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Lloyds TSB General Insurance Holdings and others v. Lloyds Bank Group Insurance Company Limited
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OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Lloyds TSB General Insurance Holdings and others (Original Respondents and Cross-appellants) v. Lloyds Bank Group Insurance Company Limited (Original Appellants and Cross-respondents) ON THURSDAY 31 JULY 2003 The Appellate Committee comprised: Lord Nicholls of Birkenhead Lord Hoffmann Lord Hobhouse of Woodborough Lord Millett Lord Walker of Gestingthorpe HOUSE OF LORDSOPINIONS OF THE LORDS OF APPEAL FOR JUDGMENTIN THE CAUSELloyds TSB General Insurance Holdings and others (Original Respondents and Cross-appellants) v. Lloyds Bank Group Insurance Company Limited (Original Appellants and Cross-respondents)[2003] UKHL 48LORD NICHOLLS OF BIRKENHEAD My Lords, 1. I have not found this question of interpretation as easy as others. The conclusion reached in the Commercial Court and the Court of Appeal has considerable attraction. In the end, and not without a degree of doubt, I agree that for the reasons given by my learned friends Lord Hoffmann and Lord Hobhouse of Woodborough this appeal should be allowed and the cross-appeal dismissed. LORD HOFFMANN My Lords, 2. In 1994 the Securities and Investment Board ("SIB") carried out an investigation into what it found to have been widespread breaches of the Financial Services Act 1986 by companies selling personal pension schemes. The marketing of such schemes was "investment business" within the meaning of the Act and could be undertaken only by authorised persons. To be authorised, the company had to belong to the appropriate self-regulating organisation. It had to comply with the rules of that organisation as if they had been made under the Act. 3. The relevant self-regulating organisation was at the time the Life Assurance and Unit Trust Regulatory Organisation ("LAUTRO"). Its rules provided, by rule 3.4 (4)(a), that "the member shall…ensure that its company representatives comply with the Code of Conduct (in so far as it applies to them)." The Code of Conduct, scheduled to the rules, contained detailed provisions about the duties of salesmen selling personal pension schemes. These had been widely marketed after the Social Security Act 1986 gave employees or ex-employees the right to transfer the value of accrued benefits in their employer's occupational scheme to a personal scheme in which the investments were managed by a company of their own choice. 4. Whether it was in the interests of an employee to leave his employer's occupational scheme and commit his future to a personal scheme was often a difficult question. A fully informed decision required the employee to be aware of the respective risks, costs and benefits of the choices open to him. Much depended upon his personal and family circumstances. The LAUTRO Code of Conduct required a sales representative to make a detailed analysis in order to give the investor what was compendiously called "best advice" on all relevant aspects of the decision. It imposed a positive duty upon the salesman (who was usually paid commission on the schemes which he sold) to advise the employee against giving up his rights under the occupational scheme unless he honestly thought it was in the employee's best interests to do so. 5. The 1994 investigation suggested that, in breach of the Code of Conduct, many employees had been persuaded to transfer to personal schemes without adequate advice about the risks, advantages and disadvantages. These breaches of the Code by salesmen were commonly called "mis-selling". The underlying reasons for mis-selling were partly the method by which salesmen were paid but largely the inadequacy of the training and monitoring of their performance provided by the companies employing them. These failures were also breaches of the LAUTRO rules, which required members to establish training schemes for their employees (rule 3.4A) and to make arrangements for monitoring their performance to ensure that they complied with the Code of Conduct (rule 3.4(3)). 6. A breach of the LAUTRO rules affecting an investor is actionable as a breach of statutory duty (see section 62 of the 1986 Act) and the companies' breaches of rule 3.4 (4)(a) by failure to "ensure" that their representatives complied with the Code of Conduct therefore gave rise to claims for compensation by investors who had suffered financial loss in consequence of mis-selling. After its investigation, the SIB required members of LAUTRO to inform persons to whom pensions had been sold that they might be entitled to a remedy in damages. The result was a flood of claims. 7. The respondents to this appeal, then members of the TSB group ("the TSB companies") received about 22,000 claims. (The TSB group has since become part of the Lloyds group). Most of the claims were for relatively small amounts; so far, no single one has exceeded £35,000. But the total sum of money involved was large. The TSB companies have paid out more than £125 million in compensation. 8. The question in this appeal is whether the TSB companies can recover any part of this money under a Bankers Composite Insurance Policy under which they and other members of the TSB group were then insured. This policy, as its name suggests, covered the group companies against a variety of risks. It was divided into four sections, each covering a different type of risk. Broadly speaking, section 1 dealt with loss caused to the insured by the dishonest or fraudulent acts of employees, section 2 with electronic and computer crime, section 3 with liability to third parties arising from breaches of common law or statutory duties by employees and section 4 with the personal liabilities of directors and officers. 9. The insured companies carried on widely different financial activities: they included Hill Samuel Bank Ltd, a well-known merchant bank, United Dominions Trust, equally well-known in hire purchase finance, TSB Bank Plc, an old-established retail bank, as well as the other TSB companies. The appellant insurer, then called TSB Group Insurance Co Ltd and now Lloyds Bank Group Insurance Co Ltd, was a captive within the group. The group risks under the policy were reinsured and the reinsurers are the real parties in interest in this appeal. 10. The risk of liability for mis-selling under the 1986 Act fell within the insuring clause of section 3 of the policy:
11. There is no dispute that each of the claims for mis-selling satisfied these requirements. But the policy included a "Schedule of Underlying Deductibles" which was said to form part of sections 1, 2 and 3. For section 3, there was to be a deductible of £1 million "each and every claim". The same was repeated in item 7 of the schedule to section 3. The effect of the deductible in section 3 was stated in paragraph 2 of the conditions:
12. So far, so bad - from the TSB companies' point of view. No single claim came anywhere near exceeding the £1 million deductible. But the TSB companies rely, and have so far succeeded, on the "aggregation clause" which follows the clauses I have already quoted:
13. In order to decide the effect of the aggregation clause, the following preliminary issue was ordered to be tried:
14. Moore-Bick J said, at [2001] Lloyd's Rep IR 237, 245, that the purpose of an aggregation clause was:
15. That seems to me a fair description. The unifying factor is often a common origin in some act or event specified by the clause. But much will turn upon the precise nature of the act or event which, for the purposes of aggregation, the clause treats as a unifying factor. The more general the description of that act or event, the wider the scope of the clause. For example, in Municipal Mutual Insurance Ltd v Sea Insurance Co Ltd [1998] Lloyd's Rep IR 421 the unifying cause was expressed in very general terms:
16. This meant that as long as one could find any act, event or state of affairs which could properly be described as a cause of more than one loss, they formed part of a series for the purposes of the aggregation clause. Hobhouse LJ held that a series of losses caused by theft and vandalism from the Port of Sunderland over a period of time were attributable to one original cause, namely the inadequacy of the port's system for protecting the goods of which it was bailee. On the other hand, in Axa Reinsurance (UK) Plc v Field [1996] 1 WLR 1026, 1035 Lord Mustill contrasted the words "arising from one originating cause" which had been used in Cox v Bankside Members Agency Ltd [1995] 2 Lloyd's Rep 437 with the words "arising out of one event" which was the unifying factor designated by the clause then before the House. An "event", he said, was "something which happens at a particular time, at a particular place, in a particular way". A "cause" on the other hand, was less constricted: it could be a continuing state of affairs or the absence of something happening. The word "originating" was also in his opinion chosen to "open up the widest possible search for a unifying factor". This meant that in the Axa case the incompetence of a Lloyds underwriter was not an "event" giving rise to the losses under a number of separate policies which he had written on behalf of various syndicates, whereas in in Cox v Bankside Members Agency Ltd it had been held to be the "originating cause" of such losses. 17. The choice of language by which the parties designate the unifying factor in an aggregation clause is thus of critical importance and can be expected to be the subject of careful negotiation; as Lord Mustill observed in the Axa case [1996] 1 WLR 1026, 1035, among players in the reinsurance market "keen interest [is] shown…in the techniques of limits, layers and aggregations". 18. In the present case the unifying factor is, as in the examples so far given, a common cause, but that cause must be a "single act or omission" or, by an extension in the parenthesis, a "related series of acts and omissions". So the question turns upon the meaning of an "act or omission" or "related series of acts or omissions." 19. Moore-Bick J said, at p 245, that an "act or omission" included any acts or omissions "of the kinds described in the insuring clause". In his view, this included the TSB companies' breach of their duty under the LAUTRO rules to establish training schemes for their employees and to make arrangements for monitoring their performance. For the purposes of the preliminary issue the TSB companies admitted, indeed, asserted, that they had been in breach of these duties. Moore-Bick J held that these breaches were an act or omission or series of acts and omissions within the meaning of the aggregation clause and that they had been the cause of all the 22,000 claims. So they could all be aggregated and treated as a single claim for the purposes of the deductible. 20. The Court of Appeal (Potter, Hale and Longmore LJJ) [2002] Lloyd's Rep IR 113 did not agree. They drew attention to clause 2 (g) of the endorsement to section 3 of the policy, which defines the term "act or omission". For present purposes, the relevant part of the definition is that the words are deemed to mean a breach of the provisions of the LAUTRO rules "as described in the insuring clause". The relevant part of the insuring clause is paragraph (iii)(g), which insures against a breach "in respect of which civil liability arises on the part of the assured". The Court of Appeal said that an "act or omission" must therefore be something which constitutes the investor's cause of action. It cannot mean an act or omission which is causally more remote. 21. It is therefore necessary to examine the nature of the cause of action asserted by the 22,000 claimants. It is a contravention of rule 3.4 (4)(a); to "ensure that" company representatives comply with the Code of Conduct. A duty to "ensure that" something does or does not happen is the standard form of words used to impose a contingent liability which will arise if the specified act or omission occurs. Even if the act or omission is that of a third party, such as a company representative, the liability is not vicarious. The company is not liable for the representative's act or omission: that is simply the contingency giving rise to the company's own liability. Nor should one be misled by the word "ensure" into thinking that the effect is to impose upon the company a duty to do something. No doubt the company will be well advised to take whatever steps it can to prevent the contingency from happening, but the question of whether it took such steps or not is legally irrelevant to its liability. It is liable simply upon proof that the contingency has occurred. 22. It follows that the absence of a training or monitoring system, even though an independent breach of the rules, was legally irrelevant to the civil liability of the TSB companies. Even without any such system, they would not have been liable unless their representatives actually contravened the Code. Likewise, any such contravention would have given rise to liability whether they had a training and monitoring system or not. It cannot therefore have been an act or omission from which liability resulted. 23. Thus far I respectfully agree with the Court of Appeal. The language of the aggregation clause, read with the definition of "act or omission", shows that the insurers were not willing to accept as a unifying factor a common cause more remote than the act or omission which actually constituted the cause of action. An act or omission could qualify as a unifying factor in respect of more than one loss only if it gave rise to civil liability in respect of both losses. In the present case, the act or omission which gave rise to the civil liability in respect of each claim (failure to give best advice to that investor) was different from the acts or omissions giving rise to the other claims. 24. But the Court of Appeal then turned to the words in parenthesis "(or related series of acts or omissions)". And in construing these words, they produced exactly the result which they had rejected in their construction of the primary words "single act or omission". They said that acts or omissions could be "related" and form a "series" if they had a "single underlying cause" or common origin (Potter LJ, at p 124; Hale LJ, at p 125) or if they were "the same omission" which had occurred on more than one occasion (Longmore LJ, at p 125). The appeal was therefore dismissed. 25. This result seems to me paradoxical. It means that the parties started by choosing a very narrow unifying factor: not "any underlying cause", not "any event" or even "any act or omission", but only and specifically an act or omission which gives rise to the civil liability in question. Having chosen this as the opening and, one must assume, primary concept to act as unifying factor, they have then, by a parenthesis, produced a clause in which the unifying factor is as broad as one could possibly wish. It is sufficient that all the claims have a common underlying cause or (on the view of Longmore LJ) the breaches of duty are the same, which I take to mean sufficiently similar. In my opinion this construction is allowing the tail to wag the dog. I do not think that it is reasonable to understand the parties as having intended the parenthesis to stand the rest of the clause on its head. 26. When one speaks of events being "related" or forming a "series", the nature of the unifying factor or factors which makes them related or a series must be expressed or implied by the sentence in which the words are used. It may sometimes be necessary to imply a unifying factor from the general context. But the express language may make such an implication unnecessary or impermissible. 27. In the present case, the only unifying factor which the clause itself provides for describing the acts or omissions in the parenthesis as "related" and a "series" is that they "result" in a series of third party claims. In other words, the unifying element is a common causal relationship. But that common causal relationship is, so to speak, downstream of the acts and omissions within the parenthesis. They must have resulted in each of the claims. This obviously does not mean that it is enough that one act should have resulted in one claim and another act in another claim. That provides no common causal relationship. It can only mean that the acts or events form a related series if they together resulted in each of the claims. In this way, the parenthesis plays a proper subordinate role of covering the case in which liability under each of the aggregated claims cannot be attributed to a single act or omission but can be attributed to the same acts or omissions acting in combination. 28. The Court of Appeal was unwilling to accept that the clause itself provided the unifying factor to justify the use of the words "related" and "series". They appear to have thought that it was in practice unlikely that acts or omissions having a common causal relationship with a series of claims would occur. So the Court of Appeal sought the unifying factor outside the clause, by implying a reference to a common underlying cause upstream of the acts or omissions in the parenthesis, or some similarity between them. The clause itself says nothing about such unifying factors. Not only that; the narrow formulation of the primary concept, "single act or omission", suggests that it was anxious to avoid them. In my view, such an implication of an unstated unifying factor is impermissible. I would reserve my opinion on the example given by my noble and learned friend Lord Hobhouse of the salesman who presents the identical document to a number of customers in succession. I would not be inclined to accept that these acts are a series just because they are very similar, although I can see it might be said that the relevant single act or series of acts can be described as the distribution of the document and the method of distribution (sending it simultaneously to a number of people, showing it to them in succession or reading it to them at a meeting) is causally irrelevant. 29. It is in my opinion quite possible that one could have separate losses caused to a number of people by the combination of more than one act or omission, none of which would have been caused by the one without the other. For example, to adapt an example of my noble and learned friend Lord Hobhouse, they may have been caused by the distribution of a misleading document in identical terms by someone who was not himself negligent but ought to have been corrected by someone else who was. The two acts or omissions would be a series which together caused each of the losses. But in any case, I think that it is wrong to allow doubts about the possibly practical application of the parenthesis (particularly when the clause may have to be applied to the wide variety of circumstances covered by the insuring clause of section 3 of the policy) to produce a construction which undermines the balance of the clause. Each of the claims did not arise from a "single act or omission". Nor did each of them arise from a "related series of acts or omissions". Each arose from a separate contravention of rule 3.4(4)(a). I would therefore allow the appeal, dismiss the cross-appeal, and answer each of the preliminary issues "No". LORD HOBHOUSE OF WOODBOROUGH My Lords, 30. This appeal has raised a question of the construction of an aggregation clause in a policy of insurance covering inter alia third party liability risks. The context is the policy deductible, ie the provision which states the level up to which the assured must self-insure (or insure elsewhere) before he has a right of recovery under the relevant policy. This provision may be qualified by an aggregation clause which enables the assured to aggregate self-insured losses together so as to exceed in aggregate the deductible and give a right of recovery. Policies also normally contain clauses which limit the liability of the insurer under the policy and such clauses may provide a limit by reference to individual losses or claims but give the insurer the right to aggregate losses or claims so as to enable him to apply the limit to that aggregate. It will, therefore, 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. 31. Another preliminary observation which needs to be made, which is true of very many professionally drafted commercial and financial contracts, and is particularly true in the present case, is that there are often well established alternatives open to the parties in the drafting of their agreement. The choice made from among these alternatives represents part of the bargain struck by the parties and must be respected by anyone (judge or arbitrator) adjudicating upon a dispute arising under the document. As noted by Lord Mustill in AXA Re v Field [1996] 1 WLR 1026 at pp.1031-5, and, as I will explain below, aggregation clauses come in different well established forms. The clause in the present case is no exception. The form it takes is plain and apparent from the language which the parties have used. It is an impressive feature of this litigation that both the Commercial Judge and the three members of the Court of Appeal have all arrived at the same conclusion. But it can be questioned whether that conclusion does not fail to give effect to the clause which the parties have chosen to include in this policy. The Policy: 32. The policy was a 'Bankers Composite Insurance' covering what was then 'The TSB Group' for 12 months from 1st November 1993. It was in four effectively self-contained sections covering a variety of classes of risk and loss relevant to the business of the Group. The section with which this appeal is concerned is Section 3 - 'Professional Indemnity'. The relevant assured were members of the Group to whom a deductible of £1,000,000 "each and every" claim applied in respect of this section. The insurer was also a TSB company and the financial significance of liability under this policy would appear to be to its reinsurers rather than to the TSB Group insurer as such. 33. The Section 3 policy was a 'claims made' policy providing an indemnity in respect of the assured's legal liability to third parties for any third party claim which is for compensatory or restitutionary damages and first made against the relevant assured during the policy period and is for financial loss falling within any of 10 listed categories, (a) to (j). These include financial loss caused by a negligent act, negligent error or negligent omission on the part of an officer or employee of the assured, or the breach of a fiduciary or professional duty, or misrepresentation on the part of the assured or an officer or employee of the assured. But the risk primarily relied on in the present case was -
There was a very high limit on the insurer's overall liability under the policy which is therefore irrelevant for present purposes. The deductible is dealt with in clause 2 which provides that the policy only covers "that part of each and every third party claim" which exceeds the deductible and continues:
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