Insurance And Reinsurance - Weekly Update - 21 December 2012

Standard Life v Ace European

Court of Appeal decides whether apportionment principle applies in liability cases

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1713.html

The first instance decision in this case was reported in Weekly Update 04/12. The insured operated a fund which suffered a one-day 4.8% fall in value. It subsequently paid customers who it estimated would have a valid claim against it and sought to recover those payments under the Mitigation Costs section of its professional indemnity insurance policy.

At first instance, Eder J held that these payments fell within the definition of Mitigation Costs as they were "reasonably and necessarily incurred..in taking action to avoid...or to reduce a third party claim". It did not matter that one motive was to avoid or reduce reputational damage.

The judge also rejected insurers' argument that if there are two equally dominant purposes in making a payment, there should be an apportionment of the Mitigation Costs. The insurers appealed on that point.

The Court of Appeal has now held that, as a matter of construction of the policy, the insured was entitled to all its Mitigation costs provided one purpose behind the payment was covered under the policy. It did not matter if the payment also achieved another "incidental objective".

Although not strictly required to do so, the Court of Appeal also considered the insurers' wider argument that cover for mitigation costs is analogous to a sue and labour provision traditionally found in marine insurance policies and so a principle of apportionment should be implied into liability insurance policies, as it is for marine policies.

That argument was rejected by the Court of Appeal. It held that marine insurance policies are different from liability policies in that the adjustment of losses under such policies proceeds on the assumption that the subject matter insured is fully covered by insurance. Where there is under-insurance (and so the insured is "his own insurer" for the uninsured balance) apportionment is required in order to ensure that insurers only contribute to the extent of their interest in the property. (Tomlinson LJ noted that "even within the confines of marine property insurance, there is no warrant for bringing into the averaging calculation interests which are not the subject of the insurance under which the claim is made"). The Court of Appeal found that the extension of the apportionment principle to liability insurance, where the extent of the liabilities to be incurred is unknown when the policy is agreed, would be "irrational and unprincipled".

The Court of Appeal also cast doubt on the view of Rix J in Kuwait Airways Corporation v Kuwait Insurance Company [1996] that apportionment could apply in a non-marine context – specifically in that case, aviation insurance. Tomlinson LJ said: "It may be that aviation property losses are traditionally adjusted in the same manner as marine property losses, but there is no finding to that effect in the Kuwait Airways case, and thus no immediately discernible rationale for the extension of the rule from marine property insurance to aviation property insurance".

COMMENT: Although both the first instance court and the Court of Appeal have now reached the same conclusion on apportionment, at first instance the possibility was mooted that the use of the words "solely" or "exclusively" in the clause might have supported a conclusion that there should be apportionment. There was no reference to that point, though, in the Court of Appeal. It remains to be seen whether the decision will be appealed to the Supreme Court.

Valiant Insurance v Sealion Shipping

Insurers appeal on aggregation point

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1625.html

The first instance decision in this case was reported in Weekly Update 03/12. Vessel owners sought an indemnity under a Loss of Hire insurance policy. The policy provided that periods of deductible had first to exceed "14 days any one occurrence, 21 days in respect of machinery claims" before the respective loss of hire could be recovered. It was agreed that this was a machinery claim and that there had been three occurrences here (the insured had tried to deal with the initial breakdown by installing a substitute...