Aggregation of Losses: Pensions Mis-Selling Lloyds TSB v Lloyds Bank Group Insurance Co Court of Apeal, 8 November 2001

Background

Lloyds TSB and other companies were involved in providing personal pension plans to the public, including those opting out of occupational schemes. They faced claims from thousands of investors, who alleged that the companies’ sales reps (formally, Financial Service Consultants or "FSCs") had failed to give "Best Advice" in accordance with the relevant code of conduct. The average claim was relatively small but the aggregate liability per company was substantial.

The companies had professional indemnity insurance which imposed a deductible "each and every third party claim" and went on to provide that:

The definition of "act or omission" was framed in the same terms as the Insuring Clause – in other words, if circumstances giving rise to a claim were covered under the policy, they also constituted an "act or omission".

In two separate cases the Court was asked to decide preliminary issues, based on assumed facts. It was common ground that there had been a systemic failure of the companies within each group concerned properly to assimilate the affect of the Financial Services Act 1986 and the regulations made under it; to appreciate the Best Advice responsibilities of the FSCs when selling pensions; and to institute a proper scheme of training to ensure that such responsibilities were carried out. Insurers accepted that the claims could be considered as a "series of claims", but contended that they could not be aggregated for the purposes of the deductible.

Moore-Bick J found that the management failure to train FSCs – and not the inadequate advice given by each FSC to a third party – was the real or effective cause of the third party claim, in that the failure of the FSCs to give Best Advice was the virtually inevitable result. He declined to decide whether this management failure was a single act or omission, or a related series of acts or omissions. He also concluded that, even if forced to confine himself to individual failures on the part of FSCs to give Best Advice, these individual failures were nonetheless linked by the common factor that they were the result of the management’s failure to provide proper training.

The companies appealed.

The Court of Appeal unanimously upheld the Judge’s conclusion, but not by his main route.

Potter LJ gave the main Judgment. He felt that, in the phrase "series of third party claims shall result from any single act or omission", "result from" imparted the notion of proximate cause. The language of the policy restricted the phrase "act or omission" to those acts or omissions which gave rise to the company’s liability. The relevant act or omission for that purpose was the failure of the company, through its FSCs, to give Best Advice to a third party. He found that the company’s duties to monitor and ensure the competence of their FSCs were simply regulatory requirements, and did not in themselves give rise to duties directly enforceable by third parties. So management failure was not in itself a single "act or omission" or a series of them for the purposes of the deductible.

However, Potter LJ agreed with the Judge that the series of claims fell within the aggregation clause, on the basis that it was the result of a "related series of acts or omissions". He accepted the Judge’s (alternative) reasoning, that the word "related" in a policy of this kind was apt to cover a series of acts and omissions directly attributable to a single underlying cause of a kind which was itself within the scope of cover provided by the policy.

He added:

"In my view it is plain that a series of acts or omissions may be related by reason of having a single underlying cause or common origin. …. This is a case … where that cause or origin consists of a failure to institute a system of training, supervision and monitoring which is .. required under Lautro Rules. …. The word "related" is wholly apt to apply to a series of acts or omissions which are of an identical or very similar nature and which share a common cause or origin of that kind."

The aggregation achieved in this case was very broad. If the basis of aggregation in the policy had been "event" instead of "related series of acts or omissions" the result would almost certainly have been different: in Caudle v Sharp (Court of Appeal, 1995), for example, one underwriter’s acceptance of 32 stop loss contracts was treated as arising from 32 events, not one.

The Court of Appeal in this case has treated the expression "related series of acts or omissions" as equivalent to "series of acts or omissions with a common cause". As Lord Mustill said in Axa v Field (House of Lords, 1996), "cause" allows for much wider aggregation than "event":

The deductible in the policies concerned here was relatively high (£1 million each and every loss, compared to the highest claim, £35,000), and nothing at all would have been payable if it had been applied to each advice given by an FSC. But this did not explicitly form part of the Court of Appeal’s reasoning.

The decision underlines the crucial importance of selecting appropriate words of aggregation. "Event" based aggregation can work perfectly well in the property field. But it may not do so in professional indemnity and other liability covers, particularly where the intention is that losses should be aggregated by reference to a background state of affairs, or a general failure or omission to do something. Such an outcome is more likely to be achieved by "cause" based aggregation.