We are pleased to share this insightful article which includes contributions from Catherine Lewis, Associate at Reed Smith LLP, a Global Law firm with recognised expertise across a broad range of industry sectors including Financial Services.
There is no doubt that the last year two years has seen a hardening insurance market and we consider in this article one of the ways in which reduced or changing capacity can impact claims recoveries due to the complexities of aggregation clauses.
As we explain below, aggregation, the contractual mechanism which bundles or attaches two or more claims together for policy coverage purposes, plays a key role in managing insurer exposure at both a direct and reinsurance level. In the next few years, policyholders can expect more pro-active use of an aggregation “strategy” by insurers both when negotiating terms and determining the attachment of claims to their policy.
Aggregation is not a one-way street in favour of insurers.
It is important that policyholders understand not only how aggregation clauses operate, but also the tactical considerations that influence whether or not to seek to aggregate. As we explain, aggregation is not a one-way street in favour of insurers. Negotiating the right terms and understanding whether or not to aggregate can benefit policyholders and maximise recovery.
There is some good news as to how the market is developing and there are now indications that the hard market may be nearing its peak (and may have peaked at the end of 2020 for some lines). The positive news for financial institutions is that (i) there are some new entrants into the D&O market (particularly excess D&O) which will help replace the capacity that disappeared in recent years; (ii) there are also some new entrants into the financial lines sector; and (iii) insurers generally have a strong capital base. That said, it will take time for these developments to be reflected in broader coverage, more flexible terms and conditions, and lower premiums.
As market capacity and appetite for risk changes, it is increasingly likely that policyholders may be forced to move between different insurers, perhaps obtaining a lower premium or better terms from a new primary insurer, or even because the primary insurer has ceased to write business and has to be replaced.
Issues can arise even if the primary insurer remains the same.
Issues with aggregation can arise particularly where there are changes in structure of wording of the programme; for example, a new entrant on a programme will be much more motivated to argue that a new claim attaches to a prior year by virtue of the operation of the aggregation clause. That said, issues can arise even if the primary insurer remains the same, as an insurer may take a different view on aggregation depending on whether they have a large exposure on a first excess layer, or a small participation on a high excess layer. An insurer will have different risk exposure depending on where it sits on a given insurance programme on a particular year and may seek to interpret policy language accordingly.
Taking a clear stance on aggregation can impact on claims attachment (and, accordingly, the limit of indemnity available), which will be important if a policyholder is changing markets on any layer of its insurance cover.
In recent years, the English courts have been asked to consider the meaning of aggregation language in a policy. Accordingly, the meaning of phrases such as “original cause”, “event or occurrence” or “same facts” is relatively settled. What remains unique about each case before an English Court or tribunal is how the outcome will turn on the specific facts of each case.
US courts, meanwhile, regularly issue decisions interpreting policy aggregation wording that could significantly affect how policyholders approach policy placement and renewal. Earlier this year, for example, the US District Court for the District of Columbia in Zurich Am. Ins. Co. v. UIP Cos., LLC issued a decision that broadly construed an “Interrelated Wrongful Acts” provision, resulting in loss of coverage for a policyholder on the grounds that it had failed to give timely notice of the relevant claim. We discuss this decision in more detail below.1
Put in simple terms aggregation allows:
“...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.”2
In the US, aggregation is often referred to in the context of “related” or “interrelated” claims or wrongful acts. In one public company directors’ and officers’ liability policy form, the term “Related” is defined as “based upon, arising from or in consequence of the same or related, or the same or related series of, facts, circumstances, transactions, situations, events, or Wrongful Acts.”3
The possibility of combining multiple losses through aggregation clauses in this way serves three main purposes:4
Many aggregation disputes centre on the inherent tension between the conflicting interests of insurers and policyholders in the application of the aggregation provisions, each often seeking to use the possibility of combination to their own benefit. These interests are not fixed in one direction. Aggregation clauses can be either a help or a hindrance for policyholder and insurer depending on the fact specific context of the claims and the overall volumes and value involved. In one dispute, an insurer might argue for aggregation; in the next, against.
A classic illustration of this inherent tension and the problem for policyholders can be seen in the facts of an English case, Lloyds TSB General Insurance Holdings and Others v Lloyds Bank Group Insurance Company Limited.5 The staff of the policyholder bank had been involved in the mass mis-selling of pension schemes. This resulted in at least 22,000 claims for customer compensation based on breach of statutory duty. None of these claims exceeded £35,000, but cumulatively they built up to a value of £125m. The deductible in the policy for each claim was £1m so the policy essentially did not respond at all to the claims if each attached to the policy on an individual basis. The answer for the policyholder was to seek to aggregate the claims together. Conversely, it was better for the insurer to treat each claim individually and essentially avoid the loss.
The position may have been reversed in a situation involving a smaller number of claims of higher value that would not exceed the policy threshold individually but would do so cumulatively. This was the case in another English decision, AIG Europe Ltd v Woodman, where the policyholder found itself arguing against an aggregation of multiple high value claims that would then enable the insurer to cap them at the policy limit.6
The competing interest illustrated by these contrasting cases has an important impact on how the law approaches the construction of aggregation clauses, which we discuss further below.
As aggregation involves the consolidation of multiple claims, disputes often arise out of predictable circumstances:
The party seeking to aggregate the losses must establish that they are linked to a single “unifying” factor.
The party seeking to aggregate the losses must establish that they are linked to a single “unifying” factor. Aggregation is not implied and the applicable unifying factor depends on the express wording of the contract. The prospects of aggregation can vary significantly, depending on which formulation is used to do this. Broadly speaking, there are three possibilities that are commonly used:
The formulation that an insurer will seek to negotiate with a policyholder may depend on their knowledge of the insured’s business and assessment of the nature, volume and value of claims. For example, if there is a risk that the insured may make a smaller number of higher value claims then more restrictive wording may be better for the insurer.
Equally, if an insured is acting in a highly regulated industry then “cause” wording may make it easier to aggregate based on losses caused by systematic failures within an organisation rather than separate acts or occurrences. Calibrating policy terms towards the correct aggregation formula may, therefore, be a delicate balancing act.
Although unifying factors used in policy wording generally fall into common categories, the approach to interpretation of the wording and application of it can vary between jurisdictions.
We have explained that aggregation can be a double-edged sword for policyholders and insurers alike. There are straightforward financial considerations for policyholders. Appropriate use of aggregation can, in a best case scenario, minimise the policy deductibles that may apply. The converse is that successful aggregation by an insurer may engage the policy cap against claims, which would have been within it if treated individually.
Appropriate use of aggregation can, in a best case scenario, minimise the policy deductibles that may apply.
However, there are also broader issues, which make it important for policyholders to give careful thought to the negotiation of appropriate aggregation terms and consideration of when to activate clauses if multiple claims arise.
The general approach of English law to the construction of any contractual wording (including insurance policies) is objective. This is even more so with regard to aggregation clauses given that the duality of their potential impact will vary depending on which party is relying on aggregation and why.
The approach of the English courts is to take a neutral stance.
Put simply, the approach of the English courts is to take a neutral stance. The court will not approach aggregation "with a predisposition towards a broad or narrow interpretation”.9 In a sense, this neutrality is welcome to the extent that it results in a fairer and more context specific outcome. However, it comes at the potential cost of certainty.
Indeed, the characteristic of the English law approach is that each case will turn on its specific facts. The law generally avoids tying the hands of the court in how it should deal with an aggregation issue and seeks maximum flexibility.
The law generally avoids tying the hands of the court in how it should deal with an aggregation issue and seeks maximum flexibility.
In the significant United Kingdom Supreme Court case of AIG Europe v Woodman an insurer found itself faced with a discrete number of high value claims by investors against a firm of solicitors in relation to a failed property development.10 It was in the insurers’ interests to argue for aggregation so as to combine the different claims made into a single claim which would then be restricted by the overall policy limit. The insurers relied on a “series” aggregation wording from the standard form indemnity policy mandated by the regulator which allowed for the combination of claims where there were "similar acts or omissions in a series of related matters or transactions”.11 The Supreme Court agreed that this wording could bite in circumstances where the solicitors had carried out essentially the same error for multiple investors and they were interconnected in that they all related to the same development.
Yet, in reaching this conclusion, the Supreme Court rejected the Court of Appeal’s contention that acts had to be “intrinsically” related. It felt that further prescription of this kind beyond the requirement that matters should be “related” did not help and that determining aggregation in this case was "an exercise of judgment, not a reformulation of the clause to be construed and applied”.12 Further: “The answer is that the application of the clause is to be judged not by looking at the transactions exclusively from the viewpoint of one party or another party, but objectively taking the transactions in the round.”13
The emphasis on the exercise of judgment by the court and the view that it should look at matters “in the round” neatly summarises the approach of the courts to aggregation in recent years. It is a fact and context specific exercise. That said there do remain some consistent elements to the English courts’ approach to aggregation when dealing with common formulations.
The flexible and contextual approach of English law can create contentious differences between insurer and policyholder, particularly where the claim involves regulatory breach or dishonesty by an employee. This is well illustrated in the recent case of Baines v Dixon Coles and Gill.
In Baines v Dixon Coles and Gill (A Firm) and others, a partner in a firm of solicitors stole money from clients on multiple occasions.17 In most cases she followed the same modus operandi to cover her tracks. The other partners in the firm faced significant claims by the defrauded clients that cumulatively exceeded the policy limit. The insurer sought to aggregate the claims on the basis that the partner’s consistent fraudulent behaviour in misappropriating funds amounted to a single act or omission or series of related acts or omissions. The court rejected this, finding the relevant act in the case of each client was the theft itself and this had occurred on multiple occasions from disparate clients and that the transactions interconnected when “taken in the round”. What did link the thefts was the state of mind of the partner, but this was a cause found to be upstream from the “act” (being the thefts) so was not caught by an aggregation provision based on occurrence.
As is apparent from this case, aggregation under English law remains highly fact-specific and dependent on fine points of context.
In contrast to the position as a matter of English law, which is comparatively settled, standards for interpreting aggregation provisions vary among US jurisdictions and often even within the same jurisdictions. That said, similar to English law, the analysis and resolution of aggregation issues in US courts also tends to be very fact-specific, with the same test in one jurisdiction sometimes resulting in two different results with respect to cases involving very similar facts, but at least one crucial factual difference. We address representative cases demonstrating the different issues implicated by aggregation provisions and the variety of approaches taken by courts to interpret and apply them.
Standards for interpreting aggregation provisions vary among US jurisdictions and often even within the same jurisdictions.
In Domokos v. Scottsdale Ins. Co., Scottsdale argued that a state court lawsuit filed against two former officers of its policyholder, Shocking Technologies, related to wrongful acts alleged to have taken place prior to issuance of the policy, and thus was excluded under the policy’s “Prior and Interrelated Wrongful Acts” exclusion.18 The lawsuit, which was brought by a former attorney representing Shocking Technologies, alleged claims against the former officers of deceit and negligent misrepresentation related to their alleged inducement of the attorney to perform legal work and incur costs for which he was never paid. In support of its coverage defence, Scottsdale argued that allegations in the underlying lawsuit concerning the officers’ conduct prior to the issuance of the policy triggered application of the exclusion.
The court disagreed. The court acknowledged that the underlying lawsuit alleged wrongful acts by the officers prior to issuance of the policy. The court noted, however, that the lawsuit also was based on allegations of misconduct after inception of the policy. “Scottsdale has not demonstrated,” the court held, “that these alleged misrepresentations … meet the definition of Interrelated Wrongful Acts.” The court further reasoned that, because the “Prior and Interrelated Wrongful Acts” exclusion did not preclude all coverage for all Claims in a lawsuit that merely involved Interrelated Wrongful Acts, there could still be coverage for a “mixed action” involving some allegations that were not interrelated with wrongful acts occurring before the policy incepted. Although decided on the basis of a motion to dismiss, the Domokos decision represents a relatively narrow interpretation of an “interrelated” claim exclusion.
Other courts have applied a far broader standard in analysing the relatedness of multiple claims. In Zurich American Ins. Co. v. UIP Companies, LLC, the policyholder, UIP, faced three separate lawsuits filed against it from June – August 2018 by plaintiff Marion Coster, who alleged ownership rights in the company. The first suit, in Delaware Chancery Court, sought appointment of an independent custodian to manage the company. The second, filed in the same court, sought cancellation of stocks issued to a third party and the creation of a constructive trust. The third suit, filed in the District Court for the District of Columbia, alleged that UIP and its principals breached their fiduciary duties and engaged in a civil conspiracy. UIP sought coverage for the lawsuits under management liability policies issued by Zurich. Zurich denied coverage on the grounds that: a February 2018 email sent by counsel for Ms. Coster to UIP constituted a “claim” under an earlier policy issued by Zurich to UIP; the email claim was “interrelated” with and constituted the same “claim” as the three lawsuits and because UIP did not give notice of the February 2018 email under its earlier policy, it had failed to satisfy the policy’s condition precedent of timely notice.
The court agreed with Zurich that the 2018 email and three lawsuits constituted the same “claim” pursuant to the policies’ “Interrelated Wrongful Acts” provision. The court noted that the February 2018 email constituted a settlement communication in which Ms. Coster’s counsel proposed two potential financial arrangements to resolve her client’s claims against the company. The court also identified the differences in the claims and legal relief sought in each of Ms. Coster’s lawsuits. Nevertheless, the Court concluded that the email and lawsuits qualified as the same “claim” because each “arises from UIP’s alleged failure to recognise and compensate Marion Coster in accordance with her purported ownership stake. On its face, the Email shares ‘a common nexus’ of fact and ‘cause or series of causally connected facts’ with the lawsuits.” Because of its finding that the email and lawsuits constituted the same “claim,” the court concluded the claim was first made under the earlier Zurich policy and that UIP had failed to give timely notice.
The UIP decision, which relied on an interpretation of the central purpose of each claim, is an example of a very broad interpretation of a policy’s aggregation provision.
There, the policyholder’s predecessor faced exposure to significant liabilities related to its manufacture of asbestos containing produce.
Another case demonstrating some courts’ broad interpretation of a related claims provision (despite key factual differences) is G-I Holdings v. Hartford Fire Ins. Co.19 There, the policyholder’s predecessor faced exposure to significant liabilities related to its manufacture of asbestos containing produce. The predecessor transferred most of its assets to other companies, which had the same individual as a majority shareholder. The policyholder declared bankruptcy and later faced suits filed in January and September 2000 and September 2001, respectively, alleging its transfer of assets constituted a fraudulent transfer. The insurers argued each of the three suits arose out of the same wrongful act, i.e., the alleged fraudulent transfer, and thus constituted a claim “first made” before their policies incepted in July 2000. Even though the three fraudulent action suits were brought by different plaintiffs and several months apart, the court agreed with the insurers, noting that the three lawsuits “cite the same facts and figures and make the same allegations” regarding the policyholder’s alleged fraudulent transfer.
The company encouraged health care providers to submit false claims to health insurers and made unlawful kickback payments.
Despite these holdings, the determination of “relatedness” issues by US courts is not a simple question of whether the court narrowly or broadly interprets the relevant provision. Rather, these issues often are resolved based on the unique facts or policy wording in each case. Such cases underscore the importance of a careful review of the facts and policy wording in connection with each claim implicating “relatedness” issues. In Millennium Labs., Inc. v. Allied World Ins. Co. (U.S.), for example, qui tam lawsuits were brought in 2011 against the policyholder, Millennium Labs, alleging the company encouraged health care providers to submit false claims to health insurers and made unlawful kickback payments.20 In 2012-13, the government served Millennium with multiple HIPAA-related subpoenas concerning an investigation of possible health care fraud. The insurer asserted that the qui tam lawsuits and subpoenas were interrelated, such that subpoenas were deemed made prior to insurer’s policy period. The Court disagreed. The Court acknowledged that the governmental investigation involved similar allegations as the qui tam actions. This mere fact, however, did not mean the investigation arose out of those earlier allegations. Rather, the Court reasoned, because the investigation was “shrouded in secrecy” and the allegations in connection with the investigation were broad and unspecific, there was no way to determine whether there was “substantial overlap” between the earlier lawsuits and the investigation.
In Nat. Union Fire Ins. Co. v. Cont’l Illinois Corp., the insurer argued that claims filed against policyholder Continental’s directors and officers during the 1983-84 policy year related to and constituted the same claim as suits against Continental’s directors and officers filed during the 1982-83 policy year, and that no coverage was available for subsequent suits after the insurer paid limits under the 1982-83 policy.21 The Court held that the later-filed claims were not interrelated with the earlier filed claims because the 1982-83 policy omitted any provision grouping related claims as a single claim. Because the earlier policy’s “interrelated acts” provision only established a single retention for multiple losses but was silent regarding the treatment of multiple claims with related facts, the court determined the second set of suits could not relate back to the earlier policy. The key takeaway from this case, therefore, is that not all “relatedness” provisions are created equal but can vary significantly depending on their specific wording.
Like English law, US law on aggregation is very fact-specific and requires close attention to the policy wording, facts and applicable legal standards.
As explained above, aggregation language can have a significant impact on the amount of cover available, whether under a complex tower of insurance or across multiple policy years. Policyholders need to ensure that they understand their policy structures and wording and that the aggregation clauses in their policies work for their business structure and claims exposure across all layers. A good understanding of the overall policy position can help maximise the best use of aggregation and avoid errors when first dealing with claims.
Aggregation language can have a significant impact on the amount of cover available.
Policyholders should be prepared for increasingly pro-active action by insurers both when negotiating terms and dealing with claims. In a hard market, insurers will seek to protect exposure in all areas. The pro-active use of aggregation clauses provides an opportunity for insurers to combine losses (or not) to their advantage.
If the use of aggregation is primarily tactical, then the flexibility to argue over fine points of language may create negotiating leverage.
While the law on aggregation remains settled to some degree, disputes are very fact and context specific. In some ways, uncertainty is not to the insurer’s advantage. But, if the use of aggregation is primarily tactical, then the flexibility to argue over fine points of language may create negotiating leverage. The trick for policyholders is to be aware of the tactical use of aggregation and to make sure they themselves use the tool to their advantage where appropriate.
That said, aggregation is a finely balanced exercise. It may not be easy to decide which route to pursue, particularly when the full extent of an exposure is not apparent. For this reason, policyholders should look to engage professional advice as the earliest possible stage.
1 2021 U.S. Dist. LEXIS 28115 (D.D.C. Feb. 16, 2021)
2 Moore-Bick J, at Lloyds TSB General Insurance Holdings and Others v Lloyds Bank Group Insurance Company Limited and others  Lloyd's Rep IR 237, 245
3 The Chubb PrimarySM, form PF-52100 (08/20)
4 Colinvaux's Law of Insurance 12th Edn – 11-319
5 Lloyds TSB General Insurance Holdings and Others v Lloyds Bank Group Insurance Company Limited  UKHL 48, 2003 WL 21554801
6 AIG Europe Limited v Woodman and others  UKSC 18
7 Aioi Nissay Dowa Insurance Co Ltd (formerly Chiyoda Fire and Marine Insurance Co Ltd) v Heraldglen Ltd  EWHC 154 (Comm)
8 Moore v IAG New Zealand Ltd  Lloyd’s Rep IR 167.
9 Per AIG Europe Ltd v Woodman  UKSC 18;  1 WLR 1168 per Lord Toulson JSC
10 AIG Europe Ltd v Woodman  UKSC 18
11 The Solicitors Regulation Authority
12 Rix LJ in Scott v Copenhagen Reinsurance Co (UK) Ltd  Lloyd’s Rep IR 696, para 81
13 Lord Toulson AIG Europe Ltd v Woodman  UKSC 18, para 25
14 Per Lord Mustill – Axa Insurance Plc v Field  1 WLR 1026;  2 Lloyd’s Rep 233
15 see AXA Reinsurance (UK) Ltd v Field  1 WLR 1026;  2 Lloyd’s Rep 233 per Lord Mustill, para 1035
16 see Countrywide Assured Group v DJ Marshall (ibid.), para 15
17 Baines v Dixon Coles and Gill (A Firm) and others  EWHC 2809.
18 Domokos v. Scottsdale Ins. Co., 2020 U.S. Dist. LEXIS 125648 (N.D.CA. July 16, 2020)
19 G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S. Dist. LEXIS 19069 (N.J. Mar. 16, 2007)
20 Millennium Labs., Inc. v. Allied World Ins. Co. (U.S.), 135 F. Supp. 3d 1165, 2015 U.S. Dist. LEXIS 133534 (S.D. Calif.)
21 Nat. Union Fire Ins. Co. v. Cont’l Illinois Corp., 673 F. Supp. 300, 302, 1987 U.S. Dist. LEXIS 10908 (N.D.IL.)
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