Aggregation clauses — their purpose & impact on limits of indemnity & policy excess

In this article we discuss the importance of aggregation clauses and the impact it may have on policy limits of indemnity and the payment of the policy excess (or excesses).

The implications of aggregation may be very significant for policyholders, so we will start with a review of facts that horrified us all.

Now over 20 years after September 11, 2001, many will recall the incident that resulted in the collapse of the “Twin Towers”.

A Boeing 767 jet crashed into the North Tower at 8:46am. Shortly after another jet crashed into the South Tower. At 9:59 am the South Tower collapsed, followed by the North Tower at 10:28 am. There was loss of life, injury and multiple billions of dollars in property damage. The world would never be the same again, the impact etched into peoples’ hearts and minds, globally.

This sequence of events presented the complex issue of aggregation to insurers. Were there one or two “occurrences”, or as often referred to in policies one or two event(s)?

Insurers contended that the attack was only one occurrence and therefore the insured could make only 1 claim on the policy. The effect this had was that the maximum the insured could recover under the policy was $3.5 billion – the actual loss, you can imagine, far exceeded this policy limit.

The insured contended that the incident was two events and therefore it was entitled to make two separate claims on the policy, with the effect that it could recover a maximum of $7.0 billion.

The determination of this issue hinged on the defined meaning of “occurrence” in the policy.[1] An “occurrence” was defined as:

“all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur”.

It was held that the two jets crashing into the World Trade Centre was only one “occurrence” within the meaning of the policy because these events were “attributable directly to … a series of similar causes”.

The wording of an aggregation clause is of course critical. In the absence of the definition in the Twin Towers policy a Court or a reasonable person may conclude that the separate crashes into the North and South Towers were separate events. Therein opening up the insurer to indemnify for two separate claims.[2]

Aggregation clauses serve two purposes:

1. Determining when a policy limit or sublimit[3] has been exhausted – if there are separate events, depending on the policy, the policy limit will “renew” for each insured loss (see “reinstatements” below); and
2. Determining how many deductibles must be paid – if there are multiple separate events then a separate deductible may need to be paid for each separate event.

Depending on the insured event and loss(es) and the circumstances that have given rise to the claimed loss(es), an aggregation clause may work either in the insured or in the insurer’s favour.

If there are a large number of small but related claims that individually do not exceed the amount of the excess, then the insured will want to aggregate all of the those claims into one claim so that only one excess applies.

Conversely, as the World Trade Centre case demonstrates, where a policy limit is likely to be exhausted by a small number of large but related claims, the policyholder will want to treat each “event” separately – and vice versa from the perspective of the insurer.

It is difficult to predict whether an aggregation clause will favour an insured or an insurer when any particular loss is suffered in the abstract.

Certain business operations may be more likely to be subject to a large number of small claims or losses rather than a small number of large losses; and this can be reflected in the policies that insure those types of risks.

For example, a company producing and selling a large number of relatively inexpensive or standardised products may prefer that product defect claims be aggregated, whereas a company that produces only a small number of very expensive items, such as shipbuilders, may prefer to ensure that insured losses are not aggregated.

Aggregation clauses are concerned with concepts of cause and effect or in legal terms “causation”. A series of independent causes or events might combine to result in one claim or loss; or many independent claims or losses may arise from one cause.

How an aggregation clause applies and its effect when any particular loss materialises is determined by the precise language used to enliven the clause.

Some aggregation clauses intend to aggregate “claims” while others seek to aggregate “events” or “occurrences” or “causes” or “acts or omissions” or “errors” or “accidents”.

The distinctions between these triggers may be very subtle, for example there is a distinction between an ‘event’ and a cause’.  An event is something that happens at a particular time, at a particular place, in a particular way. A cause, on the other hand, is less confined.

The following examples of aggregation clause wordings are demonstrative of different triggers that may be utilised in clauses:

If the answer provided by an aggregation clause is not clear on its terms or as applied to the facts of the case, the Court is likely to find against the insurer that drafted a policy in ambiguous terms (Contra Proferentem).

For example, take the situation where a train crashes, injuring 40 passengers. The passengers on the train collectively claim $1.5M. The policy includes a limit of $2M and a sublimit of $500,000 “in respect of any one accident”.

None of the individual passenger’s claims exceed $500,000.

The policy provides for an indemnity for “claims for personal injury … made against the assured in respect of accidents …” Is the “accident” the injury to the passengers; or is it the train crash? – if the latter then the insurer would not have been required to pay more than $500,000.[4] –

The Court determined that there were 40 accidents not just one.

Another colourful example in a policy where a sublimit is in play, is the circumstances that arose in Kuwait Airways Corporation v Kuwait Insurance Co.[5]

In that case Kuwait Airways owned 10 aircraft that were stolen from Kuwait airport by the Iraqi forces when they invaded Kuwait on 2 August 1990.

The insured argued that these were 15 occurrences, one for each time the Iraqi forces flew the planes away. The insurer argued that there was only one occurrence.

In finding for the insurer the Court referred to an arbitration case, that facts of which gave rise to issues that were not so conceptually dissimilar from the attacks on the World Trade Centre.

In the arbitration the arbitrator had to determine whether an air raid was one occurrence or several specific attacks.

In that case, the arbitrator had reasoned that the answer depends on the viewpoint taken. For example, if an attack is carried out on a convoy of ships the crews of each ship that was sunk may consider each sinking a separate occurrence. The Admiralty at HQ or a historian may consider the attack to be only one occurrence, such as “the Battle of Trafalgar”. Accordingly, it was said:

“whether or not something which produces a plurality of loss or damage can properly be described as one occurrence therefore depends on the position and viewpoint of the observer and involves the question of degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible”.

In the Kuwait Airways case, Rix LJ concluded that that there was a unity in these factors and held that there was only one occurrence.[6]

Earthquakes often occur as a large initial quake causing injury or property damage, followed by a number of aftershocks that cause further or additional damage over the following hours, days, weeks or months.

In Moore v IAG New Zealand Limited [2020] NZCA 319, “One event” was defined in the policy to mean “a single event or a series of events which have the same cause”. The insured’s property had suffered damage in three large earthquakes that occurred in Christchurch in September 2010, February 2011 and June 2011.

In overturning the New Zealand High Court decision, the Court of Appeal held that two separate and distinct occurrences of sudden accidental physical damage occurring four months apart in the February 2011 and June 2011 earthquakes could not properly be regarded as “a series” of losses in terms of the aggregation clause.

Particular issues also arise in relation to “claims” made professional indemnity policies where there can be a large number of individual claims that are caused by a similar pattern of distinct but repeated kinds of conduct.

In Bank of Queensland Limited v AIG Australia Limited [2019] NSWCA 190 a class action was bought against the bank on behalf of 192 members that had invested in a Ponzi scheme.

The Bank held a “claims made” policy with a limit of liability of $40 million and a deductible of $2 million for each and every claim. “Claim” was defined 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 aggregation clause 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’,

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 Bank of Queensland without recoverable insurance.

Both the Supreme Court of NSW and the Court of Appeal held that each customer withdrawal improperly authorised by the bank were separate “Wrongful Acts”, so there were multiple separate claims.

However, unlike the Supreme Court at first instance, the Court of Appeal held that each of the claims were to be aggregated so that only one deductible applied. This was because the Wrongful Acts were “related” via a commonality in the allegations of knowledge of fraud that applied to each Wrongful Act.

In taking that broad approach, the Court of Appeal of NSW’s view aligns with Lord Toulson’s comments in the Supreme Court decision of AIG v Woodman [2017] UKSC18 where he stated that the correct approach to application of an aggregation clause is to:

“.. be judged, not by looking at transactions exclusively from the viewpoint of one party or another, but objectively taking the transactions in the round.”

A contrary example which reached the opposite decision resulting in the insured’s favour, but applying the same above test, was in Leeds v Dickson Coles & Gill (A Firm), Linda Box and HDI Global Speciality SE [2020] EWHC 2809 (Ch).

In that case a solicitor had been found guilty of 12 offences of misappropriating approximately £4 million of client money for acts perpetrated over a number of years. The remaining partners of the firm sought to claim on their professional indemnity policy which had a £2m indemnity limit. The aggregation clause in the policy provided that:

 “All claims against any one or more Insured arising from: one act or omission; one series of related acts or omissions; the same act or omission in a series of related matters or transactions; similar acts or omissions in a series of related matters or transactions and all claims against one or more Insured arising from one matter or transaction will be regarded as one claim.”

The insurer asserted that all client losses were caused by the various thefts by the solicitor, from the client account and therefore should be aggregated as one claim. The English High Court disagreed as it considered that although the solicitor may have had the single intention of stealing as much money as possible, each theft from separate clients at different times must be a different act, even if those actions had been taken with a view to accomplishing one ultimate objective. Accordingly, the Court did not consider that a unifying factor which was sufficient to unite the various series of acts of theft for aggregation purposes, was present.

In Allianz Australia Insurance Limited v Rawson Homes Pty Ltd [2021] NSWCA 224 a contract works policy had a $10,000 deductible for “any one event”.

One hundred apartments that were under construction were damaged in a hailstorm. The issue was whether there was one deductible to be paid or 100 deductibles to be paid under the policy.

The NSW Supreme Court held that there should be one deductible as there was only one event. The hailstorm.  The Court of Appeal said that 100 deductibles were payable because the wording and structure of the policy meant that the policy was intended to operate as 100 separate policies rather than as 1 policy and therefore no question of aggregation under any one policy arose.

Aggregation clauses and reinstatement clauses are interrelated.

Reinstatement clauses determine at which point the policy limit is “reset” in the event of a claim on the policy. For example, a reinstatement clause might provide that if a property damage policy has limit of $1M and a fire occurs causing $800,000 of property damage the insurer will pay that sum and the policy limit will be “reset” back to $1M. If a second fire occurs causing $1.5M in the same policy period, the insurer will pay out $1M towards that loss. Reinstatement of this type is usually limited to 1 or 2 reinstatements in any one policy period.

Alternatively, the reinstatement may operate so that the policy limit does not reset for each claim or loss paid and that the limit is an “aggregate limit”. This is ordinarily in the case with “claims made” policies.

In that circumstance, if an insured faces multiple claims during the same policy period each claim will erode the amount available from the policy limit.

Where an indemnity limit is structed by way of primary and excess of loss policies, aggregation clauses may cause further complexities in assessing claims.

By way of example multi-layered policies may be required so an insured can attain a policy limit of $100m. The primary or underlying policy will set the substantive terms and conditions and each “layer” above it will intend to follow the terms and conditions of the primary policy. Each insurer will attach at their respective layer. For ease the $100m limit may be split into 10 vertical layers, each insurer deploying $10m for its particular layer.

If the primary layer policy contains an “Around the clock” reinstatement of the $10 million limit and a claim for $15 million is paid the first $10 million will be paid by the primary insurer and the next $5 million will be paid by the second layer insurer. The third layer insurer will not be required to pay anything.

However, in an “Around the clock” policy the primary layer’s policy limit will not be reinstated until the remaining $85 million is exhausted, so if the total loss is $90 million the primary layer will only be liable to pay $10 million but if the total loss was $105 million the primary layer will be required to pay $15 million, as the primary layer policy is reinstated once the remaining layers are exhausted.

In these circumstances an aggregation clause becomes important to determine whether an insured faces one claim or multiple claims or whether it is one act or omission giving rise to many claims or multiple acts or omissions that give rise to multiple claims and the point that “reinstatement” will occur.

There is a tendency in hardening insurance markets to cover multiple beneficiaries under a single policy limit or intent for a policy to cover multiple risks. The aggregation of limits here becomes a serious consideration for insureds: that is because there are cost benefits to aggregating cover for multiple insureds under 1 policy. The risk is that the limit may be eroded by the claims of other beneficiaries.

The hardening market has also seen insurers remove aggregation clauses with regard to related claims. This could mean that multiple excess may be payable in the event of a claim. Take for example a financial adviser who must pay an excess for each claimant who alleges miss-selling of a financial product, as distinct to one excess applying to all allegations made by claimants in relation to the selling of the one product.

There are significant implications to policyholders if aggregation is not understood. Tailoring aggregation clauses can be an effective way to manage insurance and claims costs and should be considered in the current market conditions.

For further information and advice relating to aggregation clauses and their impacts please contact us via the form below.

[1] World Trade Centre Properties LLC. v. Hartford Fire Insurance Co., 345 F.3d 154 (2nd Cir. 2003).

[2] This in fact did happen before a jury in related proceedings involving a different policy where the term “occurrence” was not specifically defined.

[3] Insurers may set a sublimit in a policy through use of words such as “a limit of liability of $2 million any one claim and $5 million in the aggregate”. This means the upper limit of the insurer’s liability under the policy is $5m but the insurer has set a sub-limit of $2m per claim. The insured will only be able to recover the full sum insured if there are two or more claims, the total of which comes to $5m (or more).

[4] In the real case upon which this scenario is based, the Court held that there were 40 accidents not just one. The wording of the policy as to what was meant by “accident” was ambiguous and did not resolve the question one way or the other. The insurer was not entitled to rely on the $500,000 sublimit. South Staffordshire Tramways Company Ltd v The Sickness and Accident Assurance Association Ltd [1891] 1 QB 402 (CA).

[5] It is important to note that, unlike in the World Trade Centre case example given above, “occurrence” was not defined in this policy but the same result was reached.

[6] [1996] 1 Lloyd’s Rep 664 (Rix J).