A recent Commercial Court decision, Standard Life Assurance Limited v Oak Dedicated Limited and others & Aon Limited  EWHC 222 (COMM), has highlighted the pitfalls that parties to an insurance contract, and insurance brokers, can face when relying upon a less-than-clear aggregating provision. Standard Life obtained, through brokers Aon, insurance cover under a “Financial Institutions Claims Made Comprehensive Insurance” for indemnity limits of £75 million in excess of £25 million for claims made during the period of three years from 15 May 1998 to 14 May 2001.
“Claim” was defined in the insurance policy wording as “any Claim 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 of dishonesty of any one person or group of persons acting together and any such series of Claims shall be deemed to be one Claim for all purposes under this Policy.” The excess in respect of each claim was described: “as specified in item 4(ii) of the schedule”. The policy schedule, following in this regard the slip for the relevant cover, provided that the excess was “£25 million each and every claim and/or claimant including costs and expenses.”
Having incurred liabilities of over £100 million as a result of the mis-selling of endowment policies (relating to claims by over 97,000 investors, redress for which typically varied from £3,000 to £5,000 per individual claim), Standard Life claimed an indemnity under the policy for the full sum insured. Standard Life argued that the individual claims could be aggregated as they arose from a single originating cause or source, namely a systemic failure relating to the approach to the sale of endowment mortgages and policies, consisting in a failure to ascertain and record the customers’ attitude to risk.
Insurers disputed liability, relying on the description of the excess in the insurance policy. They argued that even if the individual claims arose from a single originating cause or source, a separate excess of £25 million applied to each underlying claimant’s claim, so that in order to be recoverable there had to be a claim by a single claimant which exceeded the £25 million excess.
The court considered issues falling under three broad headings:
Whether the policy permitted aggregation of claims by different claimants against Standard Life arising from or in connection with or attributable to any one act, error, omission or originating cause or source
The judge acknowledged that where a contract of insurance is initially summarised in a slip which is later followed by a full policy wording, the general presumption is that the wording replaces the slip as the sole binding contract. The judge noted that a slip could not be used to alter or contradict a policy which supersedes it. The judge nevertheless relied upon Lord Justice Rix’s comment in HIH v New Hampshire  that the question of whether construction of the policy might be “educated” by a consideration of the slip depended upon the surrounding circumstances.
The judge considered that “the slip plays a pivotal role in the making of a contract of insurance such as this, and it would in this case be a triumph of form over substance if the court were to be denied such assistance as it may give in elucidating the terms of the bargain struck” and that “to ignore the slip in this case [would be] to deprive oneself of a valuable aid to the proper approach to construction of the policy”.
Considered as part of the factual matrix, the prominent appearance of the words “and/or claimant” which followed the words “each and every claim” in the slip (they had been added to the slip in manuscript by the underwriter during the placement of the cover in a previous year) suggested that they were likely to have been regarded by the parties as relevant to the extent of the insurer’s obligations, and therefore they should be given a meaning in the policy, despite their relegation to the policy schedule.
- The judge nevertheless cited several reasons which he considered militated strongly against an intention to impose an across the board per claimant excess, including:
- As a commercial contract, the policy ought not to be construed in a manner repugnant to its purpose, and a £25 million deductible did not “wear the air of a per claimant deductible” as no claim or series of claims by a single claimant was likely to reach that level.
- “No properly informed market professional would have regarded it as appropriate to introduce a per claimant deductible which applied across the board, as opposed to one targeted at a specific category of claim, as an underwriting measure designed to exclude that specific category or risk of cover.” There was no common market approach regarding financial institutions with an obvious exposure to mass retail claims, which involved exclusion of such claims by the setting of a per claimant deductible at a high level (which the judge considered to be an “inappropriately blunt instrument”).
- “If the intention had been to exclude from the scope of cover a particular category of claims, such as those arising from endowment policies … it would have been normal practice and more appropriately accomplished by specific exclusionary wording …”.
- The judge considered (having heard expert evidence) that in 1998 cover on a deductible per claim basis would have been readily available to Standard Life.
Notwithstanding these points, the judge considered that the words used in the schedule – and (he thought) more tellingly in the slip – should be given effect. He referred to the fact that “no witness at trial could think of any plausible purpose for the inclusion of the words “and/or claimant” in the excess provision in the slip other than the attempted achievement of a per claimant excess.” This demonstrated that in the relevant market there was a common understanding that the introduction into an excess provision of the word “claimant”, qualified by the words “each and every”, was likely to be associated with an attempt to procure that the excess operated by reference to each and every claimant. The judge therefore concluded that the policy did not permit the aggregation of related claims made by separate claimants.
Aon’s liability to Standard Life
Aon admitted that, for the 1998 renewal, Standard Life instructed them to renew the cover with an excess of £25 million and that Standard Life continued to require cover which responded to claims by different claimants, the redress for which would individually be well under the policy excess of £25 million but which together might exceed that figure where such claims were capable of aggregation. Aon accepted that it had advised Standard Life that such cover had been obtained.
The judge considered that Aon had been negligent in placing the 1998-2001 cover. He concluded that no reasonably competent broker could have come to the view that use of the words “each and every claim and/or claimant” (which had no recognised market meaning) to describe the excess in the slip and wording, were sufficiently clear to meet Standard Life’s requirements without exposing Standard Life to an unnecessary risk that the insurers might argue that the cover granted was on a per claimant basis only. In the “exceptionally weak” market of 1998, he considered that Aon could have placed cover with a straightforward deductible per claim permitting aggregation of the individual claims on similar terms (including premium).
The effect of the transfer of Standard Life’s business to a successor company under Part VII of the Financial Services and Markets Act 2000
Insurers also relied upon a Part VII transfer of Standard Life’s business to a successor company. They argued that because the relevant court orders transferred the policy itself to the successor company from its inception, the previous Standard Life company had never been a party to the insurance contract. It therefore had no cause of action to be transferred to the successor with regard to those claims in relation to which it had, prior to the order, paid compensation. The judge considered that it would be “astonishing and obviously unintended” if the relevant transfer orders had the effect that both original and successor company were divested of the opportunity of recovering under the policy. The successor Standard Life company had a right of action against insurers in relation to the claims paid by the original company.
This judgment serves as a useful reminder that in order to avoid disputes over the application of policy indemnity limits and deductibles, parties and their insurance brokers should be careful that the policy wording sets out clearly and unambiguously the agreed method of aggregation.
Bespoke wordings with no recognised market meaning can carry dangers of uncertainty of construction. In addition,the contents of the slip could be key: in some cases they may be considered at least as part of the factual matrix to elucidate the interpretation of the policy wording.
Despite the use of the “originating cause” wording (generally accepted as the widest, most inclusive form of aggregating wording) the addition of the words “and/or claimant” led to a perhaps unexpected result. In today’s landscape of contract certainty and slip audits, there should be less scope for such “slip ups”.