Apportionment of claims under liability policies has been firmly rejected by the Court of Appeal in its ruling in ACE European Group & others v Standard Life Assurance Limited [2012] EWCA Civ 1713, handed down on 18 December.

Background

The appeal arose out of a claim under Standard Life’s professional indemnity insurance to recover millions paid out in mitigating the risk of anticipated pension fund mis-selling liabilities.  The fund was invested in a substantial proportion of asset backed securities, the value of which became increasingly doubtful following the credit crunch.  Standard Life decided to switch to a different source of pricing, resulting in a one day fall in value of units in the fund of around 5% or £100 million.  This caused a mass of customer complaints and pressure from the FSA to provide compensation.

In February 2009, Standard Life made a cash injection into the fund and agreed to remediation payments in the total sum of approximately £100 million, and sought to recover this amount as mitigation costs under its professional indemnity policy.  Insurers claimed that the dominant purpose of the cash injection was to minimise brand damage, rather than to avoid or reduce insured third party claims, and in the alternative that apportionment should be made to reflect concurrent causes.

Eder J. rejected this argument at first instance and held that Standard Life was entitled to recover the entire payment from insurers.

Appeal

The Court of Appeal refused to reopen the issue of what constituted “mitigation costs” but allowed permission to appeal on two grounds: whether the judge was wrong to find that payment of mitigation costs should not be apportioned, and whether Standard Life could recover windfall payments benefiting customers to whom liability may not have been established.

Insurers argued that where a payment was made for multiple purposes, some insured and others not, the level of indemnity should be reduced applying an averaging approach more commonly recognised in marine insurance policies.

The Court of Appeal held that the language of the policy prohibited differentiation between payments for mixed motives and there is no established principle that apportionment applies to liability policies. The whole payment was recoverable as incurred for the insured purpose of mitigating Standard Life’s loss, regardless of a secondary intentional objective of protecting reputation.

The judgment also casts doubt upon views expressed in previous authorities that apportionment should apply in the context of aviation insurance.

Comment

The case highlights the potential scope of liability for professional indemnity insurers and limits the extent to which apportionment can be applied outside a marine insurance context. The language of the policy will be crucial and the possibility of apportionment had the words “solely” or “exclusively” been included in the mitigation costs clause was debated at first instance.

The decision provides some assurance to financial institutions often faced with significant pressure in the current climate to address potential claims pro-actively, to minimise regulatory risks and preserve market confidence.

For further information, please contact Georgina Squire oor the Partner with whom you usually deal.