Ace European Group & Ors v Standard Life Assurance Ltd

Where a liability policy indemnifies mitigation costs, an indivisible payment reasonably and necessarily incurred to avoid or reduce third-party claims of a type covered by the policy is recoverable in full, subject to applicable limits and exclusions. Recovery is not reduced merely because the payment also protects an uninsured interest, such as reputation, or because some liabilities exceed the policy limit. The marine-property rule of averaging rests on underinsurance and has no general application to liability insurance. A payment remains recoverable where it gives some recipients a windfall, if the payment could not have been reduced while achieving its mitigation purpose.

Standard Life Assurance Ltd sought indemnity from its professional indemnity insurers for payments made after a fall in the value of its pension fund. The payments restored the fund’s value and compensated certain customers. The policy covered mitigation costs incurred to avoid or reduce third-party claims of a type covered by the policy.

Eder J held that the payments fell within the definition of Mitigation Costs and were recoverable in full, subject to the deductible: [2012] EWHC 104 (Comm). The insurers appealed, arguing that the payments should be apportioned between insured claims, excess liabilities and brand damage, and that payments conferring windfalls were irrecoverable. The central issue was whether the policy or any general principle required such apportionment.

Appeal dismissed. Lord Justice Tomlinson gave the judgment, with Lord Justices Rimer and Longmore agreeing.

1. Construction of the policy. The policy promised to indemnify the assured for Mitigation Costs. The Cash Injection satisfied the definition and was one indivisible payment incurred for the relevant purpose. The promise was to pay all costs falling within the definition, not merely an apportioned part. A concurrent purpose of avoiding brand damage therefore did not reduce recovery. Apportionment would contradict the clear language of the insuring clause: paras [22]-[25].
2. No general apportionment rule. The marine-property rule of averaging derives from underinsurance. Section 78(3) of the Marine Insurance Act 1906 and the related provisions concerning the measure of indemnity did not support transferring that rule to liability insurance. In Joyce v Kennard (1871) LR 7 QB 78, the proposed extension had been rejected. The observations of Rix J in Royal Boskalis [1997] Lloyd's Reinsurance LR 523 were treated as erroneous, while the observations of Phillips LJ in the Court of Appeal decision, [1999] QB 674, were accepted as supporting the limited marine-property rationale.
3. Policy limits and claim type. A liability insured is not treated as its own insurer for liabilities above the policy limit. Claims are indemnified up to the limit without proportional reduction, and mitigation expenditure directed to avoiding or reducing such liabilities is not apportioned. The policy test concerned claims of a type that would have been covered, rather than claims that would necessarily fall within the indemnity after application of the limit: paras [44]-[48].
4. Necessity and windfalls. The trial judge’s findings that the payments were reasonably and necessarily incurred were accepted. Necessity was assessed in light of the stipulated purpose and the commercial realities, not solely by reference to legal obligation. The Cash Injection could not have been made in a smaller amount while restoring the fund’s value and achieving its purpose. Any windfall to some investors was therefore irrelevant to recoverability: paras [19], [50]-[51].

1. Court of Appeal (Civil Division) dismissed the insurers’ appeal from the judgment of Eder J: [2012] EWCA Civ 1713.
2. High Court of Justice, Queen’s Bench Division, Commercial Court held that the remediation payments, including the Cash Injection, were recoverable Mitigation Costs, without apportionment and subject to the deductible: [2012] EWHC 104 (Comm).