Our take: 2017 Supreme Court Judgement on Aggregation
What will the long term consequences be for claimants, solicitors and PI insurers?
Midas, a UK property development company, intended to build holiday resorts in Turkey & Morocco. Both developments were to be financed by individual investors who would either buy part of the development or would take out a loan from the developer. One firm of solicitors was instructed by the developer in relation to both developments. Investors monies were held in the solicitors’ escrow account only to be released once the security over the development was in place. Unfortunately, the solicitors released the funds to the developer without the security being in place. Both developments subsequently failed leaving the investors empty-handed. Their investment of around £10m was lost and so, not surprisingly, the investors sued the solicitors.
The solicitors had PI insurance with AIG with a limit of £3m. The policy also incorporated clause 2.5 of the Solicitors Minimum Terms & Conditions (“MTC”) which provided that:
“when considering what may be regarded as One Claim for the purposes of the limits …all claims against one or more insured arising from…similar acts or omissions in a series of related matters or transactions …will be regarded as One Claim”
The Supreme Court
Following earlier decisions at first instance and by the Court of Appeal, the Supreme Court applied a common sense approach. It held that the MTC clause 2.5 has two separate limbs, each of which must be satisfied for it to apply :
First, the claims must arise from “similar acts or omissions”.
Secondly, the claims must be a “series of related matters or transactions”. The Supreme Court held that the Court of Appeal’s use of the term “intrinsic” (to define the relationship between the transactions) was not necessary. Instead, the term “related” (MTC Clause 2.5) simply meant some form of interconnection between the matters or transactions. In other words, the Supreme Court said it required “a real or substantive connection between…transactions”. They had to be more than just “similar” but had to fit together in some way. That would depend on the specific facts on each occasion.
The Supreme Court also ruled that aggregation clauses “are to be judged not by looking at the transactions exclusively from the view point of one party or another ..but by looking at the transaction objectively..”
Here then, the claims of each group of investors did arise from acts or omissions in a series of related transactions. The legal structure of the transactions was similar and they shared the common objective of the completion of a development project.
However, the Supreme Court refused to aggregate these transactions. They related to different sites (one in Turkey, another in Morocco) and the different groups of investors were protected by different deeds of trust over different assets.
Accordingly, the Supreme Court found that the investors’ claim in the Turkish development should be treated as one claim for policy purposes, with the investors’ claims in the Moroccan development being treated as another claim for policy purposes. That meant a single limit of indemnity of £3m would apply to meet any successful claims by the investors in the Turkish development, and there would be a separate (second) limit of £3m available to satisfy any successful claim by the investors in the Moroccan development. Two limits with a total of £6M available to the investors.
We believe that the Supreme Court has brought common-sense to the fore. It has stripped away the unhelpful terms of “intrinsic” and “interdependent” (used in the lower courts). This is a sensible, straightforward application to the particular facts and seems to be the right decision.
The judgement does not provide full clarity on when claims may be aggregated. Such cases are invariably factually complex and it is likely that future cases will continue to turn on their particular facts.
Although some uncertainty surrounding the interpretation of aggregation clauses remains, both insurers and insureds should welcome the overruling of the Court of Appeal’s narrow interpretation and the return to the sensible position of determining on the facts whether transactions are “related.” A win for common sense.
This analysis is for guidance only. If you require advice or more detailed information, please contact Billy Hinken.