Lloyds TSB v. Lloyds Bank Insurance

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Lloyds TSB General Insurance Holdings Ltd and Others v The Lloyds Bank Group Insurance Co Limited: Abbey National Plc v Alan Godfrey Lee & Others (2001)
English House of Lords: Lords Nicholls, Hoffmann, Hobhouse, Millet and Walker: 31 July 2003
Jonathan Sumption QC and Guy Phillips QC, instructed by Barlow Lyde and Gilbert, for Lloyd’s TSB
Mark Hapgood QC and Timothy Howe, instructed by Simmons & Simmons, for Lloyd’s Bank Group Insurance
BANKERS’ COMPOSITE INSURANCE POLICY: LIABILITY FOR MIS-SELLING: WHETHER RESULTING FROM “any single act or omission (or related series of acts or omission)”: aggregation: aggregation clause: single underlying cause or common origin: whether equivalent to single “originating cause”
In this case, the House of Lords unanimously held that 22,000 pension mis-selling cases could not be aggregated (for deductible purposes) as one claim resulting from "any single act or omission (or related series of acts or omissions)". The bracketed words could not be construed as equivalent to an "originating cause". Whilst the unifying factor in the claims was the failure of Lloyd’s TSB to train its sales representatives in compliance with the relevant Code of Conduct, this was not in itself the "act or omission" referred to in the policy, nor was it the proximate cause of the third parties’ loss.

DMC Category Rating: Confirmed

This case note is based on an Article in the August 2003 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website.

The claims concerned failures by the insured's (Lloyds TSB) sale representatives to give clients best advice on whether or not to transfer the value of accrued benefits in their employer's occupational scheme to a personal pension scheme. As is usual for this type of claim, the individual amounts involved were relatively small, with no claim yet exceeding £35,000. But the overall cost has been very large - the TSB companies have paid out over £125 million in compensation.

The risk of liability for mis-selling fell within section 3 of the insured's bankers' composite insurance policies. Section 3 provided an indemnity in respect of the insured's legal liability to third parties for (amongst other things):
"(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) …in respect of which civil liability arises on the part of the assured".

The relevant deductible was £1 million each and every claim. No single claim for pension mis-selling came anywhere near this figure. The insured therefore sought to rely on the aggregation clause to treat the claims as one and recover amounts in excess of the deductible from insurers. The clause in question provided:
"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".

The relevant self-regulatory organisation at the time was Lautro. Lautro Rule 3.4(4)(a) provided that a member "shall … ensure that its company representatives comply with the Code of Conduct (insofar as it applies to them)". In addition, Rule 3.4(3) imposed a duty on the member to "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 Code of Conduct contained detailed provisions about the duties of salesmen selling personal pension schemes. In particular, sales representatives were required to make a detailed analysis of the potential investor's circumstances in order to give best advice.

Section 62 of the Financial Services Act 1986 provides that a contravention of the Lautro Rules by a Lautro member is actionable by any person who suffers loss as a result of the contravention, subject to any available defences.

In drafting an aggregation clause, the language chosen by the parties to denote the unifying factor linking losses together is crucial. There are a number of well-established clauses available and each of these has a different aggregating effect. In construing the words used, the court must assume that the choice the parties made represents part of the bargain they negotiated. That bargain must be respected.

A very broad aggregation wording would be something like "occurrences of a series consequent on or attributable to one source or original cause". A cause can be "a continuing state of affairs or the absence of something happening" (Lord Mustill in AXA Reinsurance (UK) Plc v Field [1996] 1 WLR 1026). In Municipal Mutual Insurance Limited v Sea Insurance Co Limited [1998] Lloyd's Rep IR 421, these words enabled a series of losses caused by theft and vandalism from the Port of Sunderland over an 18-month period to be attributed to one original cause, the inadequacy of the Port's systems for protecting the goods.

An event, on the other hand, denotes a much narrower unifying factor. It is "something which happens at a particular time, at a particular place, in a particular way". Consequently, in AXA v Field, the actions of an underwriter in negligently writing a number of policies on behalf of various syndicates could not be aggregated into one claim by the words "arising out of one event" in the reinsurance policy.

The unifying factor in this aggregation clause was neither a cause nor an event, but claims resulting from "any single act or omission (or related series of acts or omissions)". Act or omission was defined as being the same as the categories of third party claim listed in the insuring clause, including, category (g).

The High Court identified the unifying factor as the failure to train - i.e. the failure by the insured to ensure that its company representatives complied with the Code of Conduct. But it was not this failure that gave rise to each third party's cause of action against the insured. That depended on a particular representative failing to give best advice to a particular third party. The question whether or not the insured was training and monitoring its representatives was irrelevant to its civil liability to each third party. Even if it had all the proper systems in place, the insured would still have been liable. The failure to ensure that its representatives complied with the Code was not, therefore, the proximate cause of the third parties' financial loss.

Although the Court of Appeal followed this reasoning to find that the claims could not be aggregated as a single claim, it went on to hold that they were a related series of acts and omissions because they had a single underlying cause or common origin - the failure to train. This, while not being the act or omission in itself, nor the proximate cause of the third parties' loss, provided a relationship between the various acts that justified the description of them as a related series. In effect, the court had looked for a unifying factor outside the clause and upstream of the actual acts or omissions.

The House of Lords held that the Court of Appeal’s construction was impermissible. The words in the aggregation clause did not create such a wide connecting factor. If the parties had wanted to choose what was in effect an "originating cause" aggregation clause, they could have done so. As it was, the Court of Appeal's construction allowed "the tail to wag the dog". Why would the parties choose such a narrow unifying factor in one part of the aggregation clause, only to make it as broad as possible by the words in brackets? The words in brackets had to be subordinate to the rest of the clause.

For a related series of events to result in a series of third party claims, they, together, must have resulted in each of the claims. An example given by Lord Hobhouse was of a representative preparing and distributing a document that misrepresented the merits of a pension scheme and a number of third parties joining it as a result. Each act of giving the document to a third party would be a separate act, but they could, together, form a related series of acts resulting in a series of third party claims that, under the terms of this clause, could be aggregated.

This decision was reached on a particular wording and in particular circumstances. In this case, the construction of the clause favoured insurers and reinsurers. Aggregation clauses, however, can work both ways. Here, insurers were arguing against aggregation and won. But an insurer faced with a low indemnity limit might argue just as strenuously for claims to be aggregated. Whether or not the argument succeeds will depend on the words chosen by the parties.


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