UK: Counting Claims After Lloyds TSB

An aggregation clause enables two or more "claims" under a policy of insurance to be treated as a single "claim" for certain purposes when they are linked by a unifying factor defined in the policy. Aggregation may favour either the insurer or the insured depending on the circumstances. In solicitors’ professional indemnity policies, the sum insured for any one claim must, under the Minimum Terms, be at least £1 million. An insured may have several claims each less than £1 million in value, but which when added together exceed £1 million. Faced with this situation, an insurer on the primary layer of insurance may seek to rely on an aggregation provision in the liability clause to limit its exposure to £1 million and thereby reduce its liability under the policy. An insured, on the other hand, may seek to rely on an aggregation provision in relation to a series of small claims to reduce the number of deductibles payable and to reach the minimum level at which the insurers’ payment obligation starts. The latter scenario is exemplified by the Lloyds TSB decision below.

Lloyds TSB paid total compensation of £125 million in respect of 22,000 claims relating to alleged pensions mis-selling. Insurers refused indemnity on the ground that the largest claim was only £35,000 and the policy deductible of £1 million applied to each and every claim. Lloyds TSB sought to rely on the aggregation provision in the deductible clause to reach this minimum threshold of cover, arguing that the absence of a management training system and failure to monitor the sales team was a unifying factor which brought the claims within the terms of the aggregation clause. The House of Lords held that the question to decide was whether this failure had resulted in the liability Lloyds TSB owed to the individual claimants. In an important judgment for insurers, represented by BLG, the House of Lords concluded that this failure, although forming part of the background leading to the breaches of duty, was legally irrelevant to Lloyds TBS’s liability. The act or omission which did give rise to the civil liability in respect of each claim was the failure by the sales representatives to give the best advice to each claimant, and this was different in each case. Therefore, the aggregation clause did not apply and insurers were not obliged to pay anything under the policy. A full report of the decision appears in the Autumn 2003 edition of BLG’s Insurance Law Quarterly which is available from publications@blg.co.uk .

Perhaps the best known solicitors’ case on aggregation of claims is Haydon v Lo & Lo (1997). The Privy Council held that a number of thefts by a dishonest clerk from a client of the firm was a single claim for the purposes of the policy. The decision affirmed that a "claim" is not defined by reference to a cause of action, but rather to the object that is claimed, which in this case was restitution of the loss caused by a dishonest employee.

Haydon v Lo & Lo involved the old Hong Kong solicitors’ professional indemnity policy wording, which was in turn substantially similar to the old Solicitors’ Indemnity Fund policy wording. Today it is a requirement that solicitors’ policies comply with the Minimum Terms and Conditions, at least in relation to the first £1million of cover. The Minimum Terms allow for the aggregation of all claims arising from the "same act or omission" or from the "one series of related acts or omissions" for the purpose of limiting insurers’ liability under the policy. They also permit the aggregation of claims for the purposes of limiting the deductible on terms negotiated between the parties.

The Lloyds TSB decision affirms previous judicial statements that the proper interpretation of an aggregation clause depends on the wording of the particular clause and decided cases on other forms of words are therefore of limited value. The wording in the aggregation clause in the Lloyds TSB case is not dissimilar to the old SIF wording, which in turn does not differ substantially from the wording used in the Minimum Terms. The Lloyds TSB decision is therefore a more than interesting point of reference for those involved in claims against solicitors.

While not a solicitors’ professional indemnity case, the Lloyds TSB decision raises some useful additional points of general application which we can apply when interpreting aggregation clauses.

First, the Lloyds TSB decision emphasises, consistently with other important recent insurance and reinsurance case law, that the choice of words in an aggregation clause represents part of the bargain struck between the parties, and is to be respected when interpreting the policy. The decision shows that the Courts will uphold a tightly worded aggregation clause, even if to do so restricts the cover available to the insured.

Secondly, the decision shows how critical it is to take care when defining the act or event which a clause treats as the unifying factor for the purposes of aggregation. Defining the unifying "act or omission" by reference to the insuring clause, as was the case in Lloyds TSB, will limit aggregation to those acts or omissions which could give rise to a claim under the policy. Clauses aggregating losses on the basis that they arise out of "one event" will be more narrowly construed than losses arising out of "one originating cause".

Lastly, it is worth remembering that in high value cases involving excess layer insurers, the interests of the primary layer and excess layer insurers in relation to issues of aggregation may not coincide. To take the example above, where primary layer insurers wish claims to be aggregated so as to exceed their £1 million policy limit and thereby limit their exposure under the policy, it will be in excess layer insurers’ interests for there to be a number of claims each less than £1 million so that the claims stay within the limits of the primary layer of insurance. In such circumstances the same firm of solicitors may not be able to act for both the primary layer and excess layer insurers on this issue.