Standard Life Assurance Ltd v Ace European Group & Ors

Payments made under a professional indemnity policy may qualify as Mitigation Costs where they are reasonably and necessarily incurred with the expected and intended effect of avoiding or reducing covered third-party claims. The test concerns intended effect, not the insured’s motive. A payment may qualify even if it also protects an uninsured commercial interest, such as reputation, and need not discharge a particular claimant’s liability. “Necessarily” imposes a high threshold, assessed in context and with regard to practical realities. The insured must establish that the claims were of a type covered by the policy, including potential liability arising from mis-selling. A fair-valuation exclusion does not apply merely because valuation formed part of the history of the loss. A broadly worded aggregation clause may permit claims arising from a continuing misrepresentation to be treated as one claim.

Standard Life Assurance Ltd claimed indemnity from its professional indemnity insurers for remediation payments made after a substantial fall in the value of units in its Pension Sterling Fund. The Fund had been marketed as a cash-like investment but contained significant asset-backed securities whose valuation became uncertain during the credit crisis.

Standard Life first accepted a fall in unit value, then paid approximately £102 million to restore the 4.8 per cent fall and made further customer payments. It claimed that these were Mitigation Costs. The insurers disputed coverage, relying on the policy definition, the fair-valuation exclusion in clause 18(iii), and the aggregation and deductible provisions.

The principal issues were whether the payments were intended and necessary to avoid or reduce covered third-party claims, whether apportionment was required because the payments also protected the brand, whether the exclusion applied, and how the claims should be aggregated.

1. Mitigation Costs. The policy required four elements: a payment of loss, costs or expenses; reasonable and necessary incurrence; action intended to avoid or reduce third-party claims; and claims of a type that would have been covered. The remediation payments satisfied the first element.
2. “Reasonably” is objective. “Necessarily” imposes a high threshold, but its meaning depends on context and must have regard to practical realities. It does not mean that the payment had to be legally compulsory or that no alternative course was possible. Clause 6 did not create a separate route to coverage or reverse the burden of proof.
3. The phrase “in taking action to avoid or to reduce” concerns intended effect or result, not motive. The payments therefore qualified if Standard Life expected and intended them to reduce the number or value of covered claims. Protection of Standard Life’s brand was an additional purpose, but did not defeat coverage.
4. Apportionment was not required. The policy did not require the payment to be made solely or exclusively for covered claims. The cases concerning marine sue and labour expenses, including Royal Boskalis Westminster NV v Mountain [1997] LRLR 523, did not establish a general apportionment rule for this non-marine liability policy. The wording of this policy pointed against apportionment.
5. The claims had to be of a type potentially covered by the policy. It was insufficient that customers had been surprised by the fall; there had to be a link to inadequacy in the marketing literature capable of giving rise to mis-selling liability. A payment did not, however, have to discharge a particular liability to a particular claimant.
6. Clause 18(iii) did not apply. Proper valuation was merely part of the history by which the loss was calculated, not an ingredient or cause of the alleged mis-selling liability. In any event, the Fund’s assets were not held by an “investment company” within the exclusion.
7. The aggregation clause was deliberately broad. The continuing representation that the Fund was safer than it was constituted an originating cause or source connecting the claims. All remediation payments therefore fell within a single deductible.
8. Standard Life was entitled to recover all Remediation Payments, subject to the single £10 million deductible and an appropriate declaration. Costs and consequential orders were left for agreement or further determination.