The nature of a construction project gives rise to the possibility of numerous individual defects or losses arising which may be brought together in one or more claims. In a worst case scenario, there may be an underlying design error which is repeated by the insured on various projects, giving rise to multiple claims from different parties under different contracts. When indemnity is sought under the policy for such claim(s), it has to be considered to what extent the losses or liabilities should be grouped together and treated as just one claim for indemnity under the policy, or multiple claims.
The underlying liabilities may be grouped together by various different routes. On the facts and policy wording, the liabilities may comprise only "one claim" against the policy, in which case no further debate arises. Alternatively, express aggregation wording within the policy may bring together the underlying liabilities so that they are treated as a single claim.
Of course, whether it is in the insured's, or insurer's interests for the losses to be aggregated depends entirely upon the limit of indemnity under the policy, the excess, and the number and size of the losses. A slight difference in the wording can, however, make a significant impact upon the amount recoverable under the policy. Say, for example, there is a £2 million claim, which is made up of individual defects, none of which, alone, exceeds the £50,000 each and every claim excess within the policy. If, on the policy wording in place, every defect is treated as a separate claim and no aggregation provisions apply, insurers will have no liability. If the losses are aggregated, the exposure will be the full £2 million, less the £50,000 excess.
In some cases, the calculations may be so finely balanced that it cannot be determined until the insured's third party liabilities are finally resolved, who benefits from the particular losses being treated as one claim under the policy. Given that the same clause may at times favour the insured and at other times the insurer, the courts have held that "aggregation clauses thus require a construction which is not influenced by any need to protect the one party or the other. They must be construed in a balanced fashion giving effect to the words used1." In short, the courts will adopt a neutral approach to the language used, seeking to identify its natural meaning without any predisposition either for or against a party or for a particular outcome or result.
How many claims? Most professional indemnity policies are worded on a "claims-made" basis. The limit of indemnity will frequently be set on an "each and every claim" basis with the excess being assessed by reference to each "claim" that has been made.
"Claim" may or may not be defined in the policy. An important distinction that has to be drawn on the wording in place is whether "claim" means a third party claim against the insured, as opposed to a claim for indemnity by the insured against the insurer. If the latter, it may considerably increase the scope for various liabilities to be presented by the insured as one claim for indemnity under the policy.
Assuming that the reference is to a claim by a third party, in the absence of a definition in the policy, "claim" is generally interpreted as meaning a demand for something as due or the assertion of a right to something against the insured. A bare complaint on its own is not enough. The key is to identify the demand and the object or remedy sought. A distinction also has to be drawn with the "cause(s) of action" by which the claim may be supported. There may be many causes of action in support of the one claim for damages. Conversely, albeit perhaps more unlikely, one cause of action could give rise to different claims against the policy.
What is clear is that the court will look at the substance of the claim i.e. the underlying facts to determine how many claims exist. The court in Thorman v NHIC (1988), a case concerning an architect's liability for various building defects, considered certain hypothetical examples. If, say, an architect had separate contracts with different building owners and made the same mistake on each, it may be considered that there were two claims. If there was a single contract in relation to two houses in different parts of the country and different mistakes were made by the same architect: again, two claims. But, if it was the same mistake on each, possibly only one claim. Equally, if the architect was engaged to design a number of houses on a single development and a single complaint is made covering a wide number of unrelated errors, that would be one claim. But, if the defects manifested separately and each gave rise to a single complaint, two or more claims could exist.
In Mabey & Johnson Ltd v Ecclesiastical Insurance Office plc (no 2) (2003), the insured, an engineering company, was engaged by the Government of Ghana to design and build a number of bridges, to be supplied in two phases: "Ghana I" and "Ghana II". Following the collapse of a bridge, the insured reviewed its design, with the result that two bridges supplied under Ghana I were repaired and three bridges supplied under Ghana II were replaced. The insurers sought to argue that the insured's total liability to the Government of Ghana comprised only "one claim" as there was only one contract in place. The court in this case restated an important point of principle, namely that the manner in which the third party's claim is actually formulated is not decisive on the question of the number of claims, and it is necessary for the court to look at the underlying facts. In Mabey, the court was satisfied that there were two distinct contracts for Ghana I and II, with different design obligations under each. There were, accordingly, two failures on the part of the insured which gave rise to two separate claims.
The number of claims made can be a complex question to resolve. The totality of the material - the initial claim letters, the Letters of Protocol and the Particulars of Claims themselves, will have to be considered to determine which demands for compensation are to be treated as separate claims and which as part of a bigger, single claim. The court will look at the underlying facts and the policy wording and apply, above all it appears, a large dose of common sense.
Aggregation wording
The second, and related, question to consider is the impact of any aggregation wording in the policy. The purpose of an aggregation clause is "to enable 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.
Many of the cases dealing with aggregation issues arise in the reinsurance context where the stakes are typically very high. The primary insurer will reinsure some portion of his total potential loss with a reinsurer. The policy wording may seek to aggregate together the underlying losses "arising out of one event" or "from the same original cause". Interpreting these, or other, different formulations, in the context of multiple losses arising from, say, a flood, is relatively easy. Where, however, the losses are separate in time or place or, under a claims-made policy, result from the actions of multiple individuals on successive projects, it is far less straightforward.
While each case will have to be considered on its own particular facts and policy wording, decided case law can prove a useful guide.
Footnotes
1 Lord Hobhouse in Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Co Ltd (2003)
2 ibid
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
