This article has been republished to update the views on the aggregation wording "similar acts or omissions in a series of related matters or transactions" in light of the findings made in AIG Europe Ltd v The International Law Partnership LLP & Ors  EWCA Civ 367.
In brief - Difficult to predict who will benefit from aggregation clause until claim is made
Aggregation clauses can work in favour of either the insurer or the insured depending on the circumstances that give rise to the claim(s) and the amounts as compared to the coverage limit.
What are aggregation clauses?
Aggregation clauses are used to define the coverage limits (that is, the maximum amount to be paid per claim) in a policy. These clauses determine what constitutes a "claim" for the purposes of excesses and maximum liability under the policy, by either aggregating or segregating multiple losses on a policy.
The clauses perform two main functions:
- Determining how many deductibles the insured must bear
- Determining whether a policy's coverage limits / sub-limits have been reached
The insured and the insurer attempt to model their respective risk profiles before policy inception, for future circumstances that neither party can know.
Whether aggregation is in the insured's or the insurer's favour is hard to say until a claim occurs. It follows that aggregation clauses can have a significant impact on an insured's and an insurer's risk profile.
In this article, we look at the different ways parties to insurance policies have drafted aggregation clauses in an attempt to demist the crystal ball.
"An 'occurrence' (which is not materially different from an event or happening…) is not the same as a loss, for one occurrence may embrace a plurality of losses. Nevertheless, the losses’ circumstances must be scrutinised to see whether they involve such a degree of unity as to justify their being described as or arising out of one occurrence. The matter must be scrutinised from the point of view of an informed observer placed in the position of the insured": Kuwait Airways Corporation v Kuwait Insurance Co  1 Lloyd's Rep. 664.
There were three mechanical breakdowns in a ship. Each breakdown led to another, sparking a chain of events that could not be segregated. The breakdowns were held to be the same "occurrence". The insured was therefore only required to bear one per occurrence deductible (instead of three): Sealion Shipping Ltd v Valiant Insurance Co  EWHC 50.
Construction works were insured for storm damage. The works were damaged in a storm and while under repair a further storm caused additional damage. The insured was required to bear two separate per occurrence deductibles, as each instance of damage was treated as a separate "occurrence": Government Insurance Office (NSW) v Atkinson-Leighton Joint Venture (1981) 146 CLR 206.
A plumber negligently installed waterproof membrane in the bathrooms of 47 separate houses while under the one sub-contract. The sub-contractor's (insured's) policy included a $300 excess for each and every claim. The insured was required to pay 47 excesses, as the plumber's "negligence" could not constitute an event or occurrence: QBE Insurance Ltd v MGM Plumbing Pty Ltd  QSC 27.
Series of events
A number of claims were brought against the insured for the distribution of the drug thalidomide to pregnant women. The drug resulted in children being born with severe physical deformities. The insurance policy had a coverage limit of £50,000 for all claims "arising out of all occurrences of a series consequent on or attributable to one source…".
The High Court held that a "series" was a number of events of a sufficiently similar kind following one another in temporal succession. While the ingestion of thalidomide by each mother was a separate occurrence, they formed part of a "series" of occurrences that were sufficiently similar to aggregate the claims. The insurer was therefore liable to make a maximum claim payment of £50,000 for all claims: Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1.
Related series of acts or omissions
Around 22,000 claims were brought against a number of companies that failed to provide their customers with "best advice" when selling personal pension schemes, breaching the Financial Services Act 1986 (UK). The companies were covered by a policy that contained a £1 million deductible for "each and every claim" where a claim was defined as "any single act or omission (or related series of acts of omissions)".
The House of Lords held that "related" meant there needed to be a common cause to each of the losses for them to be aggregated. The insured argued that the breaches were related as the cause was inadequate training of its representatives.
The court disagreed. There was no common cause. As each breach varied in time, client, location and method, the breaches could not be considered a "related series" (and therefore each claim fell below the deductible): Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Ltd  UKHL 48.
An "originating cause" is concerned with the underlying reason why losses occur, rather than the occurrence of the losses themselves. It will likely capture a larger number of claims to be clumped together.
Use of the phrase "originating cause" is a conscious decision by an insurer or insured to open up the widest possible search for a unifying factor for the losses that a party is seeking to aggregate: Axa Reinsurance v Field  3 All ER 517.
Examples of originating causes include:
- Failure to provide adequate training to commission agents by an employer resulting in the mis-selling of financial products to multiple consumers (Countrywide Assured Group plc v Marshall  1 All ER 237)
- The negligent manufacture of a product (Pacific Dunlop Ltd v Swinbank (1999) 10 ANZ Ins Cas 61-439)
Similar acts or omissions in a series of related matters or transactions
Solicitors provided advice to a number of clients regarding two complicated property investment schemes in Turkey and Morocco. There were multiple claims against the solicitors. Their professional indemnity policy had a per claim coverage limit of £3 million (with the total of all the claims exceeding £10 million).
The insurer argued that there was one claim because the policy aggregated "similar acts or omissions in a series of related matters or transactions". The court held that each claim could be considered similar as they bore a resemblance or likeness to each other without being identical.
However, the court ultimately concluded that an aggregation clause with a very wide effect and no clear limit was too uncertain and vague to be given operative effect. Therefore the claims were not aggregated, relying on the words "series of related matters" to limit the scope of the aggregation clause: AIG v The International Law Partnership LLP and Ors  EWHC 2398.
Appeal upheld in AIG Europe Ltd v The International Law Partnership LLP & Ors
(update, May 2016)
The interpretation of the phrases "similar acts or omissions" and "series of related matters or transactions" was the focus of the appeal in AIG Europe Ltd v The International Law Partnership LLP & Ors  EWCA Civ 367.
The court examined the operative effect of the aggregation clause and ultimately found that:
- The phrase "in a series of related matters or transactions" requires that the matters or transactions have an "intrinsic relationship" with each other (as opposed to having an extrinsic relationship with a third factor, for example, where a series of "acts or omissions" could be related by their relationship to an extrinsic unifying factor).
- The requirement for an intrinsic relationship stands as the necessary restriction on the concept of relatedness, as the phrase "a series of related…" is imprecise and deliberately avoids the available and accepted wide formulations of an aggregation clause (such as, for example, "any claim or claims arising out of all occurrences consequent on or attributable to one source or original cause").
- The lower court erred in finding that the matters or transactions had to be "dependent" on each other.
- An aggregation clause should be approached neutrally, without any assumptions favouring an insured or an insurer.
The matter has been remitted to the Commercial Court to determine whether the relevant acts and omissions of The International Law Partnership were "similar acts or omissions" for the purpose of engaging the aggregation clause.
Which aggregation clause is better?
When faced with a high deductible and many small claims that may not individually exceed the deductible, an insured is likely to argue for one claim.
For example, 22,000 small claims were brought against the one insured, amounting to around £125 million in insured losses. No single claim exceeded £35,000 and the policy contained a per claim deductible of £1 million.
It was in the interests of the insured to aggregate the claims, so the deductible is reached (that is, the policy would respond after £1 million). If the claims were not aggregated, then the insurer would not be liable to pay any of the claims, as no single claim reaches the deductible threshold (Lloyds TSB).
When faced with a small number of larger claims, an insured will seek to argue for multiple claims.
For example, the two World Trade Centre towers were insured by layered property insurance that had a per claim limit of around US$3.5 billion (the actual loss far exceeding this coverage limit).
If the towers collapsing was one event (i.e. one claim) the insured could only recover a maximum of US$3.5 billion.
The insured therefore argued that there were two events (and two claims), one for each tower, so the maximum it could recover would then be US$7 billion.
The claims were complicated by different wordings in different policies:
- "All losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes" - one event: World Trade Centre Properties LLC. v. Hartford Fire Insurance Co., 345 F.3d 154 (2nd Cir. 2003).
- Occurrence not defined - jury finds two events: SR International Business Insurance Co. v. World Trade Centre Properties LLC., 467 F.3d 107 (2nd Cir. 2006). Reinsurance arbitrations found to a similar effect: AIOI Nissay Dowa Insurance Company Limited v Heraldglen Limited and Advent Capital (No 3) Ltd  EWHC 154 (Comm).
Aggregation clauses can work in favour of either party
As with most legal questions, then, the answer is that it depends. The examples above show that aggregation clauses can work in favour of either the insurer or the insured depending on the circumstances that give rise to the claim(s) and the amounts as compared to the coverage limit.
Emily Brownlee has completed an honours thesis on the topic Approaches to aggregation clauses and analysis of the insurance industry's response to co-ordinated acts of terrorism.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.