Apportionment In Liability Policies – Take Care With Your Wordings

The Court of Appeal has ruled in Ace European Group & Ors v Standard Life Assurance Ltd1 that extending the principle ofapportionment to recoveries under a liability policy between insured and uninsured losses was "irrational and unprincipled".Accordingly, only careful and precise drafting will permit aninsurer to ensure the indemnity is apportioned.

Background to the decision

This dispute arose out of the operation of Standard Life's Pension Sterling Fund (the Fund), which by 2007 included a substantial proportion of asset backed securities. Much of the literature marketing the Fund implied that this was a cash fund in the narrow sense with its capital value protected. Asset backed securities are, however, less liquid and their value subject to market movement. Following the collapse of Lehman Brothers and the onset of the credit crunch in 2008, which rendered the Fund increasingly difficult to value, Standard Life took the decision to switch to a different source of pricing data, and therefore valuation. The result was a fall in value of units in the Fund of around 4.8%, equivalent to a shortfall of approximately £100 million. Standard Life was concerned that it was vulnerable to mis-selling complaints on the basis that the customer facing literature had failed to make it clear that the capital value of the Fund was not protected.

Standard Life considered setting up a claims process and inviting any claims to be met on a case by case basis. However, it subsequently decided that a better option was to restore the shortfall by taking steps to inject c.£102 million into the Fund (the Cash Injection) to restore the shortfall. The decision to make the Cash Injection was also motivated by Standard Life's estimate that not doing so would cost it c.£300 million as a result of consequential brand damage.

Standard Life then sought to recover the Cash Injection under its professional indemnity policy which, as drafted, provided an indemnity in respect of third party claims. The policy contained a limit of £100 million and included cover in respect of "Mitigation Costs." "Mitigation Costs" were defined as "any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid a third party claim or to reduce a third party claim... of a type which would have been covered under this Policy...".

Insurers denied liability on the basis that the Cash Injection did not fall within the definition of "Mitigation...