First published November 2001
"This is a very short point of construction upon which a very large sum of money depends."
The Court of Appeal judgment in Lloyds TSB General Insurance Holdings Limited v Lloyds Bank Group Insurance Company Limited and Abbey National plc v Lee 1 held that Lloyds Bank and Abbey National could treat all their Pensions Review claims as a single claim subject to only a single excess. As a result Lloyds Bank became entitled to indemnity stated in the judgments to be in the region of £100-£125m.
The policy analysed by the court appears to be standard bankers professional indemnity insurance wording 2 . In particular, the policy provided:
"If a series of third party claims shall result from any single act or omission (or related series of acts or omissions) then, irrespective of the total number of claims, all such third party claims shall be considered to be a single third party claim for the purposes of the application of the deductible."
In the first instance judgment Mr Justice Moore-Bick had said that he did not consider "close attention to the particular words used is likely to give one much insight into the true meaning of this clause". This approach was firmly rejected by the Court of Appeal which closely analysed the relationship between the various clauses of the policy. Lady Justice Hale said that the wording construed was different to that in any other reported cases and those precedents were therefore of limited assistance.
In coming to their conclusions, the court of Appeal had to answer three questions:
- Did the claims result from a single act or omission or series of related series of acts or omissions?
The Court of Appeal held that "result from" means exactly the same as "caused by" and required an investigation into what was the proximate cause of the relevant claims. It was necessary for the assured to establish that the proximate cause of the claims was either a single act or related series of acts. However, the question of causation:
"involves application of the notion of proximate cause, applied with good sense, so as to give effect to and not defeat the intention of the parties."
- Was there one single act or omission?
The court held that there was not a single act, error or omission. A state of affairs or underlying cause could not be described as a single act, error or omission. In coming to this conclusion, the court followed Caudle v Sharpe 3 in which it was held that a series of 32 reinsurance policies written following the same mental blind-spot did not all arise out of one single event.
The court to some extent based its reasoning on a definition of "act or omission" in the policy but it also concluded that the single act or omission had to be the act or omission giving rise to the liability to the claimant, i.e. it had to be a breach of a duty owed to the claimant. Failures of training or compliance were not breaches of any duty owed to the claimants.
- Was there a related series of acts or omissions?
This was the ground on which the court unanimously found against underwriters. The three judges came to this conclusion for different reasons.
Lord Justice Potter held that acts or omissions were related if they had a single underlying cause or common origin, and failure of management to institute a system of training, supervision and monitoring could be such a common causal origin. Although he did not cite the case, this approach is similar to that of Lord Mustill in Axa v Field 4 when he said that "originating cause" involved "the widest possible search for a unifying factor in the history of the losses which it is sought to aggregate."
Lord Justice Longmore seems to have taken an even wider approach. He said:
"If a number of different people are responsible for such omissions [i.e. failure to give best advice] and such omissions give rise to different losses for different customers, the omissions are nevertheless, in my view, related and constitute a related series of omissions because they are an omission to do the same thing, although the consequences of each omission are, of course, different."
This appears to be a minority view. It contrasts with Lady Justice Hale who said:
"It would be a surprise if the parties to these [policies] intended the aggregation clause to link a large number of small consumer cases even if they arose over a comparatively short period of time and had the same or similar subject matter. But these cases are not only similar in their subject matter, but also (it is assumed) linked to one another by a single underlying cause."
What are the consequences of the judgment?
The Court of Appeal has reaffirmed the principle that cases of this nature depend on a close analysis of the relevant policy wording. Therefore, this case is unlikely to be a significant precedent in cases involving other facts or different wordings.
The case is nonetheless significant because the policy under analysis was the London market’s standard bankers professional indemnity insurance wording.
Further, the decision will undoubtedly be relied upon in other cases relating to the Pensions Review, although many other cases will fall to be dealt with under financial advisors’ policies in the FIMBRA prescribed form. This aggregates "all claims arising from the same act, error or omission or a series of acts, errors or omissions arising out of the same cause". This does not include the words "related series" which led to aggregation in Lloyds TSB. This appears to require that the common cause be the proximate cause of all the claims. The Lloyds TSB judgment did not decide that the training failures assumed in that case were the proximate clause of the client claims; the wording made it unnecessary for that issue to be considered.
It must also be noted that Lloyds TSB was a trial of a preliminary issue litigated on assumed facts. Those facts, and in particular whether the individual sales representatives’ negligence did in any sense arise from failures of training or compliance, have still to be investigated by the court.
The outcome of the Lloyds TSB case is a multi-million pound judgment against insurers. In other instances, however, the aggregation of claims may reduce insurers’ liability, where policies are written on an each and every claim limit or there is a reinstatement clause, or may enable underwriters to recover from reinsurers.
The Court of Appeal refused permission to appeal to the House of Lords, and it remains to be seen whether insurers will renew that application to the House of Lords itself. It should not be taken for granted that the House of Lords will necessarily give leave. This was a judgment of a unanimous Court of Appeal upholding the first instance judge in a case about the construction of a particular policy wording which might be viewed by the House of Lords as a one-off not meriting their attention.
FOOTNOTES
- Court of Appeal, 8th November 2001 -www.courtservice.gov.uk
- NMA 2273
- [1995] LRLR433
- [1996] 1WLR1026, 1035
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