Aggregation clauses in insurance policies - recent judicial consideration

Tuesday, November 13, 2018

Aggregation clauses play a vital role in all forms of insurance, although they have been discussed most commonly in the context of liability insurance. Aggregation fixes the amount recoverable by the assured where the assured's liability arises out of a number of separate acts of negligence. The policy may fix the maximum sum recoverable on a "per claim" basis, or it may require the assured by way of deductible to bear the first part of the amount of any claim.

Where there is a large number of small claims that cannot be aggregated, and none of the claims exceeds the deductible, the assured will recover nothing. By contrast, where there is a small number of large claims that cannot be aggregated, the assured will recover the sum insured in respect of each claim.

It follows from this that the effect of an aggregation clause will depend upon the number and size of claims, and whether the aggregation relates to deductibles or policy limits. It equally follows that there has to be a consistent interpretation of aggregation wording by the courts, because it will not be known in advance of any one case which party will benefit from aggregation.

Bank of Queensland v AIG

The recent decision of Stevenson J in the Supreme Court of New South Wales in Bank of Queensland Ltd v AIG Australia Ltd [2018] NSWSC 1689 demonstrates just how minor variations in wording can affect the outcome as between otherwise similar cases.

In this case the Bank, through an intermediary, DDH Graham Ltd (DDH), operated Money Market Deposit Accounts (MMDAs) for its clients. Some 192 clients had appointed Sherwin Financial Planners Pty Ltd (SFP) as their financial planner, and SFP had through DDH arranged MMDAs for those clients. Unfortunately, SFP appears to have been a fraudulent enterprise. Between March 2004 to January 2013 funds were withdrawn from the MMDAs by SFP without client authorisation. In February 2013 SFP went into liquidation, having misappropriated the funds in question.

The 192 account holders sought to recover their losses from the Bank. They alleged that the Bank had released funds on the strength of emails, had failed to investigate suspicious activity on the part of SPF and had knowingly assisted SFP in its dishonest conduct.

The account holders formed a Group for the purposes of representative proceedings brought in the name of one of their number. Each member of the Group signed a "Class Member Registration Form" setting out the various transgressions of the Bank. The matter was mediated, and the outcome was a settlement under which each of the Bank and DDH was to pay $6 million to the Group. The settlement was approved by the Court in May 2018, thereby bringing an end to the claims.

The Bank carried liability insurance. There was a deductible of $2 million for "each and every claim". A "Claim" was defined as either: "(i) any suit or proceeding… brought by any person against an Insured"; or "(ii) any… demand from any person that it is the intention of the person to hold and insured responsible for the results of any specified Wrongful Act." The term "Wrongful Act" meant "any act or error or breach of duty or omission or conduct". Finally, there was an aggregation clause under which all "Claims arising out of, based upon or attributable to one or a series of related Wrongful Acts" were deemed to be a single Claim.

The familiar issue in the present case was the number of deductibles to be borne by the Bank. It asserted that there was only one claim and thus only one deductible. The insurers' case was that each member of the group had brought a separate claim and that the Bank had to bear 192 deductibles.

Stevenson J found for the insurers on two separate grounds. First, although a representative action using one named claimant was only one "suit or proceeding" for the purpose of limb (i) of the definition of "Claim", each member of the group had, by signing a "Class Member Registration Form", made a separate Claim in the form of a demand for compensation. On that simple ground, the Bank had to bear 192 deductibles.

Secondly, the same conclusion followed from the application of the aggregation clause. Claims were to be aggregated into a single claim if they were "arising out of, based upon or attributable to one or a series of related Wrongful Acts." The Wrongful Acts in the present case were the unauthorised withdrawals, but they did not constitute a "series of related acts" because there was no interconnection between them: they were all carried out at different times, and while they were similar they were not a "series".

AIG Europe v Woodman

Readers may well be aware of the decision of the UK Supreme Court in AIG Europe Ltd v Woodman [2017] UKSC 18. That case concerned a number of investment contracts made with the developers of two separate sites. The funds were paid into an account held by solicitors, on terms that the funds would not be released to the developers until security had been provided. The funds were lost by release without security, and claims were brought against the solicitors. The liability policy provided that all claims "arising from similar acts or omissions in a series of related matters or transactions" were to constitute one claim for the purposes of determining the maximum sum insured.

Unsurprisingly, the insurers asserted that there was only one claim per development, whereas the solicitors (or, at least, their creditors) argued that each payment out of the fund was separate and thus could not constitute part of a "series of related matters or transactions."

The Supreme Court agreed with the insurers: the relevant "transactions" were the investment contracts and they were related in that they were interdependent, so it followed that there were only two claims and only two limits of indemnity.

Conclusion

It will be seen, therefore, that diametrically opposing conclusions were reached in the two cases. The reason is clear. In Bank of Queensland the aggregation was by reference to "one or a series of related Wrongful Acts" whereas in Woodman the aggregation was by reference to "a series of related matters or transactions". It may be commented that in Woodman the lower courts had assumed that "matters or transactions" referred to "wrongful acts", an analysis rejected in the Supreme Court.

What matters, therefore, is the trigger for aggregation. The investment contracts in Woodman and Bank of Queensland clearly constituted a "series", but the misappropriations in both cases clearly did not constitute a "series."

Care should thus be taken in the drafting to ensure that the appropriate trigger for aggregation has been adopted.

For further information please contact Jonathan Scragg or Professor Rob Merkin QC

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.