In the case of Standard Life Assurance Ltd v ACE European Ltd & 10 ORS [2012] EWHC 104 (Comm), Mr Justice Eder held that Standard Life Assurance Limited (SLAL) was entitled to recover under its professional indemnity insurance policies (the Policies) from the defendant insurers (the Insurers) in respect of remediation payments made following a significant fall in value of the Standard Life Pension Sterling Fund (the Fund).
SLAL had marketed the Fund as a temporary home for short terms funds, with some literature even referring to it as being the equivalent of putting money on deposit. However, its assets included a large proportion of asset-backed securities whose value declined significantly after Lehman Brothers collapsed. In response to this, SLAL decided to switch to a different source of prices for these securities. This resulted in a one-off one-day fall in value of the fund of around 4.8% which led to a wave of complaints and claims from customers and independent financial advisers. Rather than meeting claims individually, SLAL decided instead to restore the 4.8% fall in value, injecting £82 million into the Fund, and also to compensate those customers who had left the Fund following the fall, paying out nearly £25 million. SLAL sought to recover those payments up to the indemnity limit of £100 million (subject to a £10 million deductible), arguing that these payments were “mitigation costs”, defined in the Policies as “any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid … or to reduce a third party claim … of a type which would have been covered under this Policy“.
The Insurers argued that SLAL had made these payments for the dominant purpose of reducing the damage to their brand, or, in the alternative, that this was an equally dominant purpose as seeking to avoid or reduce claims. The Insurers contended that, as a result, there should be an apportionment of the relevant mitigation costs between what they considered to be the respective uninsured and insured interests at risk, namely the damage to the brand and the potential claims. In addition, the Insurers asserted that a significant number of claims were of a type that would not have been covered under the Policies because SLAL was not liable per se for any fall in value of the Fund, and instead would only have been liable to those customers to whom there had been mis-selling.
Eder J held that SLAL’s motive in making the payments was irrelevant, and it did not matter that in addition to avoiding and reducing claims, the cash injection was also made in order to avoid or reduce brand damage. His reasoning was that “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.” Further, he expressed doubt whether there was any general principle of apportionment in a liability policy.
In the context of costs incurred by way of mitigation, Eder J stated that any possible application of apportionment must ultimately depend on a proper construction of the particular policy in any given case. In this instance, the wording pointed against any requirement of apportionment. As regards whether the claims were covered under the Policies, Eder J rejected the Insurers’ submissions, holding that 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.”
This case suggests that when considering professional indemnity policies, the courts will interpret mitigation costs widely, and will not seek to look behind payments to ascertain whether they were based on any ulterior motives, provided such payments were in fact made in taking action to avoid or reduce claims.