Update: aggregation of pensions mis-selling claims

United Kingdom
The Claimant (the Assured) claimed an indemnity under its professional indemnity policy against the Defendant (Primary Layer Underwriters) in respect of its liability to customers to whom its employees and agents mis-sold hundreds of personal pensions between April 1988 and June 1994. Gross claims against the Assured net of costs and expenses are in excess of c. £5m.

The relevant Insuring Clause of the policy provided that "the liability of Underwriters shall not exceed for any one claim under this Policy the sum specified in the Schedule", which was £1m [each and every claim]. The Definitions section further provided that "Any Claim or Any Loss shall mean one occurrence or all occurrences of a series consequent upon or attributable to one source or original cause…. ("the aggregation clause")" .

At a CMC on 14th June 2002 Steel J. ordered the following preliminary issue based upon assumed facts, namely: whether on the proper construction of the policy all mis-selling claims against the Assured should fall to be treated as one claim for the purposes of applying the limit of indemnity so that Primary Layer Underwriters' liability would be limited to £1m.

The assumed facts were broadly that the Assured had failed to appreciate what was involved in giving advice/selling personal pensions and consequently failed to institute a proper training scheme for its sales force which led to the widespread mis-selling of pensions.

Put simply, the reason behind the preliminary issue was that if the Assured won then the £1m limit of indemnity would apply to each of the many claims against it in respect of pensions mis-selling (and, as a corollary, the three XL polices would not be impacted). On the other hand, if the Primary Layer Underwriters succeeded their liability for claims would be capped at £1m and there would be an increase in exposure for the Assured and/or the XL Underwriters (subject to separate liability and quantum defences).

CMS Cameron McKenna acted for the XL Underwriters who intervened in the proceedings under CPR 19.2 for the purpose of the above preliminary issue as they were not yet parties to the proceedings but had a legitimate interest in the outcome of the hearing. Morison J. handed down Judgment on the preliminary issue on 15th October 2002.

The Assured submitted that it bore the initial excess of £5,000 not in respect of each and every claim but in respect of each and every claimant's (i.e. customer's) claim, and that the Primary Layer Underwriters' bore the liability in excess of this first £5,000 of each and every claimant's claim subject to a £1m ceiling. It further submitted that the mis-selling claims could not be described as "occurrences of a series" (and so be aggregated) as the mis-selling of each pension was a separate, self-contained event of negligence on each salesman's part, and the claims were therefore not occurrences "consequent upon or attributable to one source or original cause".

During argument the court's attention was drawn to various authorities concerning the aggregation of multiple claims and particular reference was made to the dicta of Lord Mustill in AXA Reinsurance (UK) plc v Field 1 WLR 1026 in which he said that "an event is something which happens at a particular time, at a particular place, in a particular way…A cause is to my mind something less constricted. It can be a continuing state of affairs; it can be the absence of something happening. Equally the word "originating" was in my view consciously chosen to open up the widest possible search for a unifying factor in the history of losses which it is sought to aggregate".

Morison J drew a further distinction between an "event" and a "cause" in saying that these words fulfilled different functions as, whereas the words event, occurrence or claim described what had happened the word cause described why something had happened. He therefore agreed with the Primary Layer Underwriters' interpretation of the aggregation clause and found for them on the preliminary issue. In doing so he stressed that the proper approach to the construction of the policy wording was without pre-conception as to the result (see Steyn J's Judgment in Pagnan S.p.A v Tradax Ocean Transportation S.A [1987] 1AER 81).

In examining what constituted a series of occurrences Morison J found that there must be some connecting factor that linked the occurrences which would otherwise be separate. In the Australian case of Distillers Company Bio-Chemicals (Australia) Pty Ltd v Ajax (Insurance) Company Ltd [1974] 130 CLR1 the majority considered that the occurrences must be of a sufficiently similar kind to qualify for forming a series. In the present case Morison J. held that the customers' claims might properly all be described as occurrences of mis-selling of pensions. On the assumed facts, therefore, the claims were sufficiently related to form a series whether or not they were "attributable to one source or original cause".

However, Morison J. added that the phrase "original cause" entitled him to see if there was a unifying factor in the history of the claims faced by the Assured and he went on to conclude by saying that "In my view the lack of proper training of the selling agents and the selling employees was behind the whole problem. It was this which, on assumed facts, was a consistent and necessary factor which allowed the mis-selling to occur. Maybe the activities of individual salesmen were also causative but the [aggregation] clause entitles one to move back and find a single source or original cause; and in this case, there is one.

If you have any queries or require further information on this case, please contact Nick Woodward on +44 (0)20 7367 3305 or at nick.woodward@cms-cmck.com