No apportionment in liability insurance
Posted: 4th January 2013
In circumstances where professional indemnity insurers (the insurers) argued that part of a major financial institution’s very substantial losses had been incurred with the objective of protecting its reputation and valuable brand, the Court of Appeal has ruled that principles of apportionment applied in the shipping and aviation fields have no place in other forms of liability insurance.
Standard Life Assurance Limited (SLAL) had the benefit of a professional indemnity insurance (PII) policy with a £100 million limit of indemnity. In the course of 2009, SLAL faced a substantial number of financial claims relating to a downgrade in the valuation of its Standard Life Pension Sterling Fund (the fund). SLAL also endured mounting public criticism of its conduct which it estimated would cause damage to its brand and reputation worth £300 million if allowed to continue.
Rather than let that happen, SLAL remedied the situation by making a cash injection into the fund to make up for its loss of value and also paid compensation to clients who had withdrawn their investments during the relevant period. The total loss came to £101,862,048 (the cash injection) and SLAL made a claim up to the limit of indemnity against the insurers.
At first instance, the insurers’ argued unsuccessfully that the cash injection fell outside the definition of ‘mitigation costs’ within the meaning of the policy. Their submission that SLAL should only recover 25% of its loss, on the basis that payment of the majority of the cash injection was motivated by a desire to protect its commercial reputation and brand, was also rejected.
On appeal, the insurers argued that such an outcome was permissible by analogy with the practices of averaging and apportionment prevalent in the shipping and aviation insurance industries. However, in dismissing the appeal, the court ruled that, as a matter of construction of the policy, apportionment was simply unavailable.
Going on to deal with the wider issues of principle raised by the case, the court stated: ‘It is clear from the authorities that the rationale underlying the principle of apportionment has no place in liability insurance…it would in fact be irrational and unprincipled to attempt to introduce it. In liability insurance, the assured recovers his loss up to the policy limit.’