Supreme Court backs 'straightforward' interpretation of professional indemnity insurance terms

Out-Law News | 22 Mar 2017 | 3:37 pm | 4 min. read

The term 'a series of related matters or transactions' in a professional indemnity (PI) insurance policy merely requires some inter-connection between the matters or transactions, and not an 'intrinsic' relationship, the UK's highest court has ruled.

The long-awaited decision of the Supreme Court was a "victory for common sense", which balanced the public interest in having wide PI cover available with the need to keep the costs of that cover affordable, according to insurance law expert Nick Bradley of Pinsent Masons, the law firm behind Out-Law.com.

Over 200 individual investors had sought damages from International Law Partnership LLP (ILP) and its PI insurer, AIG, in relation to two failed holiday resort developments in Turkey and Morocco. AIG successfully argued before the Supreme Court that the 'aggregation' clause in the policy limited its exposure to two separate claims of £3 million in value, rather than the approximately £10m sought by the investors.

The aggregation clause in the policy limited claims that "arose from ... similar acts or omissions [of ILP] in a series of related matters or transactions" to £3m.

In reaching its judgment, the Supreme Court was required to fully scrutinise the 'minimum terms and conditions' (MTC) for solicitors' PI insurance set by the Law Society, which had itself been allowed to participate in the case because of its importance, said Bradley.

"Both the commercial court and the Court of Appeal came up with different interpretations of how the words 'in a series of related transactions' were to be applied, and both adopted a legalistic analysis'," he said. "The Supreme Court rejected both, and adopted a bolder and more straightforward approach. It looked at the facts put before it as to the transactions involved and simply asked, from an objective and logical viewpoint, what the transactions were and whether they were related."

"The outcome is likely to mean that the insured solicitors will have coverage for at least two sets of claim in this instance, instead of the full amount of their original multiple claims, which was the decision of the commercial court – although there is the possibility that the matter could be referred back to the commercial court on the detailed facts. So that is good news for the insurer, on the basis that the claims will be subject to an aggregate cap, albeit there will likely be two claims not one," he said.

"As the court pointed out, aggregation clauses can operate in favour of the insured by capping the amount per claim deductible; but they can equally operate in favour of the insurer, as here, by capping the total sum insured. It recognised the need to balance the public interest in having wide cover available and the cost of securing cover from the PI market. How the Law Society and the insurance market reacts now will be of interest, and the approach adopted by the Supreme Court will be followed in other aggregation cases beyond just the solicitors' PI market," he said.

Solicitors in England and Wales are required to take out and maintain PI insurance which meets certain minimum standards, known as MTC. Solicitors in Scotland are subject to similar requirements under separate legislation. The MTC prescribes a minimum figure for which solicitors must be insured for any one claim. It also permits the aggregation of claims in a number of circumstances including, as argued in this case, where the claims arise from "similar acts or omissions in a series of related matters or transactions".

The solicitors in this case had advised on the development of two planned holiday resorts, one in Turkey and one in Morocco, to be financed by private investors. As part of the relationship, they advanced funds from the investors to the developer for the purchase of the development land, which would then be held in trust by ILP on behalf of the investors. Funds were released to the developer in tranches, but the firm collapsed before the purchase of the land was complete.

ILP held PI insurance with AIG, under which the insurer's liability was limited to £3m in respect of each aggregated claim. The individual claims of each investor were worth over £10m in total. AIG's argument that the claims should be considered as one claim under the aggregation clause was rejected by the commercial court since the transactions between the developers and each investor were not mutually dependent. This was partially overturned by the Court of Appeal, although it held that the matters or transactions had to have an "intrinsic relationship" with each other.

In a unanimous judgment, the Supreme Court ruled that the Court of Appeal's use of the word "intrinsic" was unnecessary. The actual wording of the MTC "separates the requirement that the acts or omissions giving rise to the claims should be similar and the requirement that they were in a series of matters or transactions which were related", Lord Toulson said.

"Use of the word 'related' implies that there must be some inter-connection between the matters or transactions, or in other words that they must in some way fit together, but the Law Society saw fit after market negotiation not to circumscribe the phrase 'a series of related matters or transactions' by any particular criterion or set of criteria," he said. "Determining whether transactions are related is therefore an acutely fact sensitive exercise."

"The transactions entered into by the [Turkish] investors were connected in significant ways, and likewise the transactions entered into by the Marrakech investors. The members of each group were investing in a common development, for which the monies advanced by them were intended, in combination, to provide the developers with the necessary capital. Notwithstanding individual variations, they were all participants in what was in overall terms a standard scheme. They were co-beneficiaries under a common trust," he said.

However, the case for aggregating the claims of the Turkish investors with those that had invested in the Moroccan site was "much weaker", the judge said.

"They bear a striking similarity, but that is not enough," he said.

"[T]he development projects were separate and unconnected. They related to different sites, and the different groups of investors were protected by different deeds of trust over different assets. Accordingly, on the facts as they currently appear, the insurers have no right to aggregate the claims of the [Turkish] investors with those of the Marrakech investors," he said.