In Standard Life Assurance Limited v Ace European Group (and Ors)  EWHC 104 (Comm), Mr Justice Eder considered the recoverability of mitigation costs under a professional liability policy and, in particular, whether the insured's purpose in making remediation payments was relevant. He held that the insured's motive was "extraneous and irrelevant" provided the payments were made in taking action to avoid or reduce a third party claim which was of a type that would have been covered under the policy.
The dispute concerned a claim for approximately £100 million by Standard Life Assurance Limited ("SLAL") against its professional indemnity insurers (the "Insurers").
SLAL operated a £2.2 billion pension fund (the "Fund"). The Fund had been marketed as a temporary home for short term funds, with some literature referring to it as being invested in cash. The Fund's assets included a large proportion of asset backed securities. During the credit crunch, asset backed securities became increasingly illiquid, making valuation more and more subjective. As a result, with effect from 14 January 2009, SLAL decided to switch to a different source of prices, resulting in a one-off fall in value in units in the Fund of around 4.8%.
SLAL took the view that many of its customers were not fully aware of the nature of the fund and therefore may not have anticipated such a dramatic change in a single day. Following an influx of complaints, SLAL concluded that some 64% (by value) of its customers (worth approximately £124 million) would have actionable claims against it. Accordingly, on 11 February 2009 SLAL announced that it would reverse the effect of the fall by injecting cash into the Fund and compensating those customers that had left since the price reduction. It also made payments to customers who pursued claims for losses exceeding the 4.8% fall. Together, these payments amounted to £106,647,304.89 (the "Remediation Payments").
SLAL subsequently sought to recover the Remediation Payments from its Insurers under its professional indemnity insurance which consisted of a primary policy and 3 excess policies (the "Policy") on the basis that the Remediation Payments constituted Mitigation Costs. The Policy was subject to a £10 million deductible ("each and every claim/loss including costs and expenses").
Insurers denied coverage principally on the grounds that the Remediation Payments did not fall within the meaning of "Mitigation Costs" under the Policy as the payments were made, in truth, for the purpose of avoiding or reducing potential "brand damage". Insurers also contended that the actual and potential claims against SLAL could not be aggregated.
Mitigation Costs were defined under the Policy 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…"
Eder J considered the scope and effect of the clause which he said had four main elements, namely: (a) a payment of loss, costs or expenses; (b) reasonably and necessarily incurred by SLAL; (c) in taking action to avoid or to reduce third party claim/claims; (d) of a type that would have been covered under the Policy. We deal with each in turn below.
"…a payment of loss, costs or expenses…"
Eder J held that the Remediation Payments were plainly a "cost" and/or "payment for loss" falling within the definition of Mitigation Costs under the Policy.
"… reasonably and necessarily incurred…"
Insurers submitted that payments must have been reasonably incurred for the purpose of avoiding or reducing actual or potential third party claims. What is reasonable must not be viewed from the sole perspective of the insured but rather from the mutual perspective of insured and insurer. Further, it must be shown that the insured had to make payment to avoid or reduce potential third party claims.
Eder J held that the introduction of the concept of purpose here was confusing. It was also confusing to take into account the mutual perspective of insured and insurer. Whether an insured acted reasonably is an objective enquiry; there is no justification for any further requirement. Eder J accepted Insurers' submission that the term "necessary" set a high threshold, albeit one which must have appropriate regard to the realities.
"…in taking action to avoid or to reduce…"
Insurers submitted that this clause should be construed to mean action that is taken for the purpose, in the sense of motive, of avoiding or reducing claims. Accordingly, they argued the payments were not Mitigation Costs, as they were made with the dominant purpose of reducing brand damage.
Eder J rejected this argument. He found that the correct approach was to look at the intended effect of the payment, not the company's motive. He held that "[p]rovided the settlement payment was made in taking action to avoid or to reduce the third party claim which was of a type that would have been covered under the Policy, the insured's motive in making the payment is extraneous and irrelevant."
Insurers submitted, in the alternative, that the amount of any indemnity which SLAL was entitled should be reduced in accordance with the principles of apportionment found typically within policies of marine insurance or in the context of under-insurance. In such cases, there is an established principle that where a payment is made for competing purposes, one insured and one uninsured, then an apportionment should be made between the respective insured and uninsured interests.
Eder J was "at the very least, very doubtful" whether there is any general principle of apportionment in a liability policy. In any event, whether mitigation costs can or should be apportioned, in circumstances where there are two objectives motivating the action of the insured, would depend on the wording of the policy. Eder J found that the wording of the Policy in this case pointed against any requirement of apportionment. There was no limiting language in the clause such as "solely" or "exclusively" to confine the application of mitigation costs to action taken only to reduce or avoid third party claims. He noted: "it does not seem to me either sound in principle or desirable that the assured should be penalised if it might be said that those costs were also incurred to obtain some further or additional benefit".
"…of a type that would have been covered under the Policy…"
Insurers submitted that, in making the blanket cash injection, SLAL provided a windfall to those customers who had received adequate marketing literature and, consequently, SLAL had made a payment where it had no legal liability.
Eder J accepted that there was no legal necessity to undertake the course chosen by SLAL and there was a possible alternative option, namely responding to claims on a case-by-case basis. Further, Eder J agreed with Insurers that the cash injection was incurred, in part, to reduce "brand damage". However, Eder J accepted that SLAL had reasonably concluded that the number and value of third party claims would be substantially reduced if the 4.8% fall was reversed, and that this option would be less costly than dealing with cases individually.
Eder J held in order to qualify as Mitigation Costs the relevant payment does not have to be made to discharge a particular liability to a particular third party claimant: "In my view, as stipulated in the definition, the requirement is simply that the payment is reasonably and necessarily incurred in taking action to avoid or to reduce one or more third party claims of the relevant type".
The Policy contained a very wide aggregation clause: "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, shall be considered to be a single third party claim for the purposes of the application of the Deductible."
Insurers said that SLAL had not properly identified the originating cause or source to which all the claims were attributable. Further, that there was a wide variety of different complaints such as mismanagement, poor investment performance or mispricing. In addition, different misrepresentations were made to different customers and in different ways
Eder J said that it was difficult to envisage a more widely drawn form of aggregation clause. He considered that: "[t]he phrase “in connection with” is extremely broad and indicates that it is not even necessary to show a direct causal relationship between the claims and the state of affairs identified as their “originating cause or source”, and that some form of connection between the claims and the unifying factor is all that is required." Thus, Eder J held that all the actual and potential claims could be aggregated; in every case the originating cause of the complaint was that SLAL marketed the Fund as a safer investment than was in fact the case.
Accordingly, Eder J held that SLAL were entitled to recover the Remediation Payments subject to a single deductible of £10 million.
Insurers have been given leave to appeal.
This case should provide some comfort for insureds who take mitigation steps in a crisis to reduce the risk of third party claims but also to protect their brand image. Eder J was mindful of the fact that employees at SLAL were operating at "fever pitch" when the decision was made and "in that context, it is unsurprising that different individuals would have different perspectives and express different views" regarding the purpose of the decision. For that reason, Eder J concluded that motive was an unhelpful criterion for assessing whether the Policy should respond.
It remains to be seen whether insurers will seek to revise Mitigation Costs wordings to achieve apportionment between payments made for competing purposes or include limiting language such as "solely" or "exclusively".