In Ace European Group & Ors v Standard Life Assurance Limited,  EWCA Civ 1713, the English Court of Appeal reaffirmed the principle that where a loss has multiple causes, the insured’s entitlement to an indemnity in respect of an insured cause is unaffected by the fact that there also exist equally effective uninsured causes. Liability insurers are therefore not entitled to an apportionment by reference to the insured and uninsured causes of the loss .
A copy of the judgment/opinion can be found here.
Standard Life marketed a fund as a temporary and secure home for short-term investments. In fact, investors’ money was placed in risky asset-backed securities.
Standard Life revalued the fund resulting in an immediate, one-off fall in the fund’s value. It was obvious to Standard Life that this would give rise to claims against it. To preempt these, and in an attempt to avoid further reputational damage, it made a lump sum payment into the fund and compensated a number of investors directly at a cost of UK£101,862,048.
Standard Life sought to recover the sum under its professional liability policy arguing it was a “Mitigation Cost”. Insurers denied the claim, arguing the sum (i) was paid with the dominant purpose of avoiding reputational damage and (ii) was not required to avoid or reduce prospective third party claims. Both arguments were rejected at first instance.
On appeal, although the insurers did not challenge the finding of coverage for Mitigation Costs, they argued that they were entitled to an apportionment of the Mitigation Costs between that portion which was insured (i.e. used to preempt third party claims) and that portion which was uninsured (i.e. intended to protect Standard Life’s reputation).
The appeal was dismissed. The court reasoned that concepts such as averaging and underinsurance, which insurers had sought to rely upon, were of no application to liability insurance. Accordingly, the rationale underlying the principle of apportionment was irrelevant and inapplicable in the liability context.
It was suggested at first instance that the insurers could have limited the recoverable Mitigation Costs by requiring them to relate “solely” or “exclusively” to a specific purpose. The Court of Appeal did not address this point specifically although it noted that apportionment in the liability context could produce significant uncertainty because the very nature of the liabilities that insurers will seek to carve out are often impossible to quantify. If insurers do wish to cover mitigation costs, they might also seek to control their exposure through the imposition of a sub-limit or strict provisions requiring insurer consent to any settlements.