The Court of Appeal has upheld the Commercial Court’s decision in Ace European Group & Ors v Standard Life Assurance Ltd [2012] EWCA Civ 1713 that apportionment of mitigation costs has no place in a liability policy such as the professional indemnity policy under scrutiny in this case. Here the Insured, a financial services adviser, had a professional indemnity policy which included cover for Mitigation Costs defined as ‘any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid 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.’  The Insured decided to switch to a different source of prices for asset backed securities which were becoming increasingly illiquid, and their valuation more subjective, as a result of the credit crunch and the collapse of Lehman Brothers. The switch resulted in a one-off one-day fall in value of about 4.8 per cent, equivalent to about £100 million. The Insured paid that amount back into the fund to compensate customers in full for this drop in value and then sought to recover that sum in whole or in part from its Insurers.

Insurers repudiated the claim on the basis that the Insured had made the cash injection primarily to protect its brand and therefore the payments had not ‘reasonably and necessarily’ been incurred in taking action to avoid or reduce third-party claims. The court rejected that argument, concluding that so long as the payments were made to avoid or reduce third-party claims that were of a type that would have been covered by the policy, the Insured’s motive in making those payments was ‘extraneous and irrelevant’. In the court’s view it would, as a matter of practicality ‘be odd (to say the least) that an Assured’s entitlement to recover under a professional indemnity policy should depend on “motive”’.

The court accepted there was no legal obligation to make the payment, but concluded that was not the relevant test of necessity. The realities at the time meant the cash injection was necessarily incurred to avoid or reduce relevant third-party claims of a type covered under the policy. The Insured was therefore entitled to an indemnity for those costs.

Insurers appealed the Commercial Court’s decision. The Court of Appeal concluded that there was no basis for saying that a payment intended to mitigate loss (insured) which also had the incidental effect of minimising damage to the Insured’s brand (uninsured) was irrecoverable as mitigation costs. Any apportionment along the lines Insurers contended would render the policy cover for mitigation costs ineffective. The whole payment had been incurred for the insured purpose and was recoverable as such.