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

In Baines v Dixon Coles & Gill, the Court of Appeal unanimously upheld the High Court decision, which determined that claims arising from various acts of theft carried out as part of a solicitor's scheme of dishonesty would not aggregate as " one claim" under the SRA Minimum Terms and Conditions of Professional Indemnity Insurance (MTC).

Recap of background

Our previous article sets out the background facts  and the High Court decision.  In brief, the claims arose from the theft by Mrs Box (partner of a of a law firm) of over £4m from her firm's clients over several years.  When former clients sought to recover the monies stolen from them, the firm sought an indemnity from its professional indemnity insurers.

The High Court held that Mrs Box's scheme of dishonesty did not aggregate as "one act or omission" (as per clause 2.5(a)(i) of the MTC) or "one series of related acts or omissions" (as per clause 2.5(a)(ii) of the MTC).  Insurers were given permission to appeal, however, since the question of aggregation was one of general importance on which there was no direct authority.

Appeal

The insurers appealed the High Court decision on the following grounds:

1) The claims aggregated because they arose out of a series of related acts or omissions (i.e. the decision on clause 2.5(a)(ii); or,

2) Alternatively, the claims amounted to one Claim as defined by the Policy.

The Court of Appeal (Nugee LJ, Phillips LJ and Moylan LJ) unanimously dismissed the appeal, upholding High Court's decision regarding clause 2.5(a)(ii).  The decision can be found here.

"One series of related acts or omissions" - clause 2.5(a)(ii)

The Court of Appeal agreed with the High Court's interpretation of Lloyds TSB and AIG v Woodman; whilst the thefts were all underpinned by Mrs Box's long-running dishonest intentions, this was not enough of a unifying factor.

For the claims to aggregate, the series of acts and omissions required a unifying factor which would need to be either expressly or impliedly in the wording of the clause.  Applying the language of clause 2.5(a)(ii), the claims against the law firm would only be a "series of related acts or omissions" if they were caused by a combination of Mrs Box's thefts. The mere fact that Mrs Box stole from different clients was not enough to aggregate:

"In other words if there is a series of acts A, B and C, it is not enough that act A causes claim A, act B causes claim B and act C causes claim C. What is required is that claim A is caused by the series of acts A, B and C; claim B is also caused by the same series of acts; and claim C too" (paragraph 53).

One Claim as defined by the Policy

The alternative ground of appeal was that the various thefts amounted to one Claim as defined by the Policy, the "Claim" being the innocent partners' obligation to remedy a breach of the SRA Accounts Rules 2011 (in particular, Rule 7.1 which  obliged the innocent partners of the law firm to remedy a shortfall of funds in the client account).

The Court of Appeal dismissed this ground in brief terms. Whilst Mrs Box's thefts gave rise to both the innocent partners' right to claim the amount needed to remedy the shortfall, and the right to seek an indemnity for claims from third parties, in reality the claim against the innocent partners was from former clients who were not indemnified following exhaustion of the law firm's PI limit of indemnity.  This reality meant that it was irrelevant that the partners could have received an indemnity for a deemed claim for the shortfall in the client account.

Comment

The key point of the Court of Appeal judgment was that clause 2.5(a)(ii) of the MTC is to be interpreted narrowly. The Court rejected the insurers' argument that Mrs Box's dishonesty was sufficient to make the individual acts or omissions "related"; that would in effect render that clause equivalent to a wide 'originating cause'-type aggregation provision. Rather, what made acts or omissions related was to be found in the causation wording of the clause itself; they were related where they had all in combination caused the claims.

There is one potentially important wrinkle in the judgment. The Court alluded (at paragraphs 78 to 83) to an 'interesting' argument which could have been (but was not) advanced by the insurers, which might have enjoyed some prospects of success. This is based on the fact that (in accordance with common practice) the clients' money was held in the firm's single client account. Thefts from that account were, therefore, in a real sense, thefts from all of the clients at once. The only reason for attributing any one theft to a given client was the fact that Mrs Box had chosen to record a fraudulent entry in that client's ledger, which was an arbitrary choice. In fact, it might well have been argued that all the thefts cumulatively reduced the common pot; and, on that basis, might have satisfied the clause 2.5(a)(ii) requirement "that the claims all arise from the same series of acts". However, the Court of Appeal refused to decide that point because it had not been fully argued.

The Court of Appeal judgment means that there should be several £2m limits for the various clients of the firm whose money was stolen by Ms Box. However, the fact that the Court of Appeal raised the above 'interesting' point, whilst refusing to rule on it, means that this judgment may not be the last word on clause 2.5(a)(ii) - whether because the insurers in this case will appeal to the Supreme Court, or because a future case will argue that point more fully and, perhaps, succeed.