The Importance of Aggregation Clauses in Professional Clauses in Professional Indemnity Insurance Policies

UK Supreme Court clarifies effect of aggregation wording: AIG Europe Limited v Woodman¹

In a long awaited judgment, which will affect all organisations with professional indemnity insurance, the Supreme Court has clarified how professional indemnity insurance-related claims are aggregated. Overturning the Court of Appeal’s ruling that an additional “intrinsic link” test was to be applied when determining if claims could aggregate, the Supreme Court agreed with the insurers in finding that this formulation was not “necessary or satisfactory. 

Aggregation in practice 

Professional indemnity insurance is an essential part of the financial security of professional organisations that supply services to customers. Such PI or E&O cover, as it is known, is intended to meet the unexpected expense of meeting claims (including legal and other costs) brought by dissatisfied clients and/or third parties. 

PI policies almost invariably contain an aggregation clause that allows or requires a number of, usually, similar or linked claims to be treated as a single claim. The impact of these clauses can benefit either the insured, by capping the deductible, or the insurer, by capping the sum insured. This type of clause is rarely the subject of discussion when insurance is arranged, as neither the insurer nor the insured knows what claims might be brought in the future, but it can have a significant and unexpected effect when combined with the deductible that each insured has to pay when a claim is made and the overall level of insurance cover. For example, a large number of customers of a failed firm cannot recover their losses in full as their claims are treated as one claim against the firm’s limited cover, or an insurer has to pay an unexpected amount for multiple small claims that aggregate but would not otherwise be covered as they would fall below a per claim deductible. 

The various forms of aggregation clauses have led to many disputes, but the general meaning of the main types of wording had not been considered on appeal since a 2003 decision² of the House of Lords (the predecessor to the Supreme Court). 

Clarification of aggregation wording: AIG Europe Limited v Woodman 

The Supreme Court decision in AIG Europe Limited v Woodman concerned the aggregation clause in the Law Society’s minimum insurance terms for solicitors, where claims could aggregate where they arose from “similar acts or omissions in a series of related matters or transactions” but the principles will apply to similar policy wording. The case concerned about 200 individual investors in two holiday resort schemes who sued the - now insolvent - solicitors who had provided services to them all. The claims in total amounted to about £10 million, but insurers’ liability was capped at £3 million per claim. If the claims aggregated as one or more claims, the liability of insurers would be capped at £3 million per claim. In essence, the investors argued that the claims did not aggregate, while insurers argued that they did. 

The investors had succeeded in resisting aggregation at first instance but the Court of Appeal, while partly reversing the decision, had added an additional “intrinsic link” test to be applied when determining if claims could aggregate (i.e. the transactions had to have an intrinsic relationship with each other rather than an extrinsic relationship with a third factor). The Supreme Court, however, reversed that decision and decided the matter in favour of insurers (although the precise impact has to be decided at a further trial of all the facts in the High Court). 

The Supreme Court decided that whether the transactions in question were related was, first of all, “an acutely fact sensitive exercise” and that the application of the clause had to be judged by objectively taking the transactions in the round, rather than from the point of view of the participants (who might have different perceptions). In the current case, the Court found that the claims arose from acts or omissions of the solicitors in a series of related transactions, as all such fitted together in that they shared a common underlying objective of the execution of a particular development project and they also fitted together legally through trusts under which the investors were co-beneficiaries, and therefore aggregated. 

The Supreme Court indicated that it was, however, less likely that the claims of investors in the two separate holiday schemes could be aggregated into one, as, although they bore a striking similarity, they related to different sites and the different groups of investors were protected by different deeds of trust over different assets. Allowing the appeal, the Supreme Court remitted the case to the High Court to implement its decision in practice. 

Summary of effect of aggregation clause wording 

The Supreme Court did not revisit the previous decisions on aggregation. As a result we can summarise, in broad terms, the effect of various types of aggregation wording that can be found in many PI policies and which have been considered by the courts in recent years. 

Aggregation clause wording/Effect 

• a series of claims resulting from any single act or omission (or related series of acts or omissions) shall be considered a single claim/ Claims aggregate only where they share an act or omission that causes or results in the loss. This has a narrow effect. 

• similar acts or omission in a series of related matters or transactions will be regarded as one claim/This has a broader effect than the first example. Claims that in some way fit together, as a matter of fact, viewing the transactions in the round, will aggregate. 

• a series of claims arising out of one event shall be considered a single claim/This is a generally broader provision. Claims aggregate where they are linked to one event. An event is something that happens at a particular time, such as a mistake or an accident. It is a broader term than act. 

• a series of claims arising from one originating cause shall be considered a single claim/This is a broad aggregation provision. The word cause is less restrictive than event and can be a continuing state of affairs. The word originating opens up the possibility of finding a unifying factor that does not have to be the direct case of the loss or linked to one event. 

In light of the judgment, it is important for an insured to consider carefully the aggregation wording and not simply to rely on the “standard wording”. Whether a particular form of aggregation wording is “correct” for a particular PI policy will depend on many factors, including the nature and number of claims, level of cover and the size of the deductible and can be considered by each insured and its advisers when a policy is arranged. 

Although some uncertainty surrounding the interpretation of aggregation clauses remains, both insurers and insured are likely to welcome the overruling of the Court of Appeal’s narrow interpretation and the return to the position that determining whether transactions are “related” is a fact sensitive exercise. The Supreme Court decision highlights the importance of the aggregation wording chosen in professional indemnity policies. 

Footnotes

_{1) [2017] UKSC 18
2) Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] 4 All ER – a case on the impact of aggregation clauses on the repeated mis-selling of pension products.}