The principle of apportionment has long been applied to marine property losses. The Court of Appeal's decision in ACE European Group & Others v Standard Life Assurance Ltd [2012] EWCA Civ 1713 confirms that this principle, which is largely derived from the practice of averaging in marine underinsurance, has no place in liability insurance.

The facts

Standard Life marketed its Pension Sterling Fund (the Fund) as a temporary home for short term investments, however a substantial proportion of investor's money was actually being placed in risky asset-backed securities. Following the collapse of Lehman Brothers in 2008, asset-backed securities became increasingly illiquid which, in January 2009, prompted Standard Life to switch to a different source of prices and re-value the Fund. This resulted in a one-day 4.8% drop in value of the units of the Fund, which equated to approximately £100 million. Following the subsequent mass of complaints from investors and independent financial advisors, Standard Life concluded that 64% of customers by value would have valid mis-selling complaints worth £124 million. In an attempt to pre-empt these claims, and to limit brand damage, Standard Life made a cash injection into the fund of approximately £102 million.

Standard Life sought to recover this payment as a "mitigation cost" under its professional indemnity policy (the Policy). At first instance, insurers argued that the cash injection was made for the dominant purpose of reducing brand damage, which was not covered by the mitigation costs clause. However, Mr Justice Eder held that the clause was not concerned with motive or purpose, but with whether the expected or intended effect was to reduce the number of claims against Standard Life. The decision to make a cash injection was likely to reduce the number and size of claims against Standard Life, and it had also been reasonably and necessarily incurred given the stated objective was to reduce claims. On this basis, the payment fell within the definition of mitigation costs and was therefore recoverable under the Policy.

The Principle of Apportionment

Insurers were not allowed to appeal the findings of fact so the main issue on appeal was that of apportionment as a matter of law. Insurers' position was that Standard Life's recovery should be apportioned to reflect the fact that the payment was made partly for the purpose of reducing third party claims, as covered by the Policy, and partly for the purpose of reducing brand damage, which was not covered. They sought to recover 75% of the £100 million paid under the Policy, based on a total loss of £400 million for the insured and uninsured interests.

Lord Justice Tomlinson, who gave the lead decision for the Court of Appeal, confirmed Eder J's decision that no apportionment was necessary and that Standard Life was entitled to recover the full amount subject only to the deductible.

Tomlinson LJ held that it would be "inconsistent with the clear language of the [P]olicy" to absolve the insurers from paying the full amount that they promised to pay simply because the cash injection had the incidental purpose of avoiding brand damage. The cash injection was an indivisible amount that had to be paid in full to restore the fund to its original value and any apportionment would result in the insurers failing to honour their obligation to indemnify Standard Life for mitigation costs incurred. Further, the fact that the incidental objective of mitigating brand damage was achieved as well as mitigating costs or reducing claims did not make some part of the cash injection irrecoverable.

Having thus decided the appeal on its facts, Tomlinson LJ then reviewed the principle of apportionment in insurance and explained why it does not apply in liability insurance. He looked at the origins of the principle in marine insurance and authorities showing that apportionment, or averaging, derives from underinsurance of ships or cargo. For example, if a ship worth £200 million is insured for £100 million and subsequently sustains damage of £100 million, the insurer will only indemnify £50 million, ie half, of the loss.

In particular, Tomlinson LJ reviewed the comments of Mr Justice Rix (as he then was) in the cases of Royal Boskalis Westminster NV v Mountain [1997] Lloyd's Reinsurance LR 523 and Kuwait Airways Corporation v Kuwait Insurance Company [1996] 1 Lloyd's Rep 664, which insurers relied on to show that apportionment was not restricted to marine insurance. In Royal Boskalis, Rix J cited Cunard Steamship Co Ltd v Marten [1902] 2 KB 624 to suggest that apportionment might not be restricted only to underinsurance but also apply where sue and labour expenditure is incurred for two purposes: protecting or preserving insured property as well as another uninsured interest.

However, Tomlinson LJ showed that on closer examination, these authorities do not go so far as to extend apportionment to liability insurance. Further, he said that Rix J had erred in thinking that apportionment also applied to expenditure incurred for saving both an insured and an uninsured vessel. The principles of underinsurance in marine (and aviation) insurance are not applicable to third party liability insurance, where the insured recovers its loss up to the policy limit. Importantly, Tomlinson LJ said, the concept of underinsurance "makes no sense in the context of liability insurance where the extent of liabilities to be incurred is unknown when the policy is agreed."

Comment

Preventing apportionment from being extended to liability insurance indicates that it should be regarded as a tool of limited use. Although the Court of Appeal did not rule out using apportionment outside the marine underinsurance context, Tomlinson LJ's review of the law suggests that any attempt at extending the principle would be greeted with scepticism. However, it is not clear whether the not uncommon practice of very large companies intentionally purchasing only limited liability cover, whilst retaining a large potential liability net themselves, would also be distinguished from marine underinsurance in the same way. Finally, whilst the decision provides some clarity for insurers and insureds alike, it may prompt consideration of whether to include specific wording addressing apportionment in a liability context where there may be indemnities paid for a combination of insured and uninsured interests.