Aggregation under the SRA Minimum Terms: Baines v Dixon Coles and Gill

Summary

The recent High Court decision of Baines and others v Dixon Coles and Gill (A Firm) EWHC 2809 (Ch) determined that various acts of theft carried out by a solicitor as part of a scheme of dishonesty would not aggregate. They would not be considered "any one claim" under the SRA Minimum Terms and Conditions of Professional Indemnity Insurance (MTC).

This is only a first instance decision, and the judgment emphasises that whether claims will aggregate is a fact-sensitive issue.  However, insurers should note that this decision appears to indicate that the MTC prescribe a narrow approach to aggregation.

SRA Minimum Terms and Conditions

All solicitors are required to carry professional indemnity (PI) insurance that accords with the MTC.

Clause 2.1 of the MTC provides that "The sum insured for any one claim (exclusive of defence costs) must be...at least £2 million".

Clause 2.5 of the MTC lists what can be treated as a "any one claim" for the purpose of the £2 million limit of indemnity:

• "(a) all claims against any one or more insured arising from:
  • (i) one act or omission;
  • (ii) one series of related acts or omissions;
  • (iii) the same act or omission in a series of related matters or transactions;
  • (iv) similar acts or omissions in a series of related matters or transactions
  • and
• (b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim."

Clause 2.5 of the MTC therefore permits two or more separate losses to be treated as a single loss (or to be "aggregated") for the purpose of a limit of indemnity, where they are linked by one of the unifying factors listed above.

Aggregation decision in Baines v Dixon Coles

These claims arise from the discovery by two of the three partners of a law firm that the third partner, Mrs Box, had stolen over £4m from the firm's clients over a number of years. Mrs Box was sentenced to 7 years of imprisonment and the law firm was closed by the SRA.

The firm's former clients then sought to recover the monies stolen from them. The firm's insurers were joined as a defendant to these civil claims, pursuant to the Third Parties (Rights against Insurers) Act 1930.

The insurer accepted that the former clients' claims were covered by the PI policy, as the definition of a claim as per the MTC includes an obligation to remedy a breach of the SRA Account Rules (ie a theft of client money), but sought to argue that all the claims should aggregate.

The Court rejected insurers' arguments that the various thefts committed by Mrs Box aggregated as "any one claim" under either 2.5(a)(i) or 2.5(a)(ii) of the MTC.

The thefts were not "one act or omission" per clause 2.5(a)(i) of the MTC

The court was unpersuaded by insurers' argument that Mrs Box's scheme of dishonesty giving rise to the claims constituted one act.  Rejecting insurers' analogy of building a house, which they argued involves a number of steps to one singular end, HHJ Saffman determined that Mrs Box's scheme of dishonesty was more analogous to the building of a whole housing estate. There may be a singular objective, namely to build a housing estate (in the same way that Mrs Box may have had the singular objective of stealing money), but the building of each house (and each singular theft) must be a different act, even though they were carried out pursuant to the same objective.

The thefts were not "one series of related acts of omissions"

HHJ Saffman held that "the thefts...did not have a sufficient interconnection or unifying fact with any other claims to bring them within MTC 2.5(a)(ii)".

The claimants had frequently referred to Lord Toulson's analysis in AIG Europe Ltd v Woodman (albeit that that decision dealt with a different limb of the MTC); namely that the word "related" means that there must be some interconnection between the matters in order for them to aggregate.

Applying AIG, it was held that the thefts being committed by the same person, and concealed by the same processes, did not give rise to a sufficient interconnection such that they would aggregate. The answer rests on whether there is sufficient connection between the different acts; here, the "acts" causing the claimants' losses were the individual thefts from them, which resulted in different losses to different clients. Mrs Box's dishonest state of mind, whilst an underlying cause of the various individual thefts, was "upstream" of those acts; and in this context, that is not what the clause required to make those acts "related".

Neither Mrs Box's ongoing use of "teeming and lading" to hide her misappropriations (moving funds and concealing transactions to make tracing more difficult), nor her ongoing dishonesty, were accepted as unifying factors; "dishonesty is not an act, it is a state of mind".

What does this mean?

Aggregation arguments are always fact-sensitive, but it is worth noting the significant impact that  aggregation would have had in this case; if all of Mrs Box's thefts aggregated to one claim, only one limit of indemnity in the sum of £2m would apply to all of the thefts collectively, and insurers would only be required to pay out up to that amount. The total amount stolen from the clients considerably exceeded £2m, and the innocent partners did not have the wherewithal to meet any shortfall.

It is also of interest that this decision arose from a summary judgment application, together with an application for a declaration, which can provide a more efficient and less expensive route to a judicial decision on questions of construction. Noting that caution should be exercised where a fuller investigation of the facts may alter the evidence and outcome of a case (cf. Lewison LJ in EasyAir Ltd v Opal Telecom Ltd), HHJ Saffman observed that it "is also important to bear in mind ... the need to grasp the nettle and not to simply allow a case to go to trial because something may turn up which would have a bearing on the question of construction".

The Court held that the underlying cause of the individual thefts (ie, Mrs Box's dishonesty) was "upstream" of the acts, and that was not what was contemplated by the word "related". However, notably the Court did not give any guidance on what degree of "interconnectedness" is contemplated by the word "related" for the purpose of aggregation under clause 2.5(a)(ii) of the MTC. It may be that guidance on that question will have to await an appeal of this decision (if that occurs), or a different case. What is clear, however, is that the Court has adopted a narrow approach to aggregation under the MTC, and has rejected a broad approach which looks to the underlying causes of the acts or omissions founding claims against solicitors.