Judgments - Lloyds TSB General Insurance Holdings and others v. Lloyds Bank Group Insurance Company Limited

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    This provision uses the phrase "act or omission" which is later defined to mean exactly the same as the categories (a) to (j) in the insuring clause which it again quotes in full. So, if the third party claim qualifies under (g) it is the wording of (g) which defines "act or omission" as used in the aggregation clause.

    The Facts:

    34. For the purpose of this appeal there is no dispute about the relevant facts. The facts are those pleaded by the assureds which must be assumed for the purposes of the preliminary issue to be true.

    35. The Social Security Act 1986 enabled employees who would otherwise be entitled to benefits under their employers' occupational pension schemes to transfer benefits from, opt out of, or not to join, those occupational pension schemes and instead to invest for their retirement in personal pension plans. Each of the claimants (save for the fifth claimant, Lloyds TSB Life Assurance Co Ltd,) was engaged in the marketing and sale of personal pension plans to such employees ('pension transfer business'). The conduct of such business was subject to regulation as 'investment business' under the Financial Services Act 1986 (the FSA), in accordance with a regime of self-regulation administered by the responsible self-regulating organisation which until 18 July 1994 was the Life Assurance and Unit Trust Regulatory Organisation (LAUTRO) and thereafter was the Personal Investment Authority. Three of the claimants (the second, third and fifth) were at the material times members of LAUTRO; the other two were not. The appeal has however been argued on the basis of the three LAUTRO members, without distinguishing between them and the other two. The actual marketing and sale of personal pension plans was at all material times done by 'consultants' employed by one of the claimants as the case might be.

    36. Rule 3.4(4)(a) of the Rules of LAUTRO provided that a member shall "ensure that its company representatives comply with the Code of Conduct (insofar as it applies to them) ...". Rule 3.4(3) of the Rules of LAUTRO provided that a member "shall 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 LAUTRO Code of Conduct (Schedule 2 to the LAUTRO Rules) was expressly made for the purpose of ensuring that members and their representatives maintained high standards of integrity and fair dealing, in particular in relation to investors, exercised due skill care and diligence in providing services, and generally took proper account of the interests of investors in the course of carrying out investment business. The relevant duties of 'consultants' engaged in pensions transfer business were set out in the Code. Thus, the Code required the 'consultants' to give investors 'best advice' and prohibited them from advising investors on any matter unless competent to do so. The requirements of 'best advice' included giving advice in relation to sales of personal pension plans to members of occupational pension schemes with the obligation in particular to carry out a full and detailed analysis of and comparison between the costs and risks of and the benefits under the investor's occupational pension scheme and the proposed personal pension plan and to advise the investors upon them and included a positive duty not to advise an investor to give up his rights under the occupational pension scheme unless it was bona fide believed to be in his best interest to do so. Section 62 of the FSA provides that a contravention of (inter alia) the LAUTRO Rules by a member of LAUTRO should be actionable against the member at the suit of any person who suffers loss as the result of the contravention, subject to any available defences.

    37. Following public expressions of concern which led to a review carried out by the Securities and Investment Board in 1994, more than 22,000 mis-selling claims were made by investors against one or other of the claimants, claiming compensation for the losses they had individually suffered by reason of the alleged mis-selling. Each of the mis-selling claims was based on or included allegations that best advice had not been given to the investor. The failure on the part of the 'consultant' concerned to give best advice to the investor constituted a breach of the Code on the part of the 'consultant'. The failure on the part of the relevant claimant to ensure that the 'consultant' concerned gave best advice to the investor was also a breach on the part of the relevant claimant of the rules of LAUTRO. The mis-selling claims were claims against the claimants for damages for financial loss caused by (inter alia) breach of statutory duty giving rise to civil liability on their part under s.62 of the FSA.

    38. It is alleged, and must for present purposes be assumed to be true, that at all material times the claimant concerned, its officers or employees failed to consider, identify and satisfy the requirements of best advice in relation to pension transfer business and, specifically, that the relevant claimant -

    (a)    initially failed to give any specific consideration to the requirements of best advice and failed to provide any specific internal compliance guidance or training to its 'consultants';

    (b)    subsequently misinterpreted the requirements of best advice in relation to pension transfer business, and mistakenly believed that it was unnecessary for its 'consultants' to evaluate the comparative risks and benefits for the investor to invest in a personal pension plan as opposed to membership of an occupational pension scheme, or to give advice to the investor accordingly; and

    (c)    failed at all material times to establish and maintain adequate resources, policies, practices and procedures to ensure that the conduct of pension transfer business by the claimant and its 'consultants' as a whole complied with the requirements of the rules of LAUTRO and the Code, and in particular failed to instruct train, equip, monitor and supervise its 'consultants' as a whole for the purpose of conducting pension transfer business in compliance with the requirements of best advice.

    It is alleged, and must for present purposes be assumed to be true, that (i) the failures to give best advice on the part of the 'consultants' concerned and (ii) the acceptance of, or failure to reject, proposed pension transfer business on the part of the claimant concerned, its officers or employees, arose from the same underlying origin or were of an identical or very similar nature.

    39. The various claimants have paid compensation to investors exceeding £125 million in total. However, no single claim has exceeded the deductible of £1 million. Indeed, no single claim has exceeded about £35,000 in amount. It follows that the entitlement of the various claimants to be indemnified by the insurer in respect of the compensation paid by them to investors depends in the first instance upon whether the aggregation clause in Section 3 of the policy entitles them to aggregate the mis-selling claims for the purposes of the deductible. The issues for determination are thus whether the mis-selling claims against the various claimants were "a series of third party claims" which resulted from "a single act or omission" on the part of the various claimants, their officers or employees. and, if not, whether they were "a series of third party claims" which resulted from "a related series of acts or omissions" on the part of the various claimants, their officers or employees.

    The Court of Appeal:

    40. The judgments in the Court of Appeal did not wholly adopt the same reasoning as that of the judge. None treated their decision as concluded by binding authority. They rejected the argument that there had been a single act or omission but accepted the argument that there had been a related series of acts or omissions. Potter LJ ([2002] Lloyd's Rep IR at p.124) rejected the 'single act or omission' argument on the ground that the failure to ensure that the 'consultants' gave best advice was not the cause of the liability to the third party as they "were no more than regulatory duties not giving rise to duties directly enforceable by action by a member of the public". But he accepted the argument that "a series of acts or omissions may be related by reason of having a single underlying cause or common origin" which need not be within the list of insured items. So he considered that the failure to have a proper system, as alleged in this case, was such an underlying cause or origin. He considered the word "related" was "wholly apt" to apply to a series of acts or omissions which were of the same or a "very similar nature and which share a common causal origin".

    41. Hale LJ (pp.124-5) stressed that the conduct which gave rise to the individual third party claims for which the assureds were respectively liable was "not the systemic management failure which is said to be the explanation for all those individual misdeeds". But referring to the phrase "related series" found assistance in the variety of family relationships familiar to family lawyers, including "kindred and affinity". She treated the 'single underlying cause' as decisive to give rise to a sufficient relationship.

    42. Longmore LJ (p.125) stressed that the liability of the assured was personal not vicarious. "Once it is established that 'best advice' has not been given, liability is automatic." He summarised his view, saying: "if a number of different people are responsible for [the] omissions [to give best advice] and such omissions give rise to different losses for different customers, the omissions are nevertheless, in my view, related and constitute a related series of omissions because they are an omission to do the same thing, although the consequences of each omission are, of course, different."


    43. The scheme of the relevant parts of Section 3 of this policy is firstly that it has a carefully drafted insurance clause which defines the cover given. It is of no avail to the assureds to present arguments which involve saying that the proximate cause or causes of the relevant third party losses is something other than the insured cover there defined. This scheme is reinforced by the inclusion of the definition clause in effectively identical terms inserted for the purpose of defining the phrase "act or omission" as used in the aggregation clause. The result is that, for present purposes, the third party claim has to be one which is "for financial loss caused by a breach on the part of the assured or an officer or employee of the assured" of the FSA or the LAUTRO Rules and the acts or omissions relied upon to trigger the aggregation clause have also to fit that description. This was recognised by Potter LJ at p.124. It has to be what proximately caused the loss suffered by the third party and that was the act or omission of the 'consultant'. It may be that one should assume that all the 'consultants' were untrained and incompetent. But the fact remains that on occasions they may happen to have given what was in fact the best advice or that the advice which they gave did not in fact cause the third party any financial loss. The essential factor in every case has to be that the breach - act or omission - caused the third party financial loss. There is thus no "single act or omission": there were as many acts and omissions as there were third party claims. Similarly, if there is to be a related series of acts and omissions, that description has to be true of the 22,000 claims notwithstanding that each claimant will have been different, each financial loss will have been different and the actual failure to give the best advice will have been on the part of many different employees of the relevant different assureds. It is of no assistance to the assureds to say that they were themselves each in breach of their obligation to ensure that best advice was given. That statutory requirement merely creates for the relevant assured an absolute liability for the breach of its relevant employee.

    44. The second part of the structure of Section 3 to which I wish to draw attention is the deductible clause. It applies across the board, to all 10 heads of cover; it is not specific to these individual assureds or to the FSA cover. So, it is not necessary or right to construe it specifically by reference to the FSA cover. The deductible applies to "each and every third party claim". This is the starting point for the consideration of the aggregation clause. The further fact that for these assureds the deductible is set at £1 million shows that the primary intention is to confine the cover to large third party claims.

    45. The aggregation clause is applicable if there is a series of third party claims which either have resulted from a "single act or omission" or have resulted from a "related series of acts or omissions". The phrase "series of third party claims" clearly carries with it the possibility that the claims may have been made by a number of third parties and each relate to the financial loss suffered by an individual third party but do not, as such, import anything more. The following phrase "result from any single act or omission" reinforce this. The single act or omission must be the proximate cause of the financial loss caused to the third parties. This in the present context has to be an identifiable single failure by an identifiable 'consultant' to give the third parties 'best advice'. One can visualise how this might happen when a 'consultant' makes a single presentation to a room-full of people to persuade them to sign up to a pension scheme sold by his employer, one of the assureds. But this is not the scenario which the assureds invoke, no doubt because such aggregation would be insufficient to assist them in their claims against the insurer. What they seek to rely upon is the liability of the assureds by reason of the obligation to "ensure". But this does not provide them with an answer: there are as many failures to ensure as there have been failures by the various 'consultants' to give best advice. Further, a failure to ensure is not itself an "act or omission" in any physical sense, as is implied by the use of the adjective "single"; it is rather a word describing a personal responsibility for the failure of some other individual. The assureds' argument on the cross-appeal does not survive scrutiny and the Court of Appeal were right to reject it.

    46. The second basis of aggregation provided for in the clause is third party claims resulting from a "related series" of acts or omissions. It is upon this phrase that the argument before your Lordships has mainly turned. As I have stated, this argument succeeded before the Court of Appeal. But, on examination, it can be seen to raise the same fundamental difficulties as the argument on the primary phrase, "single act or omission". The claims still have to result from something done or omitted as between the relevant 'consultant' and the relevant third party. The obligation of the relevant assured to 'ensure' does not suffice to bridge the gap nor could it unless one gave a different meaning to the words 'act(s) or omission(s)' in the two adjoining phrases. Here again one can visualise a situation which might be capable of leading to aggregation under this part of the wording. Suppose a 'consultant' prepares a document which misrepresents the merits of the pension scheme he is endeavouring to sell and gives that document to a succession of people; the people who buy into the scheme as a result of having been given the misleading document by the 'consultant' could each have a claim against the assured employing that 'consultant'. Each act of giving the misleading document to a person would be a distinct act. But they could together form a "related series of acts" from which a "series of third party claims" had resulted. But here again, this was not the way the assureds put their case, no doubt for the same reasons as before and because it was not in fact what happened. They however rely upon the use of the word 'ensure' and the assumed fact that all the acts of mis-selling arose from the same underlying origin or were of an identical or a very similar nature.

    47. The assureds' argument therefore runs as follows: Each of the assureds was under a statutory obligation to take the steps indicated in the Code of Conduct to guard against mis-selling. They did not do so. As a result, 'consultants' did not give best advice and mis-selling occurred. It follows that the various assureds did not ensure that it did not occur. The underlying cause of all the cases of mis-selling was the same - the failure to take the steps required by the Code to guard against mis-selling. The requisite steps and the failure to take them were either the same in every case or very similar. This argument therefore takes the inquiry back to an earlier stage. It looks at not what caused the financial loss to the third party, the subject of the third party claim, but at the underlying situation which gave rise to the conduct of the 'consultant' vis-à-vis the third party. It can be commented that the underlying situation could equally well have been the failure of the assured to pay its 'consultants' a viable salary so that they became over-dependent upon commissions and were thus unduly influenced not to perform their duty to give best advice, a temptation to which a proportion of the 'consultants' would predictably succumb. The way in which the argument seeks to get round the basic difficulties is to say that the failure of each relevant assured to take the requisite steps, whilst not being the act or omission itself or the proximate cause of the third party's loss, provides the relationship between the various acts and omissions so as to justify the description of them as a 'related series', or, as Hale LJ might have put it, they all had the same parent, ie the failures of the assureds (or, perhaps, the same parent or uncles and aunts). Is this the correct construction to place on this clause?

    48. It is possible to have an aggregation clause which may have this effect. In AXA Re v Field [1996] 1WLR 1026, the policies discussed included two different sets of wording, one referring to "each and every loss and/or occurrence ........... and/or series of losses and/or occurrences ............ arising out of one event" and the other referring to "any claim or claims arising from one originating cause or series of events or occurrences attributable to one originating cause (or related causes)". Lord Mustill said (at p.1035):

    "In my opinion these expressions are not all the same, for two reasons. In ordinary speech, an event is something which happens at a particular time, at a particular place, in a particular way. ......... A cause is to my mind something altogether less constricted. It can be a continuing state of affairs; it can be the absence of something happening. Equally, the word 'originating' was in my view consciously chosen to open up the widest possible search for a unifying factor in the history of the losses which it is sought to aggregate. To my mind the one expression has a much wider connotation than the other."

    Accordingly where the words falling into the second category were used, losses caused by a mistake shared in common by three different underwriters as to the nature of the LMX spiral could be the single underlying cause of their having entered into a series of fatally defective reinsurance treaties and could therefore be the unifying factor justifying the aggregation of the losses suffered under those treaties, whereas the use of words falling into the first category would not suffice.

    49. Similar reasoning had earlier been adopted by Evans LJ, giving the leading judgment of the Court of Appeal in Caudle v Sharp [1995] LRLR 433 at pp.439-440. That case involved the former type of wording - "each and every loss and/or occurrence .... and/or series of losses and/or occurrences ..... arising out of one event". He did not in the context of that policy consider that the 'one event' need be an insured peril but rejected the idea that anything that happened could properly be described as 'an event'. He distinguished between a historical event such as the hundred years war and a single event such as a particular hurricane. The case was about a series of 32 asbestosis reinsurance contracts which Mr Outhwaite had underwritten without doing any proper assessment of the risk. Mr Outhwaite's repeated negligence, his sustained state of ignorance of the truth, could not be described as a single event.

    50. Similarly, in a later case Municipal Mutual Ins Ltd v Sea Ins Co [1998] Lloyd's Rep IR 421, the Court of Appeal made the same distinction between a simple 'any one event' clause and a clause, which was the clause in the policy with which the Court of Appeal were concerned, which included the words "or arising out of all occurrences of a series consequent on or attributable to one source or original cause". Accordingly they held that, where a large piece of machinery had been left unguarded and unprotected on the dockside for some 18 months and progressively stripped during that period by petty thieves, the losses fell to be aggregated under the clause because "on an ordinary use of language, the acts of pilferage and vandalism were a series of occurrences attributable to a single source or original cause". (pp.433-4)

    51. Returning to the aggregation clause in the present policy, there are no words of equivalent strength to those found in the AXA and Municipal cases - 'attributable to' - 'a single source' - 'originating cause'. The argument of the assureds has to be built upon the inclusion of the phrase "related series". But this does not have the same force or create such a strong and wide connecting factor. One is still left with the necessity to look at the acts and omissions of the individual 'consultants' which gave rise to the financial loss suffered by the third party and ask whether they were a related series of acts or omissions. In my opinion they were not. The parties could, if they had so chosen, have used a clause such as that found in the AXA and Municipal cases. They chose not to and, no doubt, the cost of obtaining insurance cover was reduced as a result. Their choice should be respected.

    52. The assumed facts expressly postulate two facts: that the losses "arose from the same underlying origin" and that the 'consultants' failures to give best advice and the various assureds' failure to reject the pension transfer business sold by the 'consultants' "were of an identical or very similar nature". The first of these facts if it is to justify aggregation requires exactly the type of reclassification and redrafting of the clause which the authorities demonstrate is not permissible. The second without the first proves too much. It would lead to the aggregation of individual acts of negligence by individual employees which were independent of each other but merely could be described as having a very similar character, eg bad advice by bank managers. The essential component of the assureds' case remains that they must say that this aggregation clause is an 'original cause' clause. That is not a permissible construction to place upon it.

    53. Accordingly, the appeal should be allowed and the cross-appeal dismissed and the questions should be answered as contended for by the insurers.


My Lords,

    54. I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Hoffmann and Lord Hobhouse of Woodborough. I agree with them, and for the reasons they give I too would allow the appeal and dismiss the cross-appeal.

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