(Re)Insurance End Of Year Review 2012

Apportionment

Whether payments by the insured to its customers were mitigation costs/ apportionment/interpretation on an aggregation clause

The insured operated a fund which suffered a one-day 4.8% fall in value. It subsequently estimated that a majority of its customers would have valid claims against it (essentially for mis-selling). It made certain payments (to customers and into the fund) which it sought to recover under the Mitigation Costs section of its professional indemnity insurance policy. The insurers denied cover. Eder J considered the following issues in this case:

(1) The policy provided cover for Mitigation Costs "reasonably and necessarily incurred by the Assured in taking action to avoid...or to reduce a third party claim". Insurers argued that the payments were not covered because they were made for the (dominant) purpose of avoiding or reducing reputational damage. The judge rejected that argument. The motive behind the payments was immaterial. The insured needed to show that the payments were made in taking action to avoid or reduce a third party claim. It did not matter if one motive of the insured was also to avoid or reduce reputational damage – that did not affect the insured's entitlement to cover. The insured also did not need to show that the payments were made to discharge a particular liability to a particular third party claimant.

(2) On the facts, the payments did fall within the scope of the Mitigations Costs clause. The insured was able to show on the facts that the fall of 4.8% was outside the reasonable expectations of any customers because of some inadequacy in the marketing literature which rendered the insured potentially liable.

(3) Insurers had also sought to argue that if there were two genuine and equally dominant purposes in making the payments (namely, to avoid or reduce reputational damage and also to avoid or reduce potential third party claims) there should be an apportionment of the Mitigation Costs. This was a novel claim in respect of a non-marine liability policy.

The judge accepted that the insurers had made "powerful" submissions but rejected the argument for apportionment. He was "at the very least, very doubtful" that there could be a general principle of apportionment in a liability policy, although he saw "much less objection in principle to the possible application of apportionment in the specific context of costs incurred by way of mitigation". However, the issue would turn on the particular wording of the clause in question and there was nothing in the wording of the Mitigation Costs clause in this case to support the apportionment argument. In particular, the words "solely" or "exclusively" did not appear in the clause.

(4) The policy contained an aggregation provision which provided (in relevant part) that "all claims...arising from or in connection with...any one act...or originating cause... shall be considered to be a single third party claim for the purposes of the application of the Deductible". Insurers argued that there was no one originating cause in this case because there was a wide variety of different types of complaints from customers. That argument was rejected by the judge.

The aggregation clause in the policy was "very wide wording". There is prior caselaw to support the view that "originating cause" opens up "the widest possible search for a unifying factor" (see Axa Re v Field [1996]). Furthermore, the phrase "in connection with" is extremely broad "and indicates that it is not even necessary to show a direct causal relationship between the claims and the state of affairs identified as their "originating cause or source," and that some form of connection between the claims and the unifying factor is all that is required".

The judge said that there was no difficulty here in aggregating the claims - the originating cause was that the fund had been marketed as a safer investment than it in fact was and that had been a continuing state of affairs even though the fund had been marketed in a number of different forms and through a number of different channels over the years.

The insurers subsequently appealed on point (3) above (apportionment). The Court of Appeal 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 the cover of 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 well.

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. 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: This appears to be the first case in which an argument has been run for apportionment in the context of a non-marine, non-property insurance policy. Although both the first instance court and the Court of Appeal have now reached the same conclusion, 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

This also seems to be the first case in which the phrase "in connection with" (in an aggregation clause) has been judicially considered. The case confirms that this phrase is considerably wider than other, more common, wording in aggregation clauses (such as "arising out of or from"/"resulting from"/"originating from") and this should be borne in mind when drafting policies. It remains to be seen whether the decision will be appealed to the Supreme Court.

Standard Life v Ace European Group & Ors [2012] EWHC (Comm) 104 and [2012] EWCA Civ 1713

Conditions precedent

Fraudulent claim and joint/composite policy/ breach of condition precedent

It was undisputed that the property owned by the first claimant (Mrs Parker) was substantially damaged by fire in December 2009. She sought to claim under an insurance policy which was taken out in July 2009 in her name (which was then Mrs Cooke). In September 2009, the second claimant (Mr Parker) was added as an assured to the policy. At the time of the fire, the claimants were living together (although not at the property) and they later married in April 2010.

The insurers denied liability on several grounds:

(1) They were entitled to avoid the policy because of two earlier fraudulent claims by Mr Parker (in 2002 and 2007). Teare J found, on the facts, that one of the earlier claims was not fraudulent but the other was. However, he also concluded that Mrs Parker was unaware that this dishonest claim had been made.

The judge went on to find that the fire had been caused by Mr Parker's wilful misconduct. The insurer did not allege that Mrs Parker was party to any conspiracy to set fire to the property. He therefore held that the insurer was entitled to avoid its obligation to indemnify Mr Parker (and in any event Mr Parker could not recover because of his involvement in the fire). Mr Parker was also liable to pay the insurer the costs of its investigation, plus simple interest and the insurer was entitled to restitution of the sums paid out, plus compound interest.

(2) Could the insurer also avoid against Mrs Parker? Although the schedule to the policy described Mr Parker as a "joint policyholder", the judge concluded that this was in fact a composite policy. That was because Mr and Mrs Parker had different interests in relation to the property. She was the owner but the judge said it was difficult to identify any interest at all of his in the property. Accordingly, her right to claim was not affected by Mr Parker's wilful misconduct.

(3) Could the insurer rely on a condition precedent in the policy? It was undisputed that it was a condition precedent that the insured provide all written details and documents which the insurer asked for. During its investigation, the insurer asked for copies of the claimants' bank statements, in order to verify a statement by Mr Parker that he had sufficient money in his bank to pay for the demolition and reconstruction of the property. The claimants refused to comply with this request and instead sent a letter from their bank (which confirmed there were sufficient funds for a rebuild).

Teare J held that this was a breach of the condition precedent (since the letter did not confirm how much was actually in the account) and it did not matter that no reliance was placed on this breach until service of the defence – he held that there had been no waiver of the...