With the rise of class action risk in the current financial climate, more entities will be looking to their insurance policies for defence and settlement costs. The scope of cover, of course, depends on the operation of the aggregation clause, the intention behind which is to cause a large number of claims to be aggregated so that only one deductible is payable and one policy limit is available. Where the aggregation clause is not triggered, a policyholder could be faced with hundreds of claims, a separate deductible for each and little to no recovery under the insurance policy.
The recent decision of the NSW Court of Appeal to give a broad, commercially-sensible interpretation to the language in an aggregation clause is a welcome one for entities facing the risk of class actions (Bank of Queensland Limited v AIG Australia Limited  NSWCA 190).
192 claimants, one representative proceeding, and the $2 million deductible
Petersen Superannuation Fund Pty Ltd brought a representative proceeding on behalf of itself and 191 other investors, alleging the investors suffered loss as a result of unwitting investment in a fraudulent Ponzi scheme and that BOQ failed to protect their interests when it became aware of the fraud.
BOQ settled the representative proceeding, and then turned to its insurer AIG for $6 million to cover its defence costs.
The policy was a “claims made” policy with a limit of liability of $40 million and a deductible of $2 million for each and every claim. The policy also contained an aggregation clause which provided that "all Claims arising out of, based upon or attributable to one or a series of related Wrongful Acts shall be considered to be a single Claim", such that one deductible applied.
BOQ argued there was only one Claim under the policy, and therefore only one deductible of $2 million applied; AIG argued that each of the represented parties' respective losses claimed in the proceeding was a separate, independent Claim under the policy and subject to a separate deductible, a result which would have left BOQ without an insurance recovery. This scenario is not unheard of.
The key issues on appeal were:
- whether the class action and other steps taken by or on behalf of the investors constituted multiple Claims or a single Claim under the terms of the BOQ insurance policy; and
- if there were multiple Claims, whether they were to be treated as a single Claim by reason of the aggregation clause in that policy.
One claim or multiple claims?
Clause 2.2 of the policy defined "Claim" to include:
- "any suit or proceeding…brought by any person against an Insured"; and
- "any verbal or written demand from any person that it is the intention of the person to hold an Insured responsible for the results of any specified Wrongful Act."
The Court of Appeal concluded there were multiple Claims on the basis that a reasonable businessperson would, taking each investor separately, consider that the representative proceeding was a "suit or proceeding" brought by that investor within the meaning of the policy. The fact that they were run as a single action by the Court pursuant to the applicable legislation and Rules was merely a matter of administrative convenience. The Class Member Registration Forms submitted by the investors each constituted a separate "written demand" within the policy definition of "Claim."
To aggregate or not to aggregate?
At first instance, Justice Stevenson held that the Wrongful Acts were the purported withdrawals made from customer accounts but that each withdrawal was a separate Wrongful Act, made on a different occasion, from a different account, causing loss to different parties, in response to different instructions and was "wrongful" for different reasons. Although they occurred "within the broader, more remote scheme of a fraudulent practice", he did not consider them sufficiently similar or logically connected as to constitute a "series of related Wrongful Acts" within the meaning of the Claims aggregation provision.
The Court of Appeal saw things differently, finding that:
- a separate Wrongful Act occurred each time BOQ acted on a request for a withdrawal; but
- the Wrongful Acts were related by reason of the "Knowledge of Fraud" allegations in the class action pleadings which applied to all of the Wrongful Acts and which were therefore the "unifying factor" between them. Of significance was that the grouping of claimants in the representative proceeding was only permitted in the Federal Court, and only occurred, because of the significant common questions that arose in connection with each of their claims,
The terms "series" and "related" were the core elements of the aggregation clause. The word "series" was held to add "little, if anything" to the notion of relatedness of the acts, other than emphasise the need for the impugned Wrongful Acts to be "related." As such, it was the degree of interconnection between the acts that facilitated aggregation in this case.
Although the Court of Appeal resolved that there were multiple Claims, it held that those Claims were to be treated as a single Claim by reason of the aggregation clause. Therefore, only one $2 million deductible was payable by BOQ and the insurers were liable to indemnify BOQ for the remainder.
What does this mean?
The Court of Appeal has applied a much broader interpretation of the aggregation language than the judge at first instance, and shifted away from the focus on arbitrary differences between the genesis of the individual claims, to emphasise the manifest and intrinsic similarities between them. Notably, it acknowledged the difficulties of construing aggregation clauses and recognised that resolution of aggregation issues remains highly fact specific. Ultimately, each case will turn on the particular wording of the clause and the nature of the claim made against the policyholder.
Nonetheless, this decision is significant: it presents a commercially-sensible and intuitive conclusion that a large number of claims that originate from what common sense would suggest to be a common underlying cause of loss, should be regarded as "related" within the meaning of that term in an insurance contract.
The appeal judgment decision illustrates the importance of properly worded and effective aggregation clauses in liability policies, so that related multiple claims, multiple wrongful acts and multiple losses are treated as a single Claim and all give rise to a single deductible. Absence of effective aggregating provisions can lead to detrimental insurance outcomes and may make insurance protection illusory, especially in the context of class action litigation.