Insurance aggregation in solicitors' professional indemnity insurance might seem a dry and technical topic which ought to remain the preserve of insurance law specialists. However, the case of Baines & others v. Dixon Coles & Gill  EWCA Civ 1211 provides a colourful example that when things go wrong, a dishonest partner's misdeeds can cause severe practical consequences for clients, firms and innocent partners.
Linda Box was the apparently respectable senior partner of a long-established Wakefield firm. She held senior offices in the Church of England. In 2015, one of her partners identified an unexplained payment from the firm's account which led him to uncover further discrepancies. When confronted, Box admitted making unauthorised payments from the firm's client account, including to meet her own tax and credit card liabilities and pay her mortgage.
Following the Solicitors Regulation Authority's (SRA) intervention, Box was charged and pleaded guilty to 13 counts of theft, fraud by abuse of position and forgery. She was sentenced to seven years' imprisonment. The total charged on the indictment exceeded £4m, although the actual amount stolen is thought to be considerably greater. The length and scale of Box's dishonesty, dating back to 2002, was described as “quite staggering” by the sentencing judge. Between 2010 and 2015, over £3m was paid to her credit card accounts.
The other two equity partners in the firm were left to deal with the fall out, including claims from clients whose money had been misappropriated. It was not suggested they had any involvement in or knowledge of Box's thefts, but as innocent partners they were potentially liable as her partners with unlimited liability. They entered into a Partnership Voluntary Arrangement.
The insurance position
The firm was insured in accordance with the SRA's Minimum Terms and Conditions for solicitors' professional indemnity insurance, with a £2m limit of indemnity for any one claim. The insurers paid claims up to £2m limit but refused to pay further claims on the basis they were entitled to aggregate all claims arising from Box's dishonest course of conduct and treat them as one claim.
The insurer argued Box's thefts formed a series of related acts and the SRA's Minimum Terms and Conditions deemed all the claims were aggregated. If they were right, any further claims would be uninsured and clients who lost out would be left to pursue the two innocent partners personally.
Two claimants obtained a declaration by the High Court that the insurers were not permitted to aggregate the claims and the insurers appealed. The SRA was permitted to intervene given its public interest role as regulator responsible for setting the minimum terms and conditions and administering the SRA Compensation Fund.
The insurer accepted that each time Box stole money she committed a theft which was a separate act, different from the other thefts. The issue was whether the thefts formed a series of related acts or omissions.
The insurer argued clause 2.5(a)(ii) of the SRA Minimum Terms, which permits the aggregation of claims arising from "one series of related acts or omissions," should be construed to permit the aggregation of claims arising from thefts which are related because they all formed part of an extended course of dishonest conduct on multiple occasions over many years.
They accepted this was a fact-sensitive question – s, for example, if a solicitor had committed a theft in 2002 and then an unrelated theft in 2015, it is difficult to say whether they formed a series of acts. However, they argued there was no break in Box's dishonest conduct and all her thefts were underpinned her dishonest conduct towards the firm's client account.
The Court of Appeal rejected this argument. Lord Justice Nugee, giving judgment, held that before a series of acts or omissions can be said to be related, it is necessary to find a relevant unifying factor identified expressly or impliedly in the wording of the aggregation clause. It was not sufficient for acts and omissions to form a “series of related acts or omissions” that Box's thefts had the same underlying origin or cause in her dishonest treatment of clients' money.
Lord Hoffman's reasoning in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd  UKHL 48 was held to be directly applicable to clause 2.5(a)(ii) of the SRA Minimum Terms and could not be distinguished as the insurer argued. For aggregation under clause 2.5(a)(ii) it is not enough that one act should have resulted in one claim and another act in another claim. The acts or events form a related series only if they together resulted in each of the claims.
In other words, it is not enough that claims A, B and C result from acts A, B and C respectively and that the acts are related; what needs to be shown is that claims A, B and C each result from the series of acts A, B and C. Claims arising from separate thefts by Box do not aggregate simply because they form part of a dishonest course of conduct, because it cannot be said that each of the claims arises from a series of Box's thefts.
The Court of Appeal also rejected an alternative submission by the insurer that aggregation was permitted on the basis that there was one deemed claim by the innocent partners to make good the deficiency in the firm's client account. Box's thefts gave rise both to the right of the innocent partners to claim the amount needed to remedy the shortfall in the client account, and to a separate claim to indemnify them against liability to clients.
The question in the present case was whether the partners have a right of indemnity for claims by clients and that turned on whether those claims fall to be aggregated with each other or with other claims already paid out. It was not relevant whether the innocent partners may have received, but in fact did not receive, payment in respect of a deemed claim for the shortfall.
The court briefly addressed the policy considerations underlying the SRA Minimum Terms and re-emphasised that the primary purpose of the SRA's power to set minimum terms for solicitors' professional indemnity insurance is the protection of the public (as was made clear by the House of Lords in Swain v. The Law Society  1 AC 598).
The claimants said if the insurer's aggregation argument was correct, clients could take no comfort from the fact their solicitor carried insurance cover for a minimum of £2m per claim, since there was no way of knowing if their claim would be aggregated with those of other clients of the firm stretching back over may years, such that in practice they did not have the benefit of insurance cover.
The decision has caused some consternation in the insurance market, with claims that the decision was too client-friendly and exposes insurers' potentially limitless liability for such claims. There are warnings of higher premiums arising from the restrictive view that the court took in this case and similar ones.
Aggregation remains an acutely fact-sensitive question and therefore a frequent source of coverage disputes. Aggregation can evidently work in favour of insured firms and their clients, but equally can work against insureds where there are a number of small claims which do not aggregate such that an excess is payable by the insured in respect of each claim.
Clearly there is a balance to be struck between a minimum level of client protection and ensuring the market can provide cover at affordable rates for firms. The debate about whether the status quo is sustainable will undoubtedly continue.
However, the decision provides welcome reassurance for clients and firms that, under the current SRA Minimum Terms, insurers are not permitted to aggregate claims on the basis of a series of dishonest acts that are otherwise unrelated.
Originally Published by Solicitors Journal
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