House of Lords overturn Court of Appeal decision on aggregation of pension misselling claims

The House of Lords has today allowed the appeal in the case of Lloyds TSB General Insurance Holdings Limited and others v Lloyds Bank Group Insurance Company Limited. The decision will be of particular interest to insurers of financial service institutions who have had numerous claims made against them by customers for financial product misselling, following the introduction of the FSA and SIB Compulsory Review and Redress Procedures. We summarise below some of the key findings of the House of Lords and highlight the consequences for the market.

Background

The Claimants in the proceedings were banks which had sold private pension plans to individuals in place of their occupational pension schemes. The sale of such plans was regulated by a scheme known as "Lautro" and, in order to comply with Lautro, it was a requirement that the individuals responsible for selling the plans, the financial services consultants (FSC's), gave what was known as "Best Advice", which included them providing the buyer with a detailed comparison between the costs and benefits attached to the different courses of action being considered. It became evident that, in an extremely large number of cases, "Best Advice" had not been given and, as a consequence, numerous claims were brought against the Claimants, coming to a total value of approximately £125 million (although no individual claim exceeded £35,000). The Claimants were insured by the Defendant against such losses by policies which provided indemnity for, amongst other things, "financial loss caused by breach….of the provisions of….[Lautro] in respect of which civil liability arises". The clause in the policy dealing with the deductible read as follows:

"Subject to the Limit of Indemnity, the Underwriters shall be liable only for that part of each and every third party claim during the Policy Period…which exceeds the Deductible stated in Item 7 of the Schedule" [This provided for a deductible of £1 million each and every claim, unlimited in the aggregate]

"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".

The Defendant Insurers, when notified by the Claimant Insureds of the claims, declined to indemnify the Insureds under the policy on the basis that each claim against an Insured by a customer constituted a separate claim for the purpose of the Deductible. The Insureds, therefore, issued claims against their Insurers for sums under the policies.

The Issues

The Court decided to deal, as a preliminary issue, with:

"Whether….the Mis-Selling Claims constitute a series of third party claims which resulted from:

1. a single act or omission by the [Insured], or
2. a related series of acts or omissions by the [Insured]

and are therefore to be considered a single third party claim subject to a single Deductible for the purposes of Condition 2 of the PI Policy"

The First Instance Decision

In the Commercial Court, Moore-Bick J ruled that the proper approach to causation, in the absence of some indication to the contrary, was to identify the "dominant", "efficient" or "real" cause of the loss; it was not necessary to indentify the proximate cause of the claims. Applying this philosophy, the judge was of the view that the third party claims were a series of claims which all resulted from a single act or omission, namely the collective failure of the management of the Insureds properly to train FSC's so as to enable them to give investors Best Advice as required by Lautro. Moore-Bick J rejected Insurers' argument that the fact that an act or omission on the part of the individual FSC was necessary to complete the company's liability should mean that the failure to provide proper training was not a "cause" of the third party liability. Moreover, the judge held that the claimants were entitled to aggregate the third party claims by reason of the additional words in the clause: "or related series of acts or omissions", which, in the opinion of the judge, merely served to widen the scope of the clause and were apt to cover a series of acts and omissions which were directly attributable to a single underlying cause of a kind which was itself within the scope of the cover provided by the policy.

The Court of Appeal Decision

Insurers appealed on the grounds that the phrase "resulted from" in the aggregation clause had to impart some notion of causation, that the managements' failures to train its FSC's were not covered by the insuring clauses, and that the series of claims were neither a single act or omission nor a related series of acts or omissions.

The Court of Appeal held that Moore-Bick J had been wrong in his interpretation of the meaning of the phrase "resulted from" in the aggregation clause. It undoubtedly imparted a notion of causation and it was therefore necessary to identify the proximate cause of any loss. In this case, the Court of Appeal were of the view that the proximate cause had to be the selling of the policies and the failure to give "Best Advice" to the third party claimants by the FSC's. The failure by the managements properly to train the FSC's was not an act or omission as contemplated by the insuring clause, but was rather simply a breach of regulatory duty under Lautro, which could not have given rise to civil liability.

However, the reversal of the first instance decision on the first limb of the preliminary issues was to prove to be irrelevant as, in any case, the Court of Appeal decided by an outright majority that Moore-Bick J had been correct in deciding that the series of claims were a "related series of acts or omissions" and so fell within the aggregation wording. The Court held that the word "related" was wholly apt to apply to a series of acts or omissions of "identical or very similar nature which shared a common causal origin" and that the third party claims in this case satisfied these criteria. According, whilst the Commercial Court had answered the preliminary issues "yes" and "yes", the Court of Appeal had answered it "no" and "yes"; however, the result as far as aggregation under the policy was concerned, was identical.

The House of Lords Decision

As stated above, the House of Lords has today overturned the decisions of both the Commercial Court and the Court of Appeal and decided, by an outright majority of 5-0, to allow the appeal of Insurers in answering both preliminary issues in the negative. All of their Lordships were of the view that, as a matter of construction, the third party claims did not arise from a "related series of acts or omissions"; instead, each arose from a separate contravention of the Lautro Rules. Whilst, Lord Nicholls, in particular, felt that "the conclusion reached in the Commercial Court and the Court of Appeal has considerable attraction", their Lordships were of the view that the obligation to ensure that the FSC's were properly trained did not have the sufficient causative effect as "there are as many failures to ensure [that the FSC's are properly trained] as there have been failures by the various "consultants" to give best advice". Accordingly, the House ruled in favour of Insurers.

Consequences of the House of Lords Decision for Insurers

It is submitted that the decision will (or at least ought to) have a profound effect on the aggregation of pension misselling claims where the policy contains an identical or very similar wording and, in this regard, the decision will be welcomed with open arms by much of the market. However, whilst Insurers in this case (and other cases like it) may be delighted at the ruling of the House, it should be borne in mind that the decision was reached following a detailed and complex analysis and construction of the exact words used in the policy. For this reason, insurers should be wary of using this decision as authority for arguing that claims of this type will never be aggregated.

The recent decisions on aggregation, culminating in today's decision, have shown that, if nothing else, it remains exceedingly hard to second-guess which way a Court will interpret a clause of this type. In his extremely commercially-astute judgment, Lord Hobhouse commented that:

"It will…be appreciated that aggregation clauses may favour the assured or the insurer and in some policies, the same aggregation clause, because it qualifies both a deductible clause and a limit clause, may at times work in favour of the assured and at other times in favour of the insurer. Aggregation clauses thus require a construction which is not influenced by any need to protect the one party or the other. They must be construed in a balanced fashion giving effect to the words used".

Thus, when considering which type of aggregation clause wording to insert in a policy, insurers should take note of the distinction drawn in this judgment between "narrow" wordings, such as that in the policy the subject of this case, and much wider wordings that refer to notions such as a "common event" or "originating cause". Insurers will wish to weigh up the possible pros and cons of having a wide wording as opposed to a narrow one and draft the appropriate clause into their policies. The decision may be different for any given type of cover; Insurers in this case clearly made the right call.

For further information, please contact Michael Baker at [email protected] or on +44 (0)20 7367 2871 or Oliver Shestopal at [email protected] or on +44 (0)20 7367 3591, from Monday 4th August 2003. For urgent enquiries on Thursday 31st July or Friday 1st August 2003, please contact Andrew Symons at [email protected] or on +44 (0)20 7367 3044.