Standard Life Assurance Ltd v Ace European Group & Ors

This was a first instance commercial insurance dispute concerning whether payments made by Standard Life Assurance Ltd (SLAL) to remediate customers after a one‑day 4.8% revaluation fall in the Standard Life Pension Sterling Fund (the "Cash Injection" and related remediation) were recoverable under SLAL's professional indemnity policy as "Mitigation Costs" (Clause 9) or were excluded by Clause 18(iii) (a "fair valuation" exclusion) or otherwise caught by the deductible/aggregation provisions (Clause 2 and Condition 6).

The court held (1) on construction that "Mitigation Costs" required payments reasonably and necessarily incurred in taking action intended to avoid or reduce third‑party claims of a type that would have been covered by the policy; the relevant enquiry focuses on the intended effect of the action (its expected/resultant effect) rather than the insured's subjective commercial motive; the words "and necessarily" impose a high but context‑sensitive threshold; and apportionment between insured and uninsured purposes was not required by the policy wording.

(2) Applying those principles, the judge found that SLAL's remediation payments, including the £101,862,048 Cash Injection, were reasonably and necessarily incurred to avoid or reduce third‑party claims that would have been of a type covered by the policy (i.e. claims arising from alleged mis‑selling based on the marketing literature) and were therefore, in principle, recoverable as Mitigation Costs.

(3) The Insurers could not rely on Clause 18(iii): the relevant liabilities did not "involve or arise out of" a proper fair valuation in the sense that the valuation was the operative cause of the liability; and, in any event, the exclusion was inapplicable because the Fund’s assets were not held by an "investment company" within the sensible meaning of that phrase.

Finally the judge held that the claims could be aggregated under Clause 2 to a single third‑party claim for deductible purposes and ordered recovery of remediation payments subject to the single £10m deductible (and other consequential declarations and costs issues to be resolved).

Background and nature of the claim: SLAL ran the Standard Life Pension Sterling Fund (the Fund). As ABS and other floating rate notes came to represent a significant part of the Fund, pricing became illiquid and subjective. SLAL changed pricing sources which produced an overnight fall of about 4.8% on 14 January 2009. SLAL then considered two remediation options: (1) a case‑by‑case complaints process ("Option 1") or (2) restore the one‑day fall by a shareholder cash injection into the Fund and then invite complaints ("Option 2"). SLAL adopted Option 2 and paid £81,999,935 into the Fund plus £19,862,113 to customers who had sold units between 14 January and 11 February 2009 (total Cash Injection £101,862,048), and subsequently paid further remediation sums. SLAL claimed these Remediation Payments from its professional indemnity insurers as "Mitigation Costs" under Section 1 of the Policy; Insurers denied cover and relied also on exclusion Clause 18(iii) and on deductible/aggregation arguments.

Procedural posture and issues before the court: First instance hearing in the Commercial Court. The main issues identified and decided were:

• Construction of the policy definition of "Mitigation Costs" (Clause 9) and whether the remediation payments fell within it (including meaning of "in taking action to avoid or to reduce a third party claim", the role of motive, and the meaning of "reasonably and necessarily incurred").
• Whether apportionment was required where payments had dual purposes (insured claims mitigation and brand/reputational protection).
• Whether Exclusion 18(iii) (relating to "fair valuation") excluded liability.
• Aggregation for application of the deductible (Clause 2): whether all complaints/claims shared a common "originating cause or source".

Court’s reasoning and findings:

• Construction of "Mitigation Costs": the phrase covers payments of loss, costs or expenses reasonably and necessarily incurred in taking action that is expected or intended to avoid or reduce third‑party claims of a type that would have been covered by the policy. The focus is on the expected/resultant effect of the action, not on the insured's commercial motive. The requirement "and necessarily" raises a high threshold assessed in context.
• Motive: the judge rejected the insurers' argument that an insured's dominant commercial motive (brand protection) defeats cover. If the action was taken because it was expected to avoid or reduce covered third‑party claims the payments can be Mitigation Costs even if protecting reputation was also a motive.
• Necessity and reasonableness: on the facts the court found SLAL honestly and reasonably believed that reversing the 4.8% fall would reduce the number and quantum of complaints and that the Cash Injection was reasonably and, in the commercial context, necessarily incurred to avoid or reduce such claims.
• Apportionment: the judge declined to import an apportionment requirement into the policy wording; if the payments were reasonably and necessarily incurred to avoid or reduce covered claims they were recoverable in full despite also serving other purposes.
• Exclusion 18(iii): the clause was construed narrowly; a lawful exercise of fair valuation that merely produced the published price did not cause a mis‑selling liability and so liabilities for mis‑selling did not "involve or arise out of" fair valuation in the exclusion’s sense. Separately, SLIF was not an "investment company" within the sensible meaning of the exclusion, so the exclusion did not apply.
• Aggregation: Clause 2's wording was wide. The court held the mis‑selling and related complaints were attributable to a single continuing state of affairs (representations about the Fund’s character) and therefore aggregated for deductible purposes; a single £10m deductible applied.

Outcome: The judge declared SLAL entitled, in principle, to recover the Remediation Payments (including the Cash Injection) as Mitigation Costs subject to the Policy’s single deductible of £10m and ordered parties to agree appropriate consequential orders and costs, failing which the court would determine those matters.

First instance judgment: The claimant's claim is successful in principle. The court held that the Remediation Payments (including the £101,862,048 Cash Injection) were "Mitigation Costs" within the policy definition because they were reasonably and necessarily incurred in taking action expected to avoid or reduce third‑party claims of a type covered by the policy; the insured's commercial motive to protect brand did not defeat cover; exclusion 18(iii) did not apply; and all claims could be aggregated under Clause 2 so that a single £10m deductible applied. The court therefore granted recovery subject to that deductible and directed agreement on consequential relief and costs.