Lloyds TSB General Insurance Holdings and others v. Lloyds Bank Group Insurance Company Limited
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
Lloyds TSB General Insurance Holdings and others (Original Respondents and Cross-appellants)
Lloyds Bank Group Insurance Company Limited (Original Appellants and Cross-respondents)
THURSDAY 31 JULY 2003
The Appellate Committee comprised:
Lord Nicholls of Birkenhead
Lord Hobhouse of Woodborough
Lord Walker of Gestingthorpe
HOUSE OF LORDS
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)
 UKHL 48
LORD NICHOLLS OF BIRKENHEAD
- 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.
- 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.
- 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.
- 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.
- 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)).
- 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.
- 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.
- 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.
- 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.
- The risk of liability for mis-selling under the 1986 Act fell within the insuring clause of section 3 of the policy:
provides an indemnity to the assured in respect of the assured's legal liability to third parties for any third party claim
which meets the following requirements:-
Any third party claim must:
(i) be for compensatory and/or restitutionary damages; and
(ii) be first made against the assured during the policy period; and
(g) be for financial loss caused by a breach on the part of the assured or an officer or employee of the assured of the provisions of the Financial Services Act 1986 (including without limitation any rules or Regulations made by any regulatory authority or any self regulatory organisation pursuant to the provisions of the Act)
in respect of which civil liability arises on the part of the assured."
- 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:
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.
The deductible shall apply to each and every third party claim and shall be subject to no aggregate limitation."
- 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:
"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."
- In order to decide the effect of the aggregation clause, the following preliminary issue was ordered to be tried:
the mis-selling claims constitute a series of third party claims which resulted from:
(1) a single act or omission by the TSB companies their officers or employees
(2) a related series of acts or omissions by the TSB companies their officers or employees
and are therefore to be considered a single third party claim subject to a single deductible for the purposes of condition 2 of the
- Moore-Bick J said, at  Lloyd's Rep IR 237, 245, that the purpose of an aggregation clause was:
"to enable two or more separate losses covered by the policy to be treated as a single loss for deductible or other purposes when they are linked by a unifying factor of some kind."
- 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  Lloyd's Rep IR 421 the unifying cause was expressed in very general terms:
"all occurrences of a series consequent on or attributable to one source or original cause
- 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  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  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.
- 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  1 WLR 1026, 1035, among players in the reinsurance market "keen interest [is] shown
in the techniques of limits, layers and aggregations".
- 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."
- 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.
- The Court of Appeal (Potter, Hale and Longmore LJJ)  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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- 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  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 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.
- 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 -
(g) "... financial loss caused by a breach on the part of the Assured or an Officer or Employee of the Assured of the provisions of the Financial Services Act 1986 (including without limitation any rules or regulations made by any Regulatory Authority or any Self Regulatory Organisation pursuant to the provisions of the Act) or of any other statute enacted in the United Kingdom or the Channel Islands including breach of a statutory duty, in respect of which civil liability arises on the part of the Assured."
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:
" The deductible shall apply to each and every third party claim and shall be subject to no aggregate limitation.
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."
This provision uses the phrase "act or omission" which is later defined to mean exactly the same as the categories (a) to (j) in the insuring clause which it again quotes in full. So, if the third party claim qualifies under (g) it is the wording of (g) which defines "act or omission" as used in the aggregation clause.
- For the purpose of this appeal there is no dispute about the relevant facts. The facts are those pleaded by the assureds which must be assumed for the purposes of the preliminary issue to be true.
- The Social Security Act 1986 enabled employees who would otherwise be entitled to benefits under their employers' occupational pension schemes to transfer benefits from, opt out of, or not to join, those occupational pension schemes and instead to invest for their retirement in personal pension plans. Each of the claimants (save for the fifth claimant, Lloyds TSB Life Assurance Co Ltd,) was engaged in the marketing and sale of personal pension plans to such employees ('pension transfer business'). The conduct of such business was subject to regulation as 'investment business' under the Financial Services Act 1986 (the FSA), in accordance with a regime of self-regulation administered by the responsible self-regulating organisation which until 18 July 1994 was the Life Assurance and Unit Trust Regulatory Organisation (LAUTRO) and thereafter was the Personal Investment Authority. Three of the claimants (the second, third and fifth) were at the material times members of LAUTRO; the other two were not. The appeal has however been argued on the basis of the three LAUTRO members, without distinguishing between them and the other two. The actual marketing and sale of personal pension plans was at all material times done by 'consultants' employed by one of the claimants as the case might be.
- Rule 3.4(4)(a) of the Rules of LAUTRO provided that a member shall "ensure that its company representatives comply with the Code of Conduct (insofar as it applies to them) ...". Rule 3.4(3) of the Rules of LAUTRO provided that a member "shall make arrangements
for the monitoring of the performance of its company representatives to ensure that they comply with the Code of Conduct (insofar as it applies to them) ...". The LAUTRO Code of Conduct (Schedule 2 to the LAUTRO Rules) was expressly made for the purpose of ensuring that members and their representatives maintained high standards of integrity and fair dealing, in particular in relation to investors, exercised due skill care and diligence in providing services, and generally took proper account of the interests of investors in the course of carrying out investment business. The relevant duties of 'consultants' engaged in pensions transfer business were set out in the Code. Thus, the Code required the 'consultants' to give investors 'best advice' and prohibited them from advising investors on any matter unless competent to do so. The requirements of 'best advice' included giving advice in relation to sales of personal pension plans to members of occupational pension schemes with the obligation in particular to carry out a full and detailed analysis of and comparison between the costs and risks of and the benefits under the investor's occupational pension scheme and the proposed personal pension plan and to advise the investors upon them and included a positive duty not to advise an investor to give up his rights under the occupational pension scheme unless it was bona fide believed to be in his best interest to do so. Section 62 of the FSA provides that a contravention of (inter alia) the LAUTRO Rules by a member of LAUTRO should be actionable against the member at the suit of any person who suffers loss as the result of the contravention, subject to any available defences.
- Following public expressions of concern which led to a review carried out by the Securities and Investment Board in 1994, more than 22,000 mis-selling claims were made by investors against one or other of the claimants, claiming compensation for the losses they had individually suffered by reason of the alleged mis-selling. Each of the mis-selling claims was based on or included allegations that best advice had not been given to the investor. The failure on the part of the 'consultant' concerned to give best advice to the investor constituted a breach of the Code on the part of the 'consultant'. The failure on the part of the relevant claimant to ensure that the 'consultant' concerned gave best advice to the investor was also a breach on the part of the relevant claimant of the rules of LAUTRO. The mis-selling claims were claims against the claimants for damages for financial loss caused by (inter alia) breach of statutory duty giving rise to civil liability on their part under s.62 of the FSA.
- It is alleged, and must for present purposes be assumed to be true, that at all material times the claimant concerned, its officers or employees failed to consider, identify and satisfy the requirements of best advice in relation to pension transfer business and, specifically, that the relevant claimant -
(a) initially failed to give any specific consideration to the requirements of best advice and failed to provide any specific internal compliance guidance or training to its 'consultants';
(b) subsequently misinterpreted the requirements of best advice in relation to pension transfer business, and mistakenly believed that it was unnecessary for its 'consultants' to evaluate the comparative risks and benefits for the investor to invest in a personal pension plan as opposed to membership of an occupational pension scheme, or to give advice to the investor accordingly; and
(c) failed at all material times to establish and maintain adequate resources, policies, practices and procedures to ensure that the conduct of pension transfer business by the claimant and its 'consultants' as a whole complied with the requirements of the rules of LAUTRO and the Code, and in particular failed to instruct train, equip, monitor and supervise its 'consultants' as a whole for the purpose of conducting pension transfer business in compliance with the requirements of best advice.
It is alleged, and must for present purposes be assumed to be true, that (i) the failures to give best advice on the part of the 'consultants' concerned and (ii) the acceptance of, or failure to reject, proposed pension transfer business on the part of the claimant concerned, its officers or employees, arose from the same underlying origin or were of an identical or very similar nature.
- The various claimants have paid compensation to investors exceeding £125 million in total. However, no single claim has exceeded the deductible of £1 million. Indeed, no single claim has exceeded about £35,000 in amount. It follows that the entitlement of the various claimants to be indemnified by the insurer in respect of the compensation paid by them to investors depends in the first instance upon whether the aggregation clause in Section 3 of the policy entitles them to aggregate the mis-selling claims for the purposes of the deductible. The issues for determination are thus whether the mis-selling claims against the various claimants were "a series of third party claims" which resulted from "a single act or omission" on the part of the various claimants, their officers or employees. and, if not, whether they were "a series of third party claims" which resulted from "a related series of acts or omissions" on the part of the various claimants, their officers or employees.
The Court of Appeal:
- The judgments in the Court of Appeal did not wholly adopt the same reasoning as that of the judge. None treated their decision as concluded by binding authority. They rejected the argument that there had been a single act or omission but accepted the argument that there had been a related series of acts or omissions. Potter LJ ( Lloyd's Rep IR at p.124) rejected the 'single act or omission' argument on the ground that the failure to ensure that the 'consultants' gave best advice was not the cause of the liability to the third party as they "were no more than regulatory duties not giving rise to duties directly enforceable by action by a member of the public". But he accepted the argument that "a series of acts or omissions may be related by reason of having a single underlying cause or common origin" which need not be within the list of insured items. So he considered that the failure to have a proper system, as alleged in this case, was such an underlying cause or origin. He considered the word "related" was "wholly apt" to apply to a series of acts or omissions which were of the same or a "very similar nature and which share a common causal origin".
- Hale LJ (pp.124-5) stressed that the conduct which gave rise to the individual third party claims for which the assureds were respectively liable was "not the systemic management failure which is said to be the explanation for all those individual misdeeds". But referring to the phrase "related series" found assistance in the variety of family relationships familiar to family lawyers, including "kindred and affinity". She treated the 'single underlying cause' as decisive to give rise to a sufficient relationship.
- Longmore LJ (p.125) stressed that the liability of the assured was personal not vicarious. "Once it is established that 'best advice' has not been given, liability is automatic." He summarised his view, saying: "if a number of different people are responsible for [the] omissions [to give best advice] and such omissions give rise to different losses for different customers, the omissions are nevertheless, in my view, related and constitute a related series of omissions because they are an omission to do the same thing, although the consequences of each omission are, of course, different."
- The scheme of the relevant parts of Section 3 of this policy is firstly that it has a carefully drafted insurance clause which defines the cover given. It is of no avail to the assureds to present arguments which involve saying that the proximate cause or causes of the relevant third party losses is something other than the insured cover there defined. This scheme is reinforced by the inclusion of the definition clause in effectively identical terms inserted for the purpose of defining the phrase "act or omission" as used in the aggregation clause. The result is that, for present purposes, the third party claim has to be one which is "for financial loss caused by a breach on the part of the assured or an officer or employee of the assured" of the FSA or the LAUTRO Rules and the acts or omissions relied upon to trigger the aggregation clause have also to fit that description. This was recognised by Potter LJ at p.124. It has to be what proximately caused the loss suffered by the third party and that was the act or omission of the 'consultant'. It may be that one should assume that all the 'consultants' were untrained and incompetent. But the fact remains that on occasions they may happen to have given what was in fact the best advice or that the advice which they gave did not in fact cause the third party any financial loss. The essential factor in every case has to be that the breach - act or omission - caused the third party financial loss. There is thus no "single act or omission": there were as many acts and omissions as there were third party claims. Similarly, if there is to be a related series of acts and omissions, that description has to be true of the 22,000 claims notwithstanding that each claimant will have been different, each financial loss will have been different and the actual failure to give the best advice will have been on the part of many different employees of the relevant different assureds. It is of no assistance to the assureds to say that they were themselves each in breach of their obligation to ensure that best advice was given. That statutory requirement merely creates for the relevant assured an absolute liability for the breach of its relevant employee.
- The second part of the structure of Section 3 to which I wish to draw attention is the deductible clause. It applies across the board, to all 10 heads of cover; it is not specific to these individual assureds or to the FSA cover. So, it is not necessary or right to construe it specifically by reference to the FSA cover. The deductible applies to "each and every third party claim". This is the starting point for the consideration of the aggregation clause. The further fact that for these assureds the deductible is set at £1 million shows that the primary intention is to confine the cover to large third party claims.
- The aggregation clause is applicable if there is a series of third party claims which either have resulted from a "single act or omission" or have resulted from a "related series of acts or omissions". The phrase "series of third party claims" clearly carries with it the possibility that the claims may have been made by a number of third parties and each relate to the financial loss suffered by an individual third party but do not, as such, import anything more. The following phrase "result from any single act or omission" reinforce this. The single act or omission must be the proximate cause of the financial loss caused to the third parties. This in the present context has to be an identifiable single failure by an identifiable 'consultant' to give the third parties 'best advice'. One can visualise how this might happen when a 'consultant' makes a single presentation to a room-full of people to persuade them to sign up to a pension scheme sold by his employer, one of the assureds. But this is not the scenario which the assureds invoke, no doubt because such aggregation would be insufficient to assist them in their claims against the insurer. What they seek to rely upon is the liability of the assureds by reason of the obligation to "ensure". But this does not provide them with an answer: there are as many failures to ensure as there have been failures by the various 'consultants' to give best advice. Further, a failure to ensure is not itself an "act or omission" in any physical sense, as is implied by the use of the adjective "single"; it is rather a word describing a personal responsibility for the failure of some other individual. The assureds' argument on the cross-appeal does not survive scrutiny and the Court of Appeal were right to reject it.
- The second basis of aggregation provided for in the clause is third party claims resulting from a "related series" of acts or omissions. It is upon this phrase that the argument before your Lordships has mainly turned. As I have stated, this argument succeeded before the Court of Appeal. But, on examination, it can be seen to raise the same fundamental difficulties as the argument on the primary phrase, "single act or omission". The claims still have to result from something done or omitted as between the relevant 'consultant' and the relevant third party. The obligation of the relevant assured to 'ensure' does not suffice to bridge the gap nor could it unless one gave a different meaning to the words 'act(s) or omission(s)' in the two adjoining phrases. Here again one can visualise a situation which might be capable of leading to aggregation under this part of the wording. Suppose a 'consultant' prepares a document which misrepresents the merits of the pension scheme he is endeavouring to sell and gives that document to a succession of people; the people who buy into the scheme as a result of having been given the misleading document by the 'consultant' could each have a claim against the assured employing that 'consultant'. Each act of giving the misleading document to a person would be a distinct act. But they could together form a "related series of acts" from which a "series of third party claims" had resulted. But here again, this was not the way the assureds put their case, no doubt for the same reasons as before and because it was not in fact what happened. They however rely upon the use of the word 'ensure' and the assumed fact that all the acts of mis-selling arose from the same underlying origin or were of an identical or a very similar nature.
- The assureds' argument therefore runs as follows: Each of the assureds was under a statutory obligation to take the steps indicated in the Code of Conduct to guard against mis-selling. They did not do so. As a result, 'consultants' did not give best advice and mis-selling occurred. It follows that the various assureds did not ensure that it did not occur. The underlying cause of all the cases of mis-selling was the same - the failure to take the steps required by the Code to guard against mis-selling. The requisite steps and the failure to take them were either the same in every case or very similar. This argument therefore takes the inquiry back to an earlier stage. It looks at not what caused the financial loss to the third party, the subject of the third party claim, but at the underlying situation which gave rise to the conduct of the 'consultant' vis-à-vis the third party. It can be commented that the underlying situation could equally well have been the failure of the assured to pay its 'consultants' a viable salary so that they became over-dependent upon commissions and were thus unduly influenced not to perform their duty to give best advice, a temptation to which a proportion of the 'consultants' would predictably succumb. The way in which the argument seeks to get round the basic difficulties is to say that the failure of each relevant assured to take the requisite steps, whilst not being the act or omission itself or the proximate cause of the third party's loss, provides the relationship between the various acts and omissions so as to justify the description of them as a 'related series', or, as Hale LJ might have put it, they all had the same parent, ie the failures of the assureds (or, perhaps, the same parent or uncles and aunts). Is this the correct construction to place on this clause?
- It is possible to have an aggregation clause which may have this effect. In AXA Re v Field  1WLR 1026, the policies discussed included two different sets of wording, one referring to "each and every loss and/or occurrence ........... and/or series of losses and/or occurrences ............ arising out of one event" and the other referring to "any claim or claims arising from one originating cause or series of events or occurrences attributable to one originating cause (or related causes)". Lord Mustill said (at p.1035):
"In my opinion these expressions are not all the same, for two reasons. In ordinary speech, 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 altogether 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 the losses which it is sought to aggregate. To my mind the one expression has a much wider connotation than the other."
Accordingly where the words falling into the second category were used, losses caused by a mistake shared in common by three different underwriters as to the nature of the LMX spiral could be the single underlying cause of their having entered into a series of fatally defective reinsurance treaties and could therefore be the unifying factor justifying the aggregation of the losses suffered under those treaties, whereas the use of words falling into the first category would not suffice.
- Similar reasoning had earlier been adopted by Evans LJ, giving the leading judgment of the Court of Appeal in Caudle v Sharp  LRLR 433 at pp.439-440. That case involved the former type of wording - "each and every loss and/or occurrence .... and/or series of losses and/or occurrences ..... arising out of one event". He did not in the context of that policy consider that the 'one event' need be an insured peril but rejected the idea that anything that happened could properly be described as 'an event'. He distinguished between a historical event such as the hundred years war and a single event such as a particular hurricane. The case was about a series of 32 asbestosis reinsurance contracts which Mr Outhwaite had underwritten without doing any proper assessment of the risk. Mr Outhwaite's repeated negligence, his sustained state of ignorance of the truth, could not be described as a single event.
- Similarly, in a later case Municipal Mutual Ins Ltd v Sea Ins Co  Lloyd's Rep IR 421, the Court of Appeal made the same distinction between a simple 'any one event' clause and a clause, which was the clause in the policy with which the Court of Appeal were concerned, which included the words "or arising out of all occurrences of a series consequent on or attributable to one source or original cause". Accordingly they held that, where a large piece of machinery had been left unguarded and unprotected on the dockside for some 18 months and progressively stripped during that period by petty thieves, the losses fell to be aggregated under the clause because "on an ordinary use of language, the acts of pilferage and vandalism were a series of occurrences attributable to a single source or original cause". (pp.433-4)
- Returning to the aggregation clause in the present policy, there are no words of equivalent strength to those found in the AXA and Municipal cases - 'attributable to' - 'a single source' - 'originating cause'. The argument of the assureds has to be built upon the inclusion of the phrase "related series". But this does not have the same force or create such a strong and wide connecting factor. One is still left with the necessity to look at the acts and omissions of the individual 'consultants' which gave rise to the financial loss suffered by the third party and ask whether they were a related series of acts or omissions. In my opinion they were not. The parties could, if they had so chosen, have used a clause such as that found in the AXA and Municipal cases. They chose not to and, no doubt, the cost of obtaining insurance cover was reduced as a result. Their choice should be respected.
- The assumed facts expressly postulate two facts: that the losses "arose from the same underlying origin" and that the 'consultants' failures to give best advice and the various assureds' failure to reject the pension transfer business sold by the 'consultants' "were of an identical or very similar nature". The first of these facts if it is to justify aggregation requires exactly the type of reclassification and redrafting of the clause which the authorities demonstrate is not permissible. The second without the first proves too much. It would lead to the aggregation of individual acts of negligence by individual employees which were independent of each other but merely could be described as having a very similar character, eg bad advice by bank managers. The essential component of the assureds' case remains that they must say that this aggregation clause is an 'original cause' clause. That is not a permissible construction to place upon it.
- Accordingly, the appeal should be allowed and the cross-appeal dismissed and the questions should be answered as contended for by the insurers.
- I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Hoffmann and Lord Hobhouse of Woodborough. I agree with them, and for the reasons they give I too would allow the appeal and dismiss the cross-appeal.
LORD WALKER OF GESTINGTHORPE
- I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Hoffmann and Lord Hobhouse of Woodborough. For the reasons which they give I would allow the appeal, dismiss the cross-appeal and answer the preliminary issues in the way they propose.
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