Aggregation of claims under Solicitors Professional Indemnity Insurance

22nd March 2017

The Supreme Court has today (22nd March 2017) handed down its much awaited Judgment in AIG Europe Limited V Woodman and Others [2017] UKSC 18.

The issue for the Supreme Court was the interpretation of the Law Society’s Minimum Terms Conditions which apply to professional indemnity policies issued to solicitors.

In particular, the Court was asked to interpret in what circumstances claims can be aggregated under the provision which provides for aggregation where claims arise from “similar acts or omissions in a series of related matters or transactions”.

Whilst this may seem at first glance to be a fairly dry point of interest to academic lawyers and insurers, it is in fact an issue of significant importance both to the profession and to claimants.

The Law Society requires all solicitors to hold a minimum level of professional indemnity insurance (currently £2,000,000 for sole practitioners and partnerships and £3,000,000 for others).

Although this will often be adequate for many claims, if claims can be aggregated (i.e. joined together and treated as one) this may well prove insufficient even dealing with relatively small claims, particularly in group litigation.

For example, if a client invests £100,000 in the purchase of a property overseas or, in a combined investment (e.g. a room in a hotel), if, as a result of the solicitor’s negligence, the investment is lost the insurance would be more than adequate to cover an individual claim.

However, if this claim is to be aggregated with others who have made similar investments then, even if there were say only a total of say 40 claims to be aggregated it can easily be seen that the insurance would be insufficient as only being enough to cover 50 or 75% of the claims.

In large schemes, the percentage of cover could be much smaller and the situation can be particularly bad for some claimants as the general rule is that the insurers will pay out on a “first come first served” basis and so, once the pot is exhausted, it could leave later claimants without a remedy.

The case which the Supreme Court was considering involved investors who were buying properties in Marrakech and Turkey.  In each case the developers were essentially the same as were the solicitors against whom the claims in negligence are being pursued.

The insurers sought to argue that all of the claims in the developments should be aggregated so that there would only be one “pot” of £3,000,000 against the total claims which were approximately £10,000,000.

Not surprisingly, the investors sought to argue that there should be no aggregation as they were not connected with each other being all separate individuals and they therefore sought to argue that each was a separate transaction and so should have the benefit of the pot of £3,000,000 applied to each of their claims.

The issue was originally dealt with in the Commercial Court where Teare J. decided the issue in favour of the individual claimants.

The insurers appealed to the Court of Appeal which overturned Teare J.’s decision but its Judgment was considered by most to be at best opaque and did not really assist in clarifying the position.

The Supreme Court has now delivered a unanimous judgment which varies from both Teare J. and the Court of Appeal.

What the Supreme Court has decided is that, in looking at whether claims are to be aggregated, the position is to be judged objectively taking the transactions in the round.

On the agreed facts of these cases, it decided that each of the two developments, as the investors were involved in a common and standard scheme and were co-beneficiaries under a common trust deed in each case the claims in respect of each development did fall to be aggregated.

This means that all the claims in respect of the Morocco development are aggregated into one pot of £3,000,000 for those claimants and, similarly, the Turkish claims are aggregated into a separate pot of £3,000,000.

The Supreme Court rejected the insurers argument that, because of similarities between the investments schemes, the aggregation should apply across both developments which would have meant only a pot of £3,000,000 rather than two.

The Judgment is to be welcomed in that it does provide greater clarity than hitherto however the Court has made it clear that the question of aggregation is fact sensitive and so arguments about this may well still persist.

For example, it may be arguable that, simply being one of a number of purchasers in the same development without anything more (e.g. as in this case where there was a common trust deed) is not sufficient to satisfy the requirements of aggregation.

Unfortunately, it may be difficult to ascertain how any such arguments fare as usually claims of this nature are dealt with in arbitration under the terms of the insurance policies and that therefore means a private and confidential Award issue which would not normally be known outside of the parties.  Whilst it is possible that further clarification may come through other cases it is unlikely that anything significant will be forthcoming for some time, if at all.

Clearly there are implications for investors and schemes involving some form of collective investment and a prudent investor may wish to ensure that its advisors have adequate insurance to cover not just any claim it might bring but also the claims of any related investors who might be similarly involved.

It is not uncommon in these sorts of cases for the investors to have been referred to relatively small firms of solicitors with whom the seller has established a connection and often may well only hold the minimum amount of cover.

Equally, solicitors involved in this type of work, may need to think carefully about the level of cover which they maintain.  Whilst the ruling means that the exposure of their insurers may be limited as a result of aggregation, this does not affect the rights of the claimants to seek full recovery for each of their losses from the solicitors directly.

22nd March 2017

This article has been written by Howard Colman, head of Dispute Resolution at Colman Coyle Limited.  Howard is regularly instructed in matters of professional liability and group claims.