High Court decision on the recovery of “mitigation costs” under Professional Indemnity Insurance Policies

Standard Life Assurance Ltd v ACE European Group [2012] EWHC 104 (Comm)

The Claimant owned an investment fund containing a substantial proportion of asset-backed securities. Following the collapse of Lehman Brothers in 2008, the asset-backed securities became increasingly illiquid, making their valuation more and more subjective.
The Claimant decided to switch to a different source of prices, which resulted in a fall in value of units of the fund by 4.8%. There followed a mass of complaints, and due to the Claimant’s fears that many of its customers would make a claim, it made a cash injection into the fund of over £100 million.

The Claimant then sought to recover the cash injection from the Defendant, which was the Claimant’s professional indemnity insurer, on the basis that the cash injection constituted ‘mitigation costs’. Under the insurance policy mitigation costs were described as:

“…any payment of loss, costs or expenses reasonably and necessarily incurred by the assured in taking action to avoid or reduce a third party claim (or to avoid or reduce a third party claim which may arise from a fact, circumstance or event) of a type which would have been covered under this policy”.

The Defendant insurers argued that the payments were made for the dominant purpose of reducing damage to the Claimant’s brand, and not for avoiding claims and, as such, were not covered under the policy.

Mr Justice Eder rejected this argument and ruled in favour of the Claimant, deciding the correct approach was to look at the intended effect of the payment, not the motive behind it. The mitigation clause was not concerned with purpose, only with whether the intended result was to reduce claims.

The Judge also dismissed the argument that there should be apportionment to reflect the fact that there may have been mixed motives (to reduce claims, and to protect reputation). He also commented that insurers should not inappropriately attempt to apply the marine property insurance principle of apportionment to professional liability policies.