Foran Glennon Palandech Ponzi & Rudloff
A Tale of Two Resorts â€“ Asymmetrical Aggregation
In attempting to create certainty, and despite best efforts to do so, the opposite can and does occur. Following the House of Lordâ€™s decision in Lloyds TSB General Insurance Holdings Ltd & Ors â€“v- Lloyds Bank Group Insurance Co Ltd  4 AER 43, insurers of solicitors became concerned that a narrow approach to aggregation was being adopted by the English courts. As a result, the aggregation provisions of the Minimum Terms and Conditions (â€śMTCâ€ť) for the mandatory primary professional indemnity insurance mandated for law firms in England & Wales was changed. This had the result that the revised aggregation language had not been tested in case law. It now has.
In the recent Commercial Court case of AIG Europe -v- OC320301 LLP & Ors  EWHC 2398 (Comm), Mr Justice Teare dealt with an application by insurers for a declaration that certain underlying claims against a firm of solicitors arising out of two failed investments in overseas property developments should be aggregated as a single claim, therefore restricting their exposure to the ÂŁ3 million per claim coverage afforded.
The relevant language of Clause 2.5 of the MTC (which, being mandatory, was deemed to replace the actual form of aggregation language in the Policy) reads:
â€śthe insurance may provide that, when considering what may be regarded as one Claim for the purposes of the limits
- All Claims against any one or more Insured arising from:
(iv) similar acts or omissions in a series of related matters or transactionsÂ will be regarded as One Claim.â€ť
In addition, the Policy also included separate aggregation language for dealing with the retention, namely that â€śa single retention shall apply to Loss arising from all Claims alleging the same Wrongful Act.â€ť As a result, the basis of aggregation for the purpose of limits was different to that for aggregation for the application of the retention â€“ this was referred to as â€śasymmetrical aggregation.
The Facts. The underlying claims derive from a UK property development company, Midas, which offered investors the opportunity to invest in holiday home developments in two locations, one in Turkey, and one in Morocco. The insured lawyers were retained to advise on the property law and securitisation aspects, security being over the land in Turkey and by way of a shareholding in the local Moroccan company which owned the land for that development. To protect the investorsâ€™ funds pending security being perfected, the insured established an escrow mechanism and two trust deeds. The trust deeds provided a mechanism whereby funds would not be released from escrow until a certain test as to the security was satisfied. Unfortunately, the local developers were unable to complete the purchase of the sites, and Midas was wound up, with all the funds allegedly having already been paid to the local developers. The trusts, and therefore the investors, were unable to recover any of the assets, due to a defect in the Turkish mortgage and the fact the investorsâ€™ interest in the Moroccan company was only 16.5%, with the local Moroccan companyâ€™s assets already pledged to other shareholders. The insured were therefore sued in two separate actions by the trustees of the two trusts.
Whilst the two underlying actions are proceeding in the Chancery Division, the insurers commenced declaratory proceedings in the Commercial Court as to the meaning ofÂ Clause 2.5 (a) (iv) above, contending that the underlying claims in fact arose from similar acts or omissions in a series of related matters or transactions, thereby falling to be aggregated as a single claim.
The Decision. Absent any authorities on the particular form of words imposed by the MTC, the specific choice of language used in the clause will determine the unifying factor giving rise to potential aggregation. As discussed in the Lloydâ€™s TSB case, the unifying factor may be express, or it may be necessary for the Court to imply a unifying factor from the general context of the relevant wording.Â As such, the Court had to construe the MTC and Clause 2.5 in particular â€śin a neutral mannerâ€ť in order to â€śidentify the meaning which the instrument would be reasonably understood to bear in its context.â€ť
To be capable of aggregation under Clause 2.5, the relevant claims must both â€śarise out of similar acts or omissionsâ€ť and be part of â€śa series of related matters or transactions,â€ť this latter qualification having the potential to restrict what was a wide form of aggregating language.
Dealing with the concept of â€śsimilar acts or omissions,â€ť it was accepted that acts or omissions could be similar if they bear a resemblance or likeness, without being identical, but that the question arose as to what level of analysis of similarity should be considered i.e. from a very high macro level, or from a very detailed micro analysis. As Clause 2.5 gave no express guidance, the Court looked at the clauseâ€™s purpose, finding that, as the purpose was to allow aggregation for the purpose of determining limits, â€śthe requisite degree of similarity must be a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity.â€ť On the facts of this case the losses alleged to have been suffered by all the Midas investors were held to be similar in relation to both resorts, and so the first aggregating limb was satisfied.
However, in order for insurers to succeed, the second limb, namely the claims must also be part of â€śa series of related matters or transactionsâ€ť must also have been satisfied. Insurers argued that the transactions relating to the two resorts ought to be considered as one single unifying â€śMidas modus operandiâ€ť, therefore satisfying this element. The judge, however, considering the clause in the context of its purpose, namely a professional indemnity cover for solicitors, considered the actual nature of the retainer and two individual investments. He found that, in the context of this particular Policy, transactions could not be related unless their terms are in some way conditional or dependent upon each other. In this case, whilst both relating to Midas investments, the judge concluded that they operated as two separate transactions, and therefore the second limb was not satisfied and aggregation was not permitted.
Conclusion. Â This case is another reminder that clauses in policies, whether standard, bespoke or mandatory must ultimately be construed in the context of the particular policy.Â In this case the imposition of the terms of the MTC, which over-rode the actual clause provided for in the Policy (and therefore giving rise to the asymmetrical aggregation), presented the judge with the challenge of interpreting, in the absence of specific precedent, the clause and Policy in accordance with established rules of contractual interpretation. Whilst decided on its specific facts, the case is a useful reminder that ultimately, if challenged, policy wordings which have not been tested by precedent, will be construed according to usual rules of contractual interpretation. As such, consideration must always be given to the policy and its purpose as a whole, particularly, as in this case, where clauses are imported, or imposed, into an existing contract and thereby creating internal inconsistencies.