Lloyds TSB General Insurance Holdings and others v Lloyds Bank Group Insurance Company Limited

The House of Lords held that an aggregation clause in a professional indemnity policy which aggregates "a series of third party claims" only applies where the series "result[s] from any single act or omission" or from a "related series of acts or omissions" as those phrases are to be read in the policy. The definition of "act or omission" in the clause referred back to the acts or omissions described in the insuring clause (including breaches of the Financial Services Act 1986 and LAUTRO rules) and therefore required the act or omission to be the proximate cause of each third party loss.

The court decided that each mis-selling claim was caused by a distinct failure by a salesman or consultant to give "best advice" and could not be aggregated merely because all the mis-selling allegedly had a common upstream origin in systemic failures of training or monitoring. The parenthetical words "(or related series of acts or omissions)" do not authorise recharacterising the clause as an "originating cause" clause permitting aggregation by reference to a remote common cause.

This appeal concerned whether some 22,000 mis-selling claims brought against members of the TSB group could be aggregated under a Bankers Composite Insurance Policy so as to exceed a deductible of £1,000,000 "each and every claim" in section 3 (Professional Indemnity) of the policy. The insureds had paid more than £125 million in compensation for mis-selling of personal pension schemes and sought recovery from their captive insurer. The key disputed issue was the meaning and scope of the policy's aggregation clause.

• Nature of the claim: insureds sought indemnity under section 3 of the policy for compensatory damages paid to third parties for mis-selling, relying on an aggregation clause to treat many small claims as a single claim for deductible purposes.
• Procedural posture: a preliminary issue was ordered (Commercial Court decision reported [2001] Lloyd's Rep IR 237), the Court of Appeal dismissed the insurer's appeal and allowed aggregation ([2002] Lloyd's Rep IR 113), and the matter came to the House of Lords on appeal (and cross-appeal).
• Issues framed by the court: whether the mis-selling claims constituted a series of third party claims which resulted from (1) a single act or omission by the assureds or (2) a related series of acts or omissions, so that they could be treated as a single third party claim for application of the deductible.

The House of Lords reasoned that the policy's insuring clause and the defined phrase "act or omission" limited the unifying factor to acts or omissions that fall within the insuring clause and that proximately caused the third party loss. The statutory duty under section 62 of the Financial Services Act 1986 imposed liability on members for failures under LAUTRO rules, but that liability arose only upon the occurrence of the consultant's contravention (failure to give best advice). Accordingly the systemic failures alleged (lack of training, monitoring or compliance systems) were legally antecedent but not the acts or omissions which directly caused each investor's loss. The Lords rejected the Court of Appeal's approach of importing a broad "single underlying cause" or "originating cause" concept into the parenthetical words "related series". In short, the aggregation clause could not be read so as to allow aggregation simply because the individual acts of mis-selling had a common upstream origin.

The judgment emphasised the importance of the precise drafting chosen by commercial parties and declined to reclassify a narrowly drafted aggregation clause into an "originating cause" form.

Appeal allowed; cross-appeal dismissed. The House of Lords held that the aggregation clause must be read in the context of the insuring clause and its definition of "act or omission", so that each aggregated claim must result from an act or omission that itself gives rise to civil liability. The mis-selling claims arose from distinct failures to give best advice and could not be aggregated by reference to a common upstream systemic failure.

Preliminary issue tried in the Commercial Court (Moore-Bick J) [2001] Lloyd's Rep IR 237; Court of Appeal (Potter, Hale and Longmore LJJ) [2002] Lloyd's Rep IR 113 (allowed aggregation); appeal to the House of Lords [2003] UKHL 48 (appeal allowed; cross-appeal dismissed).