In what is undoubtedly an important decision for the insurance market, solicitors and claimants, the Court of Appeal has ruled that claims arising from a dishonest solicitor’s thefts did not aggregate as one claim: Baines and others v Dixon Coles & Gill and others (6 August 2021).
In so doing, the court has provided important guidance on the application of limb 2 (“one series of related acts or omissions”) of the aggregation clause within the SRA Minimum Terms and Conditions of Professional Indemnity Insurance. The result is likely to concern the insurance market and could lead to higher premiums to more accurately reflect the exposure for primary layer insurers.
Facts
Linda Box, the (then) Senior Partner of Dixon Coles & Gill Solicitors, misappropriated many millions of pounds of client money from various probate estates over some 14 years until discovery in 2015. The Solicitors Disciplinary Tribunal described her conduct as involving “planned, deliberate, systematic, repeated dishonesty over a long period of time” and she was duly struck off the roll of solicitors in 2016. The following year Mrs Box was convicted of theft, fraud by abuse of position, and forgery, and given a custodial sentence of seven years; the Crown Court judge described the length and scale of her dishonesty as “quite staggering”.
Claims by those who had been defrauded by Mrs Box were presented against the firm, including its two other (innocent) equity partners. The firm’s professional indemnity insurance policy, which is compliant with the SRA Minimum Terms and Conditions of Professional Indemnity Insurance (MTC), provided cover of £2 million for any one claim. There was no excess layer cover. Insurers paid claims as presented, quantified and agreed until the £2 million indemnity limit had been exhausted.
Insurers argued they were entitled to aggregate all of the claims by the firm’s clients who had sustained loss by virtue of Mrs Box’s dishonesty so that they form a single claim. On that basis, Insurers would not be liable to meet any further claims as the limit of indemnity had already been reached.
The real focus of Insurers’ argument was that the claims against the firm arose from “one series of related acts or omissions” and thus fell within clause 2.5(a)(ii) of the MTC (Limb 2) as being “one claim”, although it was also argued the claims arose from “one act or omission” and thus were deemed to be “one claim” pursuant to MTC clause 2.5(a)(i) (Limb 1).
Insurers’ position was challenged by the Claimants in two separate actions, who each sought a declaration that Insurers were not entitled to aggregate their claims with the claims of other clients defrauded by Mrs Box.
First instance decision (28 October 2020)
The High Court (His Honour Judge Saffman) rejected the arguments advanced by Insurers to find that the claims did not aggregate. In so doing, the Judge relied upon two earlier key authorities addressing aggregation, namely the decision of the House of Lords in Lloyds TSB General Insurance Holdings Limited v Lloyds Bank Group Insurance Co Ltd (2003) and the Supreme Court decision in AIG Europe Ltd v Woodman (2017).
The argument based on Limb 1 related to the deeming of a claim being made for the purposes of the professional indemnity policy upon the discovery of a shortfall on the client account, and the obligation to remedy a breach of the Solicitors’ Accounts Rules. The Judge rejected this argument, concluding that Mrs Box's actions over a number of years could not be seen to be one act; each theft must be a different act although they may be taken with a view to accomplishing one ultimate objective.
As for the argument under Limb 2 and the question whether the claims arose out of one series of related acts or omissions, the Judge concluded that the thefts from the Claimants in the two actions did not have a sufficient interconnection or unifying factor with claims of other clients whose claims had already been satisfied to bring them within Limb 2. In so doing, he rejected the contention that Mrs Box's dishonesty was the proximate cause of the loss; what caused the losses were the individual thefts.
These were not related: being committed by the same person and perhaps concealed by the same process was not enough.
The Judge gave Insurers permission to appeal, on the basis that the question whether aggregation was possible was one of general importance on which there was no direct authority.
Court of Appeal decision (6 August 2021)
The Court of Appeal (Lord Justice Nugee, Lord Justice Phillips and Lord Justice Moylan) unanimously upheld the Judge's decision on aggregation and dismissed the appeal.
Insurers’ advanced two grounds of appeal, namely the claims aggregated because they arose out of a series of related acts or omissions within the meaning of Limb 2; alternatively the claims amounted to one claim under the definition in the policy. The appeal required analysis of the decisions in Lloyds TSB and AIG. It should be noted that Insurers did not seek to revive the argument that all the claims arose out of one act or omission within the meaning of Limb 1, it being accepted that Mrs Box's dishonesty is not itself an act, and that the acts or omissions are her individual thefts.
Whether those individual thefts were sufficiently related to be a series for the purposes of Limb 2 (the first ground of appeal) turned on the meaning of the unifying factor “one series of related acts or omissions”. In Lloyds TSB, where the aggregation clause used the similar, but not identical words “…related series of acts or omissions”, this clause was interpreted by Lord Hoffmann as confined to acts or omissions which “together resulted in each of the claims”. This, according to the Court of Appeal, means that “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 Court of Appeal regarded Lord Hoffmann's analysis in Lloyds TSB to be directly applicable to the aggregation clause in the policy, and concluded that the claims do not fall within Limb 2, as it cannot be said that each of the claims arises from a series of Mrs Box's thefts. It is not enough that the thefts in one sense can be said to be related by Mrs Box's dishonesty.
The Court of Appeal went on to find that the analysis of Lord Hobhouse (who gave different views to Lord Hoffmann on one point) in Lloyds TSB did not lead to any different conclusion. The essential point on which they agreed, and which was dispositive of the appeal in Lloyds TSB, was that it was not sufficient for acts and omissions to be a related series that they had the same underlying origin or cause, because that is a wider basis for aggregation which was not present in the subject policy wording. The same principles applied here, meaning that it was not sufficient that Mrs Box's thefts had the same underlying origin or cause in her dishonest treatment of clients' money. Arguments based on minor differences between the wording
in Lloyds TSB and the MTC, and the scope of the policies, were dismissed.
The Court of Appeal did not regard AIG (which concerned MTC clause 2.5(a)(iv) (“similar acts or omissions in a series of related matters or transactions”, i.e. Limb 4) to affect their conclusion on Limb 2, beyond noting Lord Toulson’s readiness to consider Lloyds TSB being of relevance to Limb 2.
There is, however, one loose end on this point. The Court of Appeal itself identified an argument which may have led to a contrary result on Limb 2. In summary, if a client asks for its money and it is not paid because there is a deficiency on client account due to the cumulative effect of all the thefts that have taken place from the client account, it could perhaps be said that each client who has a claim against the firm does indeed have a claim which arises from all the acts of theft taken together. Hence the requirement for Limb 2, that the claims all arise from the same series of acts, might be satisfied.
The Court of Appeal did not express any views on this argument, beyond saying it was “an interesting argument which raises a number of quite difficult points”, without any further clarification. The Court of Appeal declined to decide the appeal on a basis which was neither advanced by Insurers nor one which the respondents had come prepared to meet.
Insurers’ second ground of appeal, that there is in any event only one claim as defined in the policy, also failed. This ground rested upon the obligation to remedy a breach of the Solicitors’ Accounts Rules, which made reference to “a Claim” (singular), and the manner in which the innocent partners had treated the shortfall in client account and the need to make it good. The Court of Appeal dismissed the point, on the basis that the proper answer to the question was that there was both a right to claim the amount needed to remedy the shortfall, and also a separate claim for indemnity against liability to third parties. On this basis, the answer turned on the application of the aggregation provisions. There was accordingly no shortcut available.
Comment
This is the most important decision on aggregation of claims since the Supreme Court’s decision in AIG and we now have guidance on the application of Limbs 1, 2 and 4 of the MTC. The relatively restrictive scope for aggregation that emerges from these cases will concern primary layer insurers, although it would not be surprising for an Insurer facing indemnity claims for cumulative thefts to look to deploy the argument identified by the Court of Appeal, which has not been fully resolved.
The common theme of the decisions in AIG and in this case is the judiciary’s restrictive approach to the unifying factors which are used in the MTC; such factors being regarded as not as broad as wording allowing claims to be connected because of the same source or originating cause. The SRA intervened to oppose the appeal by Insurers, which suggests there may be resistance to a review of the MTC aggregation wording in light of the conclusion reached by the Court of Appeal. A move to a wider form of aggregation wording would protect Insurers against the catastrophic loss scenario, but issues of protection of the public and law firm exposure would consequently attract attention.
The prospects of an appeal by Insurers would appear to be slim but it cannot be ruled out. The differences between the judgments of Lords Hoffmann and Hobhouse
in Lloyds TSB had raised some discussion amongst practitioners: the Court of Appeal appeared to favour Lord Hoffmann’s narrower approach, but ultimately concluded matters on the basis that both concluded that it was not sufficient for matters to have the same underlying origin or cause. The Court of Appeal did not regard Lord Hobhouse’s comparison of a salesman giving different clients the same document to be analogous, on the basis that Mrs Box’s thefts were similar acts, but not the very same act repeated a number of times.
Whilst the case concerned repeated similar acts of theft, it may be capable of broader application, although the Supreme Court has accepted that aggregation is a fact- sensitive exercise. Insurers might accordingly keep an open mind as to how aggregation may work in different scenarios, notwithstanding the decisions in AIG and in this case.
There is a real possibility that this latest decision could lead to higher premiums to more accurately reflect the exposure for primary layer insurers. This comes at a time when capacity is restricted and pricing has been attracting attention – Insurers often say this should be regarded as a question of correction – with renewal season under way. It is a further reason therefore why Insured firms should consider the presentation of their risk very carefully.
