the Court looked to interpret the words in their context and found that in this context, to satisfy the clause, the transactions would need to be those which are “dependant on each other rather than independent of each other” and in this instance, the transactions were found to be neither conditional nor dependant on each other.
As such, the court concluded that whilst the claims did arise out similar acts or omissions i.e. both losses occurred due the similar failures to properly impose security controls, the acts or omissions in question did not occur in a series of related transactions because the Turkish and Moroccan developments and trusts were independent of each other. Ultimately, therefore, the court found that the claims could not be aggregated.
By James Crabtree, with thanks to Natalie Lewis.