November – Aggregations of Related Claims by Mike Willis

A frequent cause for solicitors’ indemnity coverage disputes is whether a claim is one of two or more “similar acts or omissions in a series of related matters or transactions”, pursuant to the overriding Solicitors Indemnity Insurance Rules Minimum Terms, thereby entitling the insurer to treat all such claims as one, and therefore subject to a single aggregate quantum insurance limit.

A decision by the Commercial Court in AIG v OC320301LLP [2015]EWHC (14 August 2015) is likely to have a significant impact on approaches taken by the courts and (more usually) arbitrators.

The claims arose from allegations that solicitors handling multiple-property developments in two developments in Morocco and Turkey had released moneys wrongly or prematurely, giving rise to aggregate claims exposures exceeding £10 million. Their insurers sought to treat all the claims as one, capping their liability to a single indemnity limit.

The Judge accepted that the claims ‘had a real or substantial degree of similarity’; but more controversially, he has distinguished as ‘unhelpful’ some interpretations of other aggregation provisions scrutinised in other reported English and Commonwealth cases, and found that, for the respective transactions to be sufficiently ‘related’ for the Minimum Terms aggregation provisions to apply, the respective matters must have been part of ‘a series’ of transactions which were “conditional or dependent upon each other”. In these cases, although the solicitors’ errors and the types of alleged losses were similar, and geographically connected at least in their respective development locations, few if any of the transactions were interdependent or conditionally linked by a ‘unifying factor’.

The insurers accordingly must expect to have to pick up the losses arising from each claim separately; and the solicitors in turn will have the burden of multiple excesses.

Why is Aggregation and this case so important?

Aggregation rules were introduced into solicitors min terms a few years ago because insurers were getting fed up with multiple claims arising from one mistake; a single or narrow modus operandi of a deviant employee; or a systemic flaw in a firm’s standard document or procedure. The rule, invocable at the insurer’s option, is intended to cap the insurer’s exposure to one indemnity limit even though there might be more than one claimant, claim event, or loss occurrences. When applied, the insurers escape a nasty spike in claims outlay, but beyond the cap, the insured firm is uninsured and therefore claimants’ prospects of recovery are curtailed to what they can recover, as ordinary creditors, from the liable firm, its owners and guarantors. The Rule has commercial significance for the profession and its composite branding. It’s also a big issue for insureds and their stakeholders because it casts uncertainty on their financial profile, both generally and if they operate at all in provisions of multiple services to typical patterns. For most businesses this isn’t a lose-sleep issue though, because the minimum insurance level (2m for unincorporated firms; 3m for corporates) is usually ample to cover their highest imagined risks, single or composite.

Trouble is………
• Their imaginations are not always wide enough to apprehend the full range or extent of possible losses for which they may be blamed.
• Whilst being blamed for stuff doesn’t necessarily – and often doesn’t – translate into liability, even the most adumbrative ‘circumstances’ can be reputationally catastrophic;
• The potential limit to firms’ capability to transfer their liability risks undermines confidence among their clients and stakeholders and makes investment in or financial backing of them harder or more expensive to obtain; and
• The value to the profession at large of its public protection commitment is diluted, eroding one of the pillars of what makes lawyers ‘special’ and creates opportunities for non-lawyers to offer similar services cheaper than the lawyers can, thereby reducing lawyers’ prospective markets.
Insurers’ exercise of their aggregation options are usually and necessarily – because the policyholder has little to lose by doing so – cause for challenge by the policyholder, creating delays and hiatus for dealing with the problem or resolving claims, and a cloud hovering above the firm damaging to its business. Usually such disputes are governed by arbitration clauses in the policy, and either resolved by arbitrators or ultimately settled by negotiation, hence judicial jurisprudence on the effects and interpretations of the aggregation rule has been limited. So, when there is a court decision, it’s valuable and likely to be very influential to/upon those who deal with such issues; and its wider consequences and potential significance for all firms is extensive, even if most firms’ leaders are not particularly attuned. 
 
One commercial/political issue likely to be affected is the proposal to reduce compulsory solicitors insurance from current levels to £500k, which has attracted widespread discussion and quite passionate support for and against. Detractors – including me – say it will further erode investor confidence and dilute the vital specialness of the profession and its industry. Supporters say it won’t make much practical difference because the reliability of risk-transference has already been eroded, and presently it’s too unfair and/or burdensome and something has to be done to level the ground between lawyers and their non-lawyer competitors.

F Mike Willis Ltd is an incorporated solicitors practice established by Mike Willis. Mike has been providing to clients and colleagues in his former firm for three decades: helping professionals in England and Wales with their identified civil liability and regulatory risks and exposures and opportunities.