We previously commented on the first instance judgment in Standard Life Assurance Limited v Ace European Group (and Ors) [2012] EWHC 104 (Comm) in which 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 (click here to read our full report). This week the Court of Appeal unanimously dismissed the appeal brought by the professional indemnity insurers, confirming the position taken by Eder J at first instance on the limited points on which leave to appeal had been granted ([2012] EWCA Civ 1713).

1. Background

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 pension fund with funds including asset backed securities. These securities became difficult to value during the credit crunch and SLAL decided to switch to a different source of prices. This resulted in a one-off fall in the value of units in the fund. Following customers’ complaints, SLAL decided to reverse the effect of the fall by injecting cash into the fund (the Cash Injection) and compensating clients who had left since the price reduction (together the Remediation Payments, which exceeded £100 million). SLAL sought to recover the Remediation Payments from Insurers.

At first instance Eder J considered the recoverability of the Remediation Payments under SLAL's professional liability policy and, in particular, whether SLAL's purpose in making Remediation Payments was relevant. 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.

Eder J held that SLAL'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. He held that SLAL was entitled to recover the Remediation Payments subject to a single deductible of £10 million.

Insurers sought permission to appeal against Eder J's findings that: (a) the Cash Injection was not made with the dominant purpose of avoiding or reducing brand damage; and (b) that the Cash Injection was "necessary" to avoid or to reduce third party claims when considering the definition of Mitigation Costs.  Permission to appeal in relation to these grounds was refused.

Insurers were granted permission to appeal on two ancillary grounds that: (a) apportionment between insured and uninsured interests was required and thus SLAL was not entitled to recover the full amount of the Cash Injection; and (b) part of the Cash Injection should be irrecoverable as that part represented a payment to investors that SLAL had decided had no actionable claims against it ("a windfall").  Lord Justice Tomlinson noted that these issues represented a "fraction" of the coverage and other legal issues which Eder J had to resolve at first instance.

2. Decision

The Court of Appeal unanimously dismissed Insurers' appeal on the basis that: its position on apportionment was untenable as matter of construction of SLAL's policy and the principle of apportionment has no application in liability insurance; and the fact that some investors may have received a windfall was irrelevant for the purpose of recoverability of the Cash Injection.  

3. Apportionment

Insurers' main ground of appeal failed as Eder J at first instance had found that the Remediation Payments (including the Cash Injection) met the criteria to satisfy the definition of Mitigation Costs under the policy and Insurers had promised to pay Mitigation Costs.  Therefore, the apportionment of these costs would amount to Insurers failing to honour the promise to pay all costs which were Mitigation Costs, subject to exclusions and limits in the policy.

This finding was sufficient to dispose of the appeal on this issue but Tomlinson LJ went on to consider the legal position of apportionment in liability insurance.  Insurers said that there was a rule of law (unless the policy provided otherwise) which requires apportionment.  They drew upon marine insurance law and in particular the Suing and Labouring Clause under section 78 of the Marine Insurance Act 1906 which prescribes the application of average in the case of expenditure incurred to avert damage to the insured and uninsured property.  Tomlinson LJ said: "There is no default position applicable outside the field of marine property insurance", noting that the approach in the field of marine property insurance relies on the assumption that the subject matter assured is fully covered by insurance. Apportionment had no application (and would in any event be unworkable) in the field of liability insurance where the insured recovers his loss up to the policy limit and the extent of the liabilities to be incurred is unknown when the policy is placed.  The fact an insured may prove to be inadequately insured does not come about as a result of deliberately underestimating the position as any liability will not have been incurred (or known) at placement of the policy.  

4. Windfall

Insurers advanced a subsidiary ground of appeal to the effect that part of the Cash Injection should be irrecoverable as representing a payment to persons who have no claim because no misrepresentation had been made to them (it was said that 36% of the Cash Injection was paid to customers who were not perceived as having valid claims). Therefore, it was argued, reinstatement of the fund had conferred a windfall on those persons which could not be regarded as a payment reasonably and necessarily incurred in taking action to avoid or reduce third party claims.

Tomlinson LJ thought this ground of appeal "quite hopeless".  Eder J had found that payment was reasonably and necessarily incurred in taking action to avoid or reduce third party claims of a type which would have been covered under the policy.  Tomlinson LJ said that the payment was indivisible and could not have been made in a reduced amount if it were to achieve its purpose. The fact that it produced a windfall to some investors was irrelevant to recoverability.  

5. Comment

As noted in our commentary on the first instance judgment, the case should provide some comfort for insureds with policies containing similar mitigation costs wording who take mitigation steps in a crisis to reduce the risk of third party claims but also to protect their brand image.  That said, in light of the first instance judgment, this has been an area of market focus by insurers and brokers alike with wordings seeking to achieve apportionment between payments for competing purposes  and/or including limiting language such as "solely" or "exclusively".

It remains to be seen whether Insurers seek to appeal the decision to the Supreme Court.