November 20, 2018

The application of aggregation clauses to Ponzi schemes is an area bereft of prior authority. In Bank of Queensland Ltd v AIG Australia Ltd [2018] NSWSC 1689, the Supreme Court of New South Wales had to decide whether multiple claims against a bank arising from multiple unauthorised withdrawals were to be treated as one claim for the purposes of the deductible applicable to a liability insurance policy. The Court’s decision is considered by Miles Harris of 4 New Square.

The facts

The insured was the Bank of Queensland Ltd which sought an indemnity under a civil liability insurance policy in respect of a total of AUS$6m it had incurred in defending and settling a group action brought by 192 claimants (“the Group Members”) against it and its agent, DDH Graham Ltd (“DDH”).

The claimants had all invested in a financial product offered by the insured known as a Money Market Deposit Account (“MMDA”). The MMDAs were administered by DDH. Each account holder nominated an authorised signatory to whom DDH had promoted the MMDAs. One such signatory was Sherwin Financial Planners Pty Ltd (“SFP”). SFP acted as financial adviser to all the Group Members. They alleged that SFP had operated the accounts in effect as a Ponzi scheme.

Representative proceedings were brought under the Federal Court of Australia Act 1976 by a single fund. The remaining Group Members each completed a Class Member Registration Form in order to be included within the group which would benefit from any settlement of the proceedings.

The Group Members alleged that under the terms of the contract between them and the insured:

  • Withdrawals from MMDAs could only be authorised by written instructions, by telephone, by fax or at branches of the insured Bank in writing;
  • Withdrawals from the MMDA could not be authorised by email; and
  • The insured was required to question and not to act on a valid or purportedly valid withdrawal instruction in circumstances which raised a serious or real possibility that fraud was being committed.

It was alleged that over a period years SFP developed a practice of using funds deposited in the MMDAs without authority for its own purposes to create the appearance that they were paying returns to investors. It was said this was done by giving suspicious instructions to DDH, at least some of which were by email, from which DDH either knew or ought to have known both that there was a serious or real possibility that a fraud was being committed in respect of the accounts the subject to the suspicious instructions, and that SFP was committing a fraud in respect of one of more other MMDAs. It was said that in complying with the suspicious through DDH the insured had acted in breach of the above contractual terms and/or knowingly assisted the fraudulent practices of SPF.

The claim brought by the Group Members was settled by the insured and it sought an indemnity from insurers under the Policy; the lead insurer was AIG Australia Limited.

The Policy was subject to a retention of AUS$2m for each “Claim” (as defied under the policy), meaning insurers were only liable for loss in excess of that retention. Insurers maintained that the retention was applicable to each of the 192 individual claims of the Group Members, with the practical effect that the insured had no right to an indemnity under the Policy.

Terms of Policy

Clause 2.2 of the Policy provided that:

Claim means:

(i) Any suit or proceeding, including any civil proceeding … brought by any person against an Insured for monetary damages or other relief …

For the purposes of this policy all Claims arising out of, based upon or attributable to one or a series of related Wrongful Acts shall be considered to be a single Claim, conversely where a Claim involves more than one unrelated Wrongful Act, each unrelated Wrongful Act shall constitute a separate Claim.”

A “Wrongful Act” was defined in clause 2.20 of the Policy as meaning any

(i) Act or error or breach of duty or omission or conduct (including misleading or deceptive conduct committee or attempted or allegedly committed or attempted by of the Insured; or

(ii) Any act of error or breach of duty or omission or conduct (including misleading or deceptive conduct) committed or attempted or allegedly committed or attempted by or on behalf of another person for which the Insured is legally liable:

In the actual or alleged provision of, or actual or alleged failure to provide Professional Services.

Without limiting its scope, Wrongful Act includes:

  • (a) Breach of contract for the provision of Professional Services …

  • (e)Breach of trust or fiduciary duty…”

The Parties’ Arguments

Insurers contended that the proceedings constituted 192 separate claims, each arising from a separate “Wrongful Act”. Conversely, the Insured asserted that the proceedings brought by the Group Members were to be regarded as only one claim because they had been pursued on a representative basis by only one of them.

The Judgment

Stevenson J concluded that there were 192 “Claims” within the meaning of the Policy.

He started by accepting the insured’s argument that clause 2.2(i) of the Policy meant that the starting position was that the representative action amounted to a single claim, even if each of the Class Member Registration Forms also constituted a separate claim. However, the judge considered that this conclusion was not determinative of the overall result.

Series of related wrongful acts

Stevenson J noted that the final part of clause 2.2 had both an aggregation clause (its first limb) and a disaggregation clause (its second limb).

Citing authorities including Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2001] 4 All ER 43, the judge emphasised that aggregation clauses operate by identifying a unifying factor, which in this case was a “Wrongful Act”. On the facts there were undoubtfully  multiple “Wrongful Acts”, the real issue was whether they could be said to be part of a “series of related” “Wrongful Acts”. He decided that they were not.

Referring to authority including Attorney-General v Cohen [1937] 1 KB 478, he held that for events to be part of a series they must in a “sufficient degree” be similar in nature, have more than “mere contiguity of time or place” and share an “integral relationship” and be in “temporal succession” and “be one of a kind or have some characteristic in common”.  

As to what was required for “Wrongful Acts” to be related the judge had regard to recent Supreme Court decision in AIG Europe v Woodman [2017] UKSC 18 where it was held that whether “matters of transactions” were related was an “acutely fact sensitive exercise” but that the word ‘related’ implied “that there must be some interconnection between the matters or transaction, or in other words that they must in some way fit together”

He also noted the United States decision if American Automobile Insurance Co v Grimes 2004 US Dist LEXIS 1696 at [6]-[7] where it had been held claims were related if there was a “logical or causal connection” and academic commentary on Lloyds TSB General Insurance Holdings Ltd  that had suggested “there must be a unifying factor or common cause no more remote than the act or omission that actually constituted the cause of action”.

Stevenson J acknowledged that there were respects in which the Wrongful Acts from which the claims against the insured arose could be said to be similar in nature and have some characteristics in common. The withdrawals were all made over a particular period, from an MMDA owned by a client of SFP, on the purported instructions of SFP that were not authorised and should not have been acted on, had been made in the course of a fraud practiced by SFP and implemented by the insured in breach of its contractual obligations. However, he did not regard these factors as sufficient:

  • Each withdrawal was made on a different occasion, from a different MMDA, causing loss to a different party and in response to different instructions. Although some of the withdrawals were in a way related or interconnected because they happened to have been made pursuant to instructions given in one email and were implemented almost simultaneously, that could not be said of all of them.
  • Moreover, the judge held that the fact that all the withdrawals occurred within a broader fraudulent scheme was a factor more remote than the “Wrongful Act” which was the focus of the unifying factor required by the Policy. In his view the overarching fraud was “not the ‘level’ at which the unifying factor is to be determined…”
  • The withdrawals were said to have been ‘wrongful’ for different reasons: in some cases it was because they were made on the basis of instructions from unauthorised persons; in others they were from mandated persons but suspicious; yet others were made after it was said the insured had knowledge of the fraud. The judge did not accept that this meant the various transactions could be said to have “…a ‘sufficient degree’ of similarity nor an “integral relationship” such as to constitute them a ‘series’ of transactions, nor the necessary ‘causal’ or; logical’ ‘interconnection; to constitute them being a ‘series of related’ wrongful acts. 169. The mere fact of their occurrence within the broader, more remote scheme of a fraudulent practice is not sufficient to aggregate the Claims”

Stevenson J also held that the same result was arrived at by applying the second limb of clause 2.2 (the disaggregation clause) because, for the same reasons, the “Wrongful Acts” were each “unrelated” and so any “Claim” would thus “involve more than one unrelated Wrongful Act”.


The decision of Stevenson J provides a reminder of why aggregation clauses must be interpreted neutrally: here the insured wished to aggregate different claims, while in AIG v Woodman the insurer had wanted to do so. The case is also a powerful illustration of the need to focus on the precise wording of any aggregation clause and, in particular, the chosen unifying factor when approaching any aggregation issue. Had the clause in the Policy chosen as a unifying factor “the originating cause” of the loss suffered by the claimants, or the motive for the wrongful acts, then the outcome would probably have been different. As it was, the judge concluded that the wording required the insured to demonstrate that each of the wrongful acts themselves was part of a related series. The court declined to regard the overarching fraudulent scheme as sufficient to create a relationship between distinct events.

The judge’s decision seems intuitively surprising: some may feel that he concentrated on points of distinction between the genesis of the individual claims rather than focusing upon the – manifest – similarities. If the decision is appealed, it will be interesting to see if it is upheld.

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