Aggregation under the solicitors' minimum terms: are primary layer insurers ready for potentially limitless liability?

In Baines v Dixon Coles & Gill¹  the Court of Appeal has substantially limited the extent to which claims against solicitors can aggregate.

The decision, which may come as a surprise to many, prevents insurers from aggregating claims arising from a dishonest course of conduct of a solicitor, and may be applicable in a wider context too.

The Facts

DCG was a small solicitors' practice. The firm's senior partner was discovered to have stolen more than £4 million from at least 75 of her clients over a period of many years, mainly from the estates of deceased persons. The partner in question was struck off and subsequently sentenced to 7 years in prison.

The firm's insurance policy contained an aggregation clause reflecting the SRA's Minimum Terms and Conditions:

"All Claims against any one or more Insured arising from:

1. one act or omission;
2. one series of related acts or omissions;
3. the same act or omission in a series of related matters or transactions;
4. similar acts or omissions in a series of related matters or transactions;

will be regarded as one Claim"

The firm's insurer had already paid out claims totalling £2m (the policy limit) and denied that it was liable to pay out any more on the basis that the various thefts formed a series of related acts and should all be aggregated. The claimants (two of the affected clients) disagreed.

If insurers' position was right then any further claims, including those of the claimants in this case, would be uninsured. The claimants' only chance of recovery would lie against the offending solicitor (or her fellow partners). The aggregation issue was therefore of considerable importance.

The High Court found in favour of the claimants. The firm (and its insurers) appealed. The Court of Appeal has now dismissed the appeals: the claims will not aggregate and the £2m limit will apply to each claim.

Analysis

The judge at first instance decided that the thefts could not be viewed as one act. Each theft must be treated as a different act even if they are all taken with a view to accomplishing one ultimate objective (ie the theft of client monies). This aspect of the judgment was not appealed.

The Court of Appeal was however asked to consider whether the claims arose out of one series of related acts. The Court's analysis of this point was informed by two authorities: Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] UKHL 48 (Lloyds TSB) and AIG Europe Ltd v Woodman [2017] UKSC 18 (AIG). Our analysis of the AIG case can be found here.

In Lloyds TSB, Lord Hoffmann held that for events to be ‘related’ or form a ‘series’, there must be a unifying factor which is expressed or implied by the words used in the relevant clause.

Insurers argued that since the thefts all formed part of an extended course of dishonest conduct on multiple occasions over many years, they were a series of acts of omissions which were all related. This argument was rejected. The Court of Appeal's reasoning can be summarised by the following extract from paragraph 53 of the judgment:

If there is a series of acts A, B and C, it is not enough that act A causes claim A, act B causes claim B and act C causes claim C.  What is required is that claim A is caused by the series of acts A, B and C; claim B is also caused by the same series of acts; and claim C too.

The claims by the individual clients did not arise from the combination of all the thefts. Instead, the claims by each client arose from the theft of its money. No claim therefore arose from a related series of acts. They were no doubt similar acts, all flowing from the partner's dishonesty; but this is not enough to make them a series of related acts for the purposes of aggregation.      

Commentary

The application of aggregation provisions in a solicitors' minimum terms compliant policy can be fraught with difficulty. They are a constant source of dispute. Sometimes the provisions work to the benefit of the insured, and sometimes to the benefit of the insurer, depending on the facts. But what is clear from the Court of Appeal's decision in Baines is that, whatever happens, a solicitors' MTC compliant clause is now more likely to work for the benefit of the claimant.

This judgment is therefore likely to cause concern for law firms and their professional indemnity insurers faced with multiple claims involving the theft of client monies. It is also potentially applicable to other types of claims, for example repeated similar negligent acts or omissions.

The decision substantially limits the scope of aggregation. That may work to insured firms' advantage in cases such as this one, where the limit of liability is made available in full for each of a number of claims. In other scenarios, where there are a large number of small value claims, an insured firm may be required to pay its excess in relation to each one, and may well have preferred the claims to aggregate.

Overall though, insurers are likely to find their attempts to aggregate claims are frustrated. This will be of particular concern to primary insurers who may have to pay out in respect of multiple claims without the protection of a single reducing limit. In the context of sustained dishonest conduct, such as in this case, this could lead to almost limitless liability. It remains to be seen whether the decision will be appealed to the Supreme Court. If it is then there will likely be interest from various sides, not least the SRA (which intervened in the Court of Appeal proceedings to oppose the appeal).

The court also considered the particular scenario of whether claims which arise out of a deficiency of the client account can still aggregate. The point postulated was this: where multiple thefts from the client account occur, the overall deficiency on the client account arises out of the cumulative effect of the thefts; they are not attributable to any one particular theft. Accordingly, should the claims of each client who subsequently claims against the firm aggregate on the basis that they all arise out of acts of theft taken together, and therefore arise from the same series of acts?

The court declined to determine the point on the basis that it had neither been an argument advanced by the appellant nor one which the respondents had come to meet. However, the fact that Lord Justice Nugee considered it to be an "interesting argument" which raised "difficult points" suggests that he may have considered there to be some ground for distinction. His comments leave the door open to a favourable finding on the point in the future.

1. [2021] EWCA Civ 1211