AIG Europe Limited v Woodman (and others)  UKSC 18
In AIG v Woodman, the Supreme Court was asked to construe clause 2.5(a)(iv) of the SRA minimum terms and conditions (“MTC”). This was the first case before the Supreme Court in relation to an aggregation clause since the House of Lords decision in Lloyds TSB General Holdings v Lloyds Bank Group Insurance Co Ltd  Lloyd’s Rep IR 623. The Supreme Court’s decision is considered by 4 New Square’s Peter Morcos who (with Ben Lynch and led by Colin Edelman QC) appeared for the successful appellants, AIG.
A large number of claims had been brought by many individuals against AIG’s Insured, ILP (a partnership carrying on business as solicitors which was dissolved in 2010 but restored to the Register of Companies for the purpose of the underlying claims explained below). The underlying claims (“the Underlying Claims”) were made by a number of persons (“the Underlying Claimants”) against four of the respondents. The Underlying Claims were advanced in two sets of proceedings. The Underlying Claims arose out of losses the Underlying Claimants said they had suffered because of alleged failings of ILP, and other respondents, in connection with their dealings with Midas International Property Development plc (“Midas”), a company which had retained ILP. The underlying proceedings identified a variety of causes of action including misrepresentation, breach of fiduciary duty and negligence. Mr Woodman (the named respondent in the Supreme Court proceedings) represented, in effect, the interests of the Underlying Claimants for the purposes of the aggregation issue.
The Underlying Claims were all based upon the fact that each Underlying Claimant: (a) made an investment by way of a loan or purchase in a Midas scheme in Turkey or Morocco; (b) made their loan or purchase on the basis that their money would be protected by security; (c) had lost their investment (subject to any residual value the land might have had) because it turned out there was insufficient security for the investments they made; and (d) complained that their lost investment was the result of failings on the part of ILP and other respondents in releasing their money in the absence of adequate security.
AIG’s insured, ILP, had a policy with a limit of £3m for any one claim. The relevant policy terms were subject to the aggregation provisions found at Clause 2.5 of the MTC, namely:
(a) all Claims against any one or more Insured arising from:
- one act or omission;
- one series of related acts or omissions;
- the same act or omission in a series of related matters or transactions;
- similar acts or omissions in a series of related matters or transactions
(b) all Claims against one or more Insured arising from one matter or transaction will be regarded as One Claim.”
THE ISSUE BEFORE THE SUPREME COURT
The Supreme Court was asked to interpret Clause 2.5(a)(iv) of the MTC (“the Aggregation Clause”) as a matter of principle. The parties provided the Court with an agreed statement of facts, subject to the caveat that should the Court remit the matter to trial the parties would have the scope to argue the facts fully before a first instance court. This was because many of the factual findings necessary on AIG’s case were not made in the Commercial Court at the original trial.
At first instance, Teare J had held that each and every claim arose out of a similar act or omission. This finding was not challenged before the Supreme Court. The judge considered that the requisite degree of similarity needed to be real or substantial rather than fanciful or insubstantial. The judge upheld AIG’s arguments that the common thread to all of the claims was a failure to apply the cover test properly before releasing the monies from escrow, thereby exposing the investors to loss in the event that the developments themselves failed: this meant that there was a real and substantial degree of similarity sufficient to satisfy the first part of sub-clause (iv).
The sole issue before the Supreme Court was therefore the construction of the phrase “in a series of related matters or transactions” as it appeared in the Aggregation Clause.
THE DECISIONS BELOW
At first instance, Teare J concluded that the Aggregation Clause required that the matters or transactions must be “inter-connected”, “dependent on each other” or “conditional or dependent upon each other” in order for those matters or transactions to be related. In doing so, the learned judge adopted the approach advocated for by Mr Woodman.
The Court of Appeal eschewed this line of reasoning. In relation to the proper construction of the word “related”, the Court of Appeal asked the correct question at  of its decision (emphasis added):
“The question then is how that connection or relationship is to be established – what degree of connection or relation is required for the purpose of the aggregation clause? Will any connection do, however remote?”
However, the Court of Appeal went on to hold at  that (emphasis added):
“In our view it must, as [counsel for the SRA] submitted, be an intrinsic rather than a remote relationship. That means that there must be a relationship of some kind between the transactions relied on rather than a relationship with some outside connecting factor, even if that extrinsic relationship is common to the transactions. Thus transactions which all take place with reference to one large area of land in a particular country might be related transactions if they refer to or (perhaps) envisage one another, but if the relevant transaction is the payment of money out of an escrow account which should not have been paid out of that account, the fact of geography is too remote; what will be intrinsic will depend on the circumstances of that payment.”
AIG was granted leave to appeal this decision by the Supreme Court, and an expedited hearing was set down for 10 October 2016.
THE JUDGMENT OF THE SUPREME COURT
Lord Toulson delivered the judgment of the Court, allowing AIG’s appeal. At  of the judgment, Lord Toulson held that the Court of Appeal’s formulation of the Aggregation Clause as requiring an intrinsic relationship between matters or transactions was neither “necessary or appropriate”. In so doing, the Supreme Court rejected the arguments of both Mr Woodman, and the SRA as intervener.
The key components of Lord Toulson’s decision mirrored AIG’s submissions closely and are as follows:
- The Court reiterated at  the need for aggregation clauses to be read neutrally because: (i) generally “such clauses have the capacity in some cases to operate in favour of the insurer (by capping the total sum insured), and in other cases to operate in favour of the insured (by capping the amount deductible per claim)”; and (ii) in the specific case of the MTC, the Law Society “has to balance the need for reasonable protection of the public with considerations of the cost and availability of obtaining professional indemnity insurance”.
- The term “related” requires: “a real connection between…transactions” () and “some inter-connection between the matters or transactions, or in other words they must in some way fit together” ().
- The Court acknowledged at  that “[d]etermining whether transactions are related is therefore an acutely fact sensitive exercise. To borrow the language of Rix LJ in Scott v Copenhagen Reinsurance Co (UK) Ltd  Lloyd’s Rep IR 696, para 81, it involves “an exercise of judgment, not a reformulation of the clause to be construed and applied””. In this case, the Court indicated that its view was that two limits of indemnity should apply (one for the Morocco investors and one for the Turkey investors), subject to any further argument on the facts at a retrial.
- At  of the Supreme Court Judgment, Lord Toulson criticised the Court of Appeal for taking too narrow a view of the term “transaction”. The Court of Appeal appeared “to have taken a narrow view of the transactions when it spoke, at para 19, of the relevant transaction being “the payment of money out of an escrow account which should not have been paid out of that account.” That was an act giving rise to a claim, but the act occurred in the course of a wider transaction.”
- The Court found that the Aggregation Clause  “is to be judged not by looking at the transactions exclusively from the viewpoint of one party or another party, but objectively taking the transactions in the round.”
The upshot of this decision is that the application of the Aggregation Clause is highly fact sensitive and will depend upon the relevant matters or transactions being viewed in the round. Any notion of interdependence or intrinsic relationships that appeared in the Commercial Court and Court of Appeal judgments has now been dispensed with. The touchstone for whether matters or transactions are related is simply whether there is a real connection between them, or in other words “whether they fit together”.