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

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.