Liability insurance: Court of Appeal upholds first instance decision on apportionment

The Court of Appeal has upheld a High Court decision rejecting apportionment for mitigation costs between insured and uninsured interests as this was inconsistent with the clear wording of the policy.

Standard Life Assurance Limited, part of the Standard Life group, sought to recover from its PI insurers the costs of making an approximately £100 million cash payment into one of its funds which suffered a fall in unit prices of nearly 5% as a result of the collapse in the value of asset backed securities (“ABS”) following the bankruptcy of Lehman Brothers. Some of the marketing literature of the fund had referred to it as being invested in ‘cash’ or even as being the equivalent of putting money on deposit. In making the payment, Standard Life acted not only to stem claims but also to preserve its brand image and reputation.

High Court decision

In the High Court, one of the principle issues in the case was whether the payment into the fund fell within the definition of Mitigation Costs: "...any payment of loss, costs or expenses reasonably and necessarily incurred... in taking action to avoid a third party claim or to reduce a third party claim..." . The court rejected the insurers' submission that the wording of the clause should be construed to mean action taken for the purpose, in the sense of with a motive, of avoiding or reducing claims. Eder J found that the language of the clause clearly pointed in favour of intended "effect" or "result" rather than "motive" and commented that, as a matter of practicality, it would be odd for an insured's entitlement to recovery under a PI policy to depend on "motive". The words "necessarily incurred" set a high threshold but it was not necessary for Standard Life to show that there was a legal necessity to make the payment.

While describing their submissions as “powerful”, the court also rejected the insurers' alternative argument that where there are two equally dominant purposes being pursued in taking the relevant action, one of which is the preservation of uninsured interests (such as brand image), there should be an apportionment between the insured and uninsured interests. The court held that the question of whether mitigation costs should be apportioned would depend on the wording of the policy. In this case the wording was against a requirement of apportionment, the judge noting, for example, that the words "solely" or "exclusively" did not appear in the clause.

The court also considered the aggregation clause (in the context of the application of the deductible) which included the wording: "arising from or in connection with or attributable to any one act, error, omission or originating cause...” and concluded that the words "in connection with" were wider than the wording considered in Axa v Field, Municipal Mutual v Sea Insurance and Countrywide v Marshall. It indicated that it was unnecessary to show a direct causal relationship between the claims and the state of affairs identified as their "originating cause or source" as some form of connection between the claims and the unifying factor was all that was required. As such, the judge aggregated all actual and potential claims, the originating cause being that the fund was marketed as a safer investment than was the case.

Court of Appeal decision

The insurers appealed against the conclusion that Standard Life was able to recover in full provided that they could show that the mitigation costs claimed under the policy were expected and intended to avoid or to reduce third party claims regardless of whether they were also incurred for some other purpose. The insurers argued that the provision within a liability policy to recover mitigation costs is akin to a sue and labour provision found in marine policies (which provide for an apportionment in the case of expenditure incurred to avert damage to both insured and uninsured property).

It was held that as a matter of construction of the policy any apportionment would result in the defendant failing to honour its promise to indemnify for mitigation costs. As the payment was incurred for the insured purpose it could not be said to be in some part irrecoverable as mitigation costs merely because the payment achieved some other purpose – such an interpretation would be inconsistent with the plain wording of the policy. The court stated that there is no default position in relation to the apportionment of expenses which applies outside the field of marine property insurance as its use in that field derived from the assumption that the subject matter insured is fully covered by insurance (with the rationale for the principle being underinsurance). The concept of underinsurance does not make sense in the context of liability insurance where the extent of the liabilities to be incurred is unknown when the policy is agreed.

The Court of Appeal also rejected the subsidiary grounds of appeal whereby insurers argued that 36% of the cash payment was paid to investors who had no valid claims (as no misrepresentations had been made to them) and as such this amount should be irrecoverable. The court rejected the argument and found that the payment was indivisible and had been both 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.

Comment

Although this is a decision which involved a detailed examination of the factual background and the particular wording of the policy in question, the approach taken to the issue of cover for mitigation costs, and the Appeal Court’s views on the principle of apportionment, will be of interest to insurers and insureds alike. It is also of significance that the aggregation wording in question appears to be some of the widest considered in a line of well-known judgments on that issue.

Further reading: ACE European Group and Others v Standard Life Assurance Limited [2012] EWCA Civ 1713