Ace European Group and Others v Standard Life Assurance Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Tomlinson,Lord Justice Rimer,Lord Justice Longmore |
| Judgment Date | 18 December 2012 |
| Neutral Citation | [2012] EWCA Civ 1713 |
| Docket Number | Case No: A3/2012/0421 |
| Court | Court of Appeal (Civil Division) |
| Date | 18 December 2012 |
[2012] EWCA Civ 1713
Lord Justice Longmore
Lord Justice Rimer
and
Lord Justice Tomlinson
Case No: A3/2012/0421
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION, COMMERCIAL COURT
Mr Justice Eder
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Alistair Schaff QC and Mr Andrew Wales QC (instructed by Mayer Brown International LLP) for the Appellants
Mr George Leggatt QC and Mr Simon Salzedo QC (instructed by Addleshaw Goddard LLP) for the Respondent
Hearing dates : 16, 17 October 2012
The Appellants, whom I will call "the Insurers", were for the policy year 2008/2009 the professional indemnity insurers of the Respondents, Standard Life Assurance Limited, to whom I shall refer as either "SLAL" or "the Assured". The policy, or strictly a primary policy and three excess policies, afforded cover in total of £100M above a self-insured deductible of £10M. The indemnity given was in respect of the Assured's civil liability for any third party claims made against the Assured during the policy period arising out of the provision of or failure to provide financial services by the Assured. Both "civil liability" and "financial services" are defined terms. Civil liability is defined to mean:-
"(a) a legally enforceable obligation to a third party for compensatory damages in accordance with an award of a court or tribunal by whose jurisdiction the Assured is bound; or
(b) a legally enforceable obligation to a third party for compensatory damages acknowledged by an agreement made, with the consent of the Underwriters, such consent shall not be unreasonably withheld or delayed, between the Assured and third party in settlement of a claim; or
(c) any compensatory damages pursuant to any award, directive, order, recommendation or similar act of a regulatory authority, self regulatory organisation or ombudsman or following arbitration or other alternative dispute resolution processes whose findings are binding upon the Assured.
…
Compensatory damages shall include civil compensation or damages, compensatory restitution, any other compensatory payment of money or delivery of property of any kind and any settlement agreed by the Underwriters."
The indemnity provided by the insuring clause includes the Assured's defence costs and expenses, claimant costs and (if the Assured is liable therefor) co-defendant costs. The insuring clause also provided:-
"This Policy shall also indemnify the Assured for Mitigation Costs."
"Mitigation Costs" is also a defined term. Mitigation Costs are defined as:-
"Mitigation Costs shall mean 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 (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 (notwithstanding any Deductible amount)."
In 2009 SLAL faced the prospect of multiple claims arising out of its provision of financial services, namely, the manner in which it had sold and operated its Standard Life Pension Sterling Fund, hereafter "the Fund". Between 14 January and 10 February 2009 SLAL faced mounting and damaging criticism of its conduct in this regard. The immediate catalyst for that criticism was that with effect from 14 January 2009 SLAL adopted a new method of valuing the asset backed securities in the Fund, different from that which had hitherto been used, thereby producing an immediate one-off one day fall in value of units in the Fund of around 4.8%. The Fund had been marketed to many investors as a temporary home for short-term funds in a manner which suggested that it was invested in cash or the equivalent of putting money on deposit. It was a surprise to many to find that their money had been invested in asset-backed securities, let alone that a new and more reliable method of valuing them needed to be adopted. It is no exaggeration to say that SLAL faced something of a crisis. In order both to avoid and to reduce the claims, both actual and potential, and to avoid or reduce further damage to the Standard Life brand, on 10 February 2009 SLAL resolved to make a lump sum payment into the Fund which would have the effect of restoring its value to what it had been before the revaluation. It resolved also to compensate those who had sold units in the Fund between 14 January and 11 February 2009 on the same basis, i.e. by making a payment to them which restored the value of their units to what it had been before the reduction. The lump sum payment into the Fund, £81,999,935 and payments to customers in respect of units sold between 14 January and 11 February, £19,862,113, in total £101,862,048, was referred to as "the Cash Injection".
SLAL sought to recover the Cash Injection, and some associated payments to which I will refer hereafter, from the Insurers. Insurers denied liability.
The key issue at trial in the Commercial Court was whether the Cash Injection fell within the definition of Mitigation Costs. Insurers argued that all or some of the Cash Injection should properly be regarded not as made for the purpose of avoiding or reducing claims, but rather as made for the dominant purpose of avoiding or reducing potential brand damage. The judge, Eder J, found that the Cash Injection was reasonably and necessarily incurred by Standard Life in taking action to avoid or reduce third party claims of a type which would have been covered under the Policy. The judge also found however that another, equally efficacious intended objective of making the Cash Injection was to avoid brand damage.
The Insurers argued at trial that, consistent with those findings, there should be an apportionment of the Cash Injection between "the insured and uninsured interests at risk and sought to be preserved by the Cash Injection". SLAL had, submitted Insurers, assessed the brand damage if they did not make the Cash Injection as likely to be of the order of £300M. SLAL had, moreover, assessed the potential liabilities to pay third party claims that were averted by the Cash Injection as substantially exceeding the policy limit of £100M. It followed, argued Insurers, that in broad terms the amount of the Cash Injection which should be regarded as properly referable to the avoidance of claims within the policy limit of £100M was 25%.
Eder J held that no apportionment was required and that SLAL was entitled to recover the full amount of the Cash Injection, subject only to the deductible. At paragraph 185 of his judgment he said this:-
"… It is my conclusion that in order to succeed and so far as this part of the definition of Mitigation Costs is concerned, SLAL must show that the costs claimed were expected and intended to avoid or to reduce third party claims of the stipulated type; and SLAL will be entitled to recover in full even if such costs were also incurred for some other purpose."
It is against that conclusion that Insurers appeal. It is common ground for the purposes of this issue that the Cash Injection met the Policy's definition of Mitigation Costs.
There is a subsidiary ground of appeal to the effect that part of the Cash Injection should be irrecoverable as representing a payment to persons who have no claim because no misrepresentation had been made to them as to the nature of the Fund. Reinstatement of the Fund to its 14 January value had to that extent conferred on such holders of units in the Fund a windfall which could not be regarded as a payment reasonably and necessarily incurred in taking action to avoid or reduce third party claims.
The judge was faced with a major contest on the facts and the issues which arise on appeal represent only a fraction of the coverage and other legal issues which he had to resolve. His judgment is very long, running to 90 single spaced pages and 264 paragraphs. The curious can find it at [2012] EWHC 104 (Comm). In order to set the issues on this appeal into their factual context it is necessary only to put a little flesh on the bones which I have already sketched out. In doing so I have borrowed heavily from the parties' helpful skeleton arguments prepared for the appeal.
The Fund was launched in July 1996 and, as already indicated, marketed as a temporary home for short term funds, with some literature referring to it as being invested in "cash" and even as being the equivalent of putting money on deposit. However, by 2007 the Fund's assets included a substantial proportion of asset backed securities. By early 2008 the Fund was valued at approximately £2.3 billion, around 50% of which was invested in asset backed securities and floating rate notes.
From late 2007 and especially after the collapse of Lehman Brothers in September 2008, market prices of asset backed securities began to fall and securities of that type became increasingly illiquid, making their valuation more and more subjective. Units in the Fund fell in value from time to time during this period. With effect from 14 January 2009 Standard Life switched to new sources of prices, resulting in a one-off one day fall in the value of units in Fund of around 4.8%. The overall fall in value of the Fund over its entire life from launch up to and including 14 January 2009 was about 9.8%, equivalent to about £190M.
Following the one day fall in value on 14 January 2009, Standard Life received widespread criticism in the media, a mass of complaints...
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