Following our case review of the first instance decision in this matter, the UK Court of Appeal handed down its decision last week, which will be a cause for concern for the solicitors’ primary market.
The judgment, which addresses the aggregation provisions in the SRA Minimum Terms and Conditions (MTCs), confirmed a first instance decision that multiple claims arising from separate thefts by a dishonest partner (including, but not exclusively, from client account) did not aggregate. They could not, therefore, be treated as a single claim attracting one limit of indemnity because they did not arise out of a series of related acts or omissions.
Dixon Coles & Gill (DCG) was a firm of solicitors. A partner, Mrs Box, stole funds from client and office account as well as diverting funds destined for the client account to her own, private, accounts (thefts which she admitted).The firm closed in January 2016, after making a notification to HDI its professional indemnity insurers. HDI Global Specialty SE (HDI) underwrote a policy with a limit of indemnity for each and every claim of £2 million.
Mrs Box was struck off by the Solicitors Disciplinary Tribunal (SDT) on 14 November 2016, with the SDT describing her conduct as involving “planned, deliberate, systematic, repeated dishonesty over a long period of time”. She was later sentenced to seven years in prison.
Mrs Box’s conduct started as long ago as February 2002, although the majority took place between 2010 and 2015 when she was regularly diverting large sums of money from client account to pay personal and family expenses. She also diverted funds from the sale of client assets directly to her, bypassing client account altogether. The criminal indictment was for over £4 million and auditors found 85 files (mainly probate) had been the subject of misappropriations.
Clients who had been the victims of Mrs Box began to bring claims. Soon, the value of the claims was more than double the £2 million limit of indemnity. A key issue for those claimants, and the innocent partners of the firm, was whether HDI was entitled to aggregate and hence cap its exposure at £2 million.
The MTCs in force at the material time contained the following aggregation wording:
"2.5 One claim
The insurance may provide that, when considering what may be regarded as one claim for the purposes of the limits contemplated by Clauses 2.1 and 2.3:
(a) all claims against any one or more insured arising from:
i. one act or omission (Limb 1)
ii. one series of related acts or omission (Limb 2)
iii. the same act or omission in a series of related matters or transactions (Limb 3)
iv. similar acts or omissions in a series of related matters or transactions and (Limb 4)
(b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.”
A more comprehensive look at the first instance decision is available here. In essence:
- HDI argued that the claims aggregated on the basis that:
- They arose from one act or omission (and therefore engaged Limb 1) or
- They arose from one series of related acts or omissions (engaging Limb 2).
- The first contention was rejected on the basis that Mrs Box’s actions, taken over a number of years, could not be seen to be one act.
- The second contention was rejected on the basis that the thefts from the claimants did not have a sufficient interconnection or unifying factor with any other claims to conclude that they arose from one series of related acts or omissions.
- The judge found that Mrs Box’s dishonesty was not the proximate cause of each loss, deciding that the individual thefts were not related (commission by the same person and concealment using the same methodology was not enough).
HDI appealed on two grounds:
1 The claims aggregated because they arose out of a series of related acts or omissions (maintaining their argument on Limb 2) and (alternatively).
2 The claims amounted to one claim under the definition of claim in the MTCs.
The Court of Appeal’s judgment
A series of related acts or omissions?
HDI argued that Mrs Box’s thefts were a series of acts and omissions which were related, forming part of an extended course of dishonest conduct on multiple occasions over many years. Whilst accepting that this was a fact-sensitive question, there was nothing to suggest that there had been any break in Mrs Box’s dishonest conduct and all her thefts were underpinned by the dishonest way in which she had treated the firm’s client account. This, HDI argued, engaged Limb 2.
The Court of Appeal considered both Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd  (Lloyds TSB), and AIG Europe Ltd v Woodman  (AIG) in rejecting HDI’s arguments.
Considering Lloyds TSB, the Court of Appeal concluded that before a series of acts or omissions can be said to be related, a unifying factor has to be identified, expressly or impliedly, in the wording of the clause. For example:
- If there is a series of acts A, B and C, it is not enough that act A causes claim A, act B causes claim B and act C causes claim C.
- What is required is that claim A is caused by the series of acts A, B and C; claim B is also caused by the same series of acts; and claim C too.
On the present case, this requirement would only be satisfied if each of the relevant claims arose from a combination of the relevant thefts. However, this was not the case here – one claimant’s claim would arise from a theft of its money and have nothing to do with a separate theft from a separate client. Neither claim would therefore arise from the same related series of acts.
AIG concerned Limb 4 and HDI sought to rely upon the Supreme Court’s statement that for transactions to be related, there must be “some inter-connection” between them, suggesting that the inter-connection between Mrs Box’s thefts was that they all arose out of her dishonesty. However, the Court of Appeal dismissed the suggestion that AIG impacted the argument run by HDI. In doing so it focussed on Lord Toulson’s comments in AIG, when discussing the need for a series of related matters of transactions to engage Limb 4 (Limb 2 was not the subject of argument in AIG), that:
"If insurers were permitted to aggregate all claims arising from repeated similar negligent acts or omissions arising in different settings, the scope for aggregation would be so wide as to be almost limitless."
The Court of Appeal concluded that Lord Toulson’s comments suggested that Limb 2 would not permit aggregation of claims arising from repeated similar acts of negligence either, which would be no different when considering repeated similar acts of dishonesty.
HDI’s argument was based on the MTCs definition of ‘claim’.
“Claim means a demand for, or an assertion of a right to, civil compensation or civil damages or an intimation of an intention to seek such compensation or damages.
For these purposes, an obligation on an insured firm and/or any insured to remedy a breach of the Solicitors’ Accounts Rules 1998 (as amended from time to time), or any rules (including, without limitation, the SRA Accounts Rules 2011) which replace the Solicitors’ Accounts Rules 1998 in whole or in part, shall be treated as a claim, and the obligation to remedy such breach shall be treated as a civil liability for the purposes of Clause 2, whether or not any person makes a demand for, or an assertion of a right to, civil compensation or civil damages or an intimation of an intention to seek such compensation or damages as a result of such breach…” [our emphasis]
Any breach of the Solicitors Accounts Rules had to be remedied promptly including replacement money improperly drawn from a client account.
HDI argued that:
- It was the duty of the innocent partners, on discovery that money had been taken from client account, to replace it.
- The second paragraph of the definition permits innocent partners to make a claim on their insurers for the money required and to do so before any clients know that they have cause for complaint, let alone before they assert a claim.
- Upon notification of Mrs Box’s thefts to HDI, the innocent partners were treating the shortfall in client account and the need to make it good immediately as a single deemed claim under the policy.
- Having recovered £2 million, which was a single limit of indemnity but less than the shortfall in the client account, they were not entitled to extend their protection beyond the limit of indemnity by treating subsequent claims, arising from the deficiency, as separate claims.
This argument was roundly rejected by the Court of Appeal. Mrs Box’s thefts were found to have given rise both to the right of the innocent partners to claim the amount needed to remedy the shortfall in the client account, and to a separate claim to indemnify them against liability to their clients. These represented separate claims, rather than a single claim as contended on HDI’s behalf.
The client account: a chink of light?
An issue arose during argument which was addressed briefly in the judgment:
- DCG operated a single mixed client account, with ledgers maintained in respect of each individual client.
- Had DCG operated separate bank accounts for each client, it would have been straightforward to identify those clients from whom Mrs Box had taken money. However, where funds are held in a single client account, the matter was less straightforward. Where there is one fund, who is to say which client’s money has been stolen?
- Whilst, in practice, a fraudulent solicitor will seek to cover their tracks by making a dishonest balancing entry in one client ledger, this would notionally allow the fraudster to decide where to allocate the loss arising from their theft. The Court of Appeal expressed doubt as to whether this was an appropriate methodology to determine who had suffered losses from a client account theft.
- During the course of argument Phillips LJ suggested that the position may be that each client is entitled to call for payment of their money and if they are not paid (due to a client account shortfall) they will have a claim. That shortfall will not be attributable to any one particular theft, but to the cumulative effect of all the thefts that have taken place.
- On that analysis it could be said that each client who has a claim against the firm has a claim which arises from all the acts of theft taken together, potentially satisfying Limb 2.
In circumstances where the thefts were not exclusively from MCB’s client account, and since the argument had not previously been raised, the Court of Appeal left the point undecided. We can anticipate this argument being developed in subsequent client account shortfall claims.
The Court of Appeal’s judgment, like the first instance decision, will be of concern to primary layer insurers (and welcomed by those only providing excess layer cover to solicitors). As indicated earlier, these sort of frauds often span many years and numerous clients. Aggregation arguments often advanced by primary layer insurers will now be more difficult to sustain. Multiple primary limits of indemnity may be repeatedly “hit” by such claims.
In an already hard market, with many firms seeking to renew in October, the decision could not have come at a worse time. We anticipate primary layer underwriters will regard this decision as material to their pricing. Further due diligence/auditing of financial systems (including enhanced financial risk questionnaires and disclosure) as to the potential for financial mismanagement is also likely. Firms may wish to be proactive and show underwriters that their payment procedures have been tightened to make the risk of client account fraud less likely.
After the Lloyds TSB decision, the insurance market lobbied the Law Society for a change to the aggregation provisions in the MTC. Similar steps could be taken again. But that will not help firms struggling for cover this October. One can also anticipate resistance to this on the basis, often quoted, that the primary purpose of solicitors’ PI insurance is the protection of the public and not necessarily the solicitor.