Standard Life Assurance Ltd v ACE European Group – financial mis-selling claims
The claimant, Standard Life, claimed under its professional indemnity insurance for about £100 million spent to mitigate the risk of anticipated claims arising from the mis-selling of its Standard Life Pension Sterling Fund (the Fund). The Fund had been marketed as a temporary home for short term funds, with the suggestion in some literature that it was the equivalent of putting money on deposit. In fact the Fund’s assets included a substantial proportion of asset backed securities which, following the collapse of Lehman Brothers in 2008, became increasingly illiquid making their valuation more and more subjective.
Standard Life decided to switch to a different source of prices. This resulted on 14 January 2009 in a one-off one day fall in value of units in the Fund of about 4.8 per cent (equivalent to about £100 million). This caused a mass of complaints from customers and independent financial advisers (IFAs) and pressure from the Financial Services Authority (FSA) and the media.
Anticipating claims totalling about £124 million (on the assumption that about 65 per cent of customers would have valid mis-selling claims based on the literature), Standard Life decided to make a cash injection into the Fund, which together with compensation to those customers who had left the Fund, totalled a little over £100 million.
Subsequently payments of more than £4 million were made to customers who pursued claims for losses exceeding the 4.8 per cent fall.
All of these sums, collectively described by Eder J as “remediation payments”, were claimed under Standard Life’s policy with the defendant insurers. The policy was for £100 million and covered “mitigation costs” defined as:
“ … any payment of loss, costs or expenses reasonably and necessarily incurred by the assured in taking action to avoid or reduce a third party claim or to reduce a third party claim (or to avoid or reduce a third party claim which may arise from a fact, circumstance or event) of a type which would have been covered under this policy”.
Standard Life claimed that the remediation payments constituted mitigation costs. The insurers raised several arguments to defeat this claim. Their potential knock-out argument was that the cash injection was made for the dominant purpose of avoiding or reducing brand damage. Since this was not a purpose covered by the mitigation costs clause, the claim failed entirely. The judge rejected this argument. The clause was not concerned with purpose, but only with whether the intended effect or result was to reduce the number of claims. It was enough that the payment was reasonably and necessarily incurred in taking action to avoid, or to reduce, one or more third party claims otherwise covered by the policy.
Alternatively, the insurers argued that there should be an apportionment to reflect the fact that Standard Life may have had mixed motives when making the cash injection, both to reduce claims (covered) and to protect its reputation (not covered). The judge also rejected this argument. Insurers were seeking inappropriately to export the principle of apportionment from marine property insurance to non-marine non-property professional liability insurance.
He held that the cash injection was reasonably and necessarily incurred. The fact that Standard Life could have adopted another course of action, waiting for the claims to come in and then considering each in turn, did not prevent this from being the case. Standard Life was in principle entitled to recover all the remediation payments without apportionment, subject only to the question of any exclusion (the insurers’ argument on a potential exclusion under the policy was rejected) and aggregation.
There was a deductible of £10 million in respect of a single claim, defined as:
“all claims or series of claims (whether by one or more than one claimant) arising from or in connection with or attributable to any one act, error, omission or originating cause or source, or the dishonesty of any one person or group of persons acting together”.
The judge held that all of the actual and potential claims could be aggregated so that Standard Life had to bear only one deductible. It was difficult to envisage a more widely drawn form of aggregation clause. The representation of the Fund as a safer investment was, in fact, a continuing state of affairs and constituted a factor unifying both the claims Standard Life was seeking to avoid or reduce when making the cash injection and the subsequent claims. These claims resulted in further compensation payments. The phrase “in connection with” was extremely broad and all that was required was some form of connection between the claims and the unifying factor.
The current plethora of financial mis-selling claims will lead to close scrutiny of this judgment and it is not surprising that the defendant insurers have been given leave to appeal. It will often be the case, particularly given the pressure on financial institutions facing these claims to do the right thing and to take early steps to resolve claims, that money is thrown at the problem before formal claims are made. The prospect of reducing an FSA fine for regulatory breaches acts as another incentive towards proactive mitigation of this type. The definition of mitigation costs in the relevant policy is critical in such cases.
As for aggregation, the clause in this case was described by Eder J as “as wide as, and in one respect wider than, any aggregation clause which has been considered in any of the reported cases”. The word “originating” opens up “the widest possible search for a unifying factor in the history of the losses which it is sought to aggregate” (Lord Mustill in Axa Reinsurance v Field). The words “or source” as an explicit alternative to “cause” could only have been included to emphasise still further the intention that the doctrine of proximate cause should not apply and that losses should be traced back to wherever a common origin can reasonably be found.
Eder J looked at the wording in a pensions mis-selling case, Countrywide Assured Group plc v Marshall. There the aggregation clause referred to “one occurrence or all occurrences of a series consequent upon or attributable to one source or original cause”. Morison J held on assumed facts that all the claims made by customers who had been mis-sold pensions were to be aggregated. The clause in that case was narrower than that in the Standard Life policy. Although it referred to “one source or original cause”, it did not contain the phrase “in connection with,” instead including the narrower phrase “consequent upon or attributable to”.
This should be contrasted with the very different aggregation clause in Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Co Ltd. In this pensions mis-selling decision, the relevant clause referred to “a series of third party claims” resulting from “any single act or omission or related series of acts or omissions”. There was a £1 million deductible in respect of "each and every claim". The House of Lords allowed the insurers’ appeal, finding that the acts and omissions of Lloyds TSB’s financial services consultants, which gave rise to the financial loss suffered by third parties, were not a related series of acts or omissions. The phrase “related series” did not have the same force or create such a strong and wide connecting factor as phrases, such as “attributable to”, “a single source” and “originating cause” found in the earlier cases of Axa Reinsurance v Field and Municipal Mutual Insurance Ltd v Sea Insurance Co Ltd. The fact that the claims arose from a common underlying cause, Lloyds TSB’s general failure to implement proper training and monitoring, was not relevant.