Aggregation of client account thefts: a challenging first instance decision for primary layer insurers

Baines v Dixon Coles and Gill [28.10.20]

This article has been republished on LexisNexis.

On 28 October 2020, the High Court handed down summary judgment in the related proceedings of Baines v Dixon Coles and Gill and Guide Dogs for the Blind Association v Box.

The judgment is important for professional indemnity insurers as to aggregation in cases involving the theft of client monies.

Facts

The claims arose out of the misappropriation of over £4 million by a former equity partner (Mrs Box) of Dixon Coles and Gill (DCG), a firm of solicitors. Mrs Box pled guilty to theft offences in March 2017 and was sentenced to imprisonment of seven years. In the resulting civil claims, the victims of the fraud sought to recover their losses from Mrs Box’s former partners and from DCG’s professional indemnity insurers, HDI Global Specialty SE (HDI).

The victims fell into two categories, each of which brought their claim separately:

The Scholefield claimants – various charity residuary beneficiaries of the estate of Mr Scholefield, of which Mrs Box was co-executor with Mr Gill and
The Diocese claimants – the Bishop of Leeds and the Leeds Diocesan Board of Finance. Until 2005, Mrs Box was the Registrar of the Diocese of Wakefield (whose assets subsequently vested in the Diocese of Leeds).

The court was told that Mrs Box engaged in wholesale ‘teeming and lading’ to hide the misappropriations by:

Replacing misappropriated funds from one DCG client ledger with amounts from another client ledger or other fund Mrs Box administered
Misappropriating funds from probate estates and obscuring deficits by paying money directly to beneficiaries of the affected ledger from an unconnected client ledger
When monies were received by DCG, instead of crediting funds to the client ledger that the funds related to, crediting it instead to a different client ledger in order to conceal a shortfall due to earlier fraudulent activity

DCG’s policy provided for the minimum possible cover of £2 million and contained an aggregation clause consistent with the SRA Minimum Terms and Conditions of Professional Indemnity Insurance (MTC). In circumstances where the misappropriations were likely to exceed £2 million, HDI asserted that the claims aggregated.

Both sets of claimants applied for summary judgment concerning the construction of the aggregation clause in the MTC – and, particularly, whether thefts from the Scholefield claimants and the Diocese claimants should aggregate.

The aggregation clause

Clause 2.5 of the MTC states:

"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
ii. one series of related acts or omission
iii. the same act or omission in a series of related matters or transactions
iv. similar acts or omissions in a series of related matters or transactions and

(b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.”

HDI’s case was put forward on the basis of limbs (i) and (ii) only.

One act or omission

HDI argued that each of the client losses was caused by the thefts of Mrs Box either from client account or from money which ought to have gone into client account but was diverted by her. DCG was under a “single, indivisible obligation” pursuant to rule 7.1 of the SRA Accounts Rules (SAR) to reconstitute the client account promptly on discovery. Compliance with that obligation was a single “claim” in accordance with the SRA Glossary.

The claimants’ position was that the Glossary refers to “an obligation on an insured firm to remedy a breach of the [SAR] … and the obligation to remedy such breach shall be treated as a civil liability…” The use of the singular, indefinite article could only mean that each breach constituted a separate breach. There was not one theft from clients but numerous thefts from disparate clients amounting to multiple breaches of the SAR.

The court agreed with the claimants, concluding that each misappropriation amounted to a separate breach of the SAR:

“Mrs Box may have had the single intention of stealing as much money as possible but … each theft, must, in my judgment, be a different act although they may be taken with a view to accomplishing one ultimate objective.”

One series of related acts or omissions

The Court took significant guidance from the decision in AIG Europe Ltd v Woodman [2017], notwithstanding Woodman being concerned with limb (iv) of MTC 2.5. HHJ Saffman drew from Lord Toulson’s observation in Woodman that the “use of the word “related” implies that there must be some interconnection between the matters or transactions … they must in some way fit together”.

The claimants submitted that there was insufficient “interconnection” between the dishonest acts of Mrs Box in respect of each claimant. They argued that the acid test is “whether any one client can plead a complete claim against the firm without referring to another act, matter or transaction from which a different claim arises.” Each client or estate sustained its own separate loss and “each act that plundered money from them was a wholly different act from the act which plundered money from other entities.”

HDI argued that the relationship between the acts had been created by Mrs Box’s “ongoing determination to raid the firm’s client account”; it was all part of the same fraud. Each of the claims arose out of related acts of dishonesty with the overarching connection between those acts being the teeming and lading by Mrs Box. The claimants argued that the teeming and lading was purely incidental to the acts of theft.

The court concluded that what had to be “related” for the purpose of aggregation was the thefts themselves. Teeming and lading was simply a way of concealing them. No unifying factor was present – even though the thefts were all committed by the same person by the same process:

It was not Mrs Box’s dishonesty which was the proximate cause of [the Claimants’] loss … Dishonesty is not an act, it is a state of mind. What caused these Claimants’ losses were the individual thefts from them. True it is that these were motivated by dishonesty but it is the “acts” that matter, not the motivation for the “acts”. These acts resulted in different losses to different clients. There cannot, in my view, be said to be a single loss because I am satisfied that the acts of theft were not related on a proper construction of MTC 2.5(a)ii).

Accordingly, it was not open to HDI to aggregate the claims.

Comment

The decision will be of concern to primary layer insurers (although not excess layer insurers). Frauds of this type – particularly in a probate context - are rarely isolated to a single client, and often involve teeming and lading. Aggregation is now more difficult. Insurers will no doubt be astute to factor the ramifications of this decision into their 1 April 2021 renewal pricing. It is not presently known whether the decision will be appealed.