Standard Life Assurance Ltd v Ace European Group and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Eder |
| Judgment Date | 01 February 2012 |
| Neutral Citation | [2012] EWHC 104 (Comm) |
| Docket Number | Case No: 2010 FOLIO 421 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 01 February 2012 |
[2012] EWHC 104 (Comm)
Mr Justice Eder
Case No: 2010 FOLIO 421
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
George Leggatt QC and Simon Salzedo QC (instructed by Addleshaw Goddard) for the Claimant
Alistair Schaff QC, Andrew WalesandJosephine Higgs (instructed by Mayer Brown International LLP) for the Defendants
Hearing dates: 11, 12, 13, 17, 18, 24, October 1, 2 November 2011
A. Introduction
This is an insurance claim by Standard Life Assurance Limited ("SLAL") which is a wholly-owned subsidiary of Standard Life Plc ("SL") and part of the Standard Life group of companies. The claim is brought against the defendants, SLAL's 2008/2009 professional indemnity insurers (the "Insurers"). It arises out of the operation of SLAL's Standard Life Pension Sterling Fund (the "Fund") which had been 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 ("ABS"). From 2007, as the credit crunch took hold, and especially after the collapse of Lehman Brothers in September 2008, ABS became increasingly illiquid making their valuation more and more subjective. The pricing sources upon which SLAL relied to value the ABS in the Fund became "stale" in the sense that there were no recent trades in particular securities upon which to base up to date prices. At this time, the total value of the Fund was in excess of £2 billion.
With effect from 14 January 2009, SLAL took the decision to switch to a different source of prices. The result was a one-off one-day fall in value of units in the Fund of around 4.8%. This generated a mass of complaints and claims from customers and independent financial advisers ("IFAs") and severe pressure from the Financial Services Authority ("FSA") and the media. It is important to note that although the one-day fall on 14 January 2009 was about 4.8% of the value of the Fund (equivalent to approximately £100 million), the overall fall over the entire period of the Fund was about 9.8% of the value of the Fund (equivalent to about £190m).
Between 14 January 2009 and 10 February 2009, SLAL intensively considered how best to respond to the issues raised both by customers and by the FSA. SLAL's research indicated that some 65% — subsequently reduced to 64% — (by value) of customers would have valid claims for compensation for such overall fall (essentially for "mis-selling" based on the literature – identified and referred to as B/C literature — produced by SLAL which misdescribed the Fund) equivalent to some £124m although importantly this assumed what was referred to as a "claim rate" or a "response rate" of 100% ie that 100% of such customers would in fact make a claim. (The figure of £124m is slightly confusing. It was originally arrived at by taking an estimated figure of 65% (not 64%) of £190m = £123.5m and rounding it up to £124m. Nevertheless, for present purposes and notwithstanding possible objections from mathematical purists, it was, as I understood, common ground that the figure of £124m was, in effect, to be treated as being based on the 64% figure. In this judgment, unless otherwise stated, I proceed on that basis.)
Specifically, during this period, SLAL was considering two main options viz either set up a complaints process and invite claims ("Option 1") or restore the one-day 4.8% fall in the Fund and again set up a complaints process and invite claims ("Option 2"). Importantly, it was recognised at the time at least by some individuals that Option 2 would, in effect, provide a "windfall" to those customers (ie the remaining 36% by value) who were thought not to have any valid claim ie of the sum of approximately £100m which would be injected under Option 2, some £36m would be paid into the Fund for the benefit of customers who were thought (at least by some) not to have any valid claim. In the event, SLAL decided to adopt Option 2. The reasons for so doing lie at the heart of this dispute.
Pursuant to that decision on 11 February 2009, SLAL announced that it would pay into the Fund and to customers who had left the Fund since the price reduction sufficient money to compensate customers in full for the 4.8% price fall. The amount paid into the Fund on 11 February 2009 was £81,999,935 and the amount paid to customers in respect of units sold between 14 January and 11 February 2009 was £19,862,113 making a total of £101,862,048 (the "Cash Injection"). Further payments have been made to customers who have pursued complaints for losses exceeding the 4.8% fall which totalled £4,785,256.89 as at 3 October 2011. I shall refer to all these payments, including the Cash Injection as the "Remediation Payments". SLAL now seeks to recover these Remediation Payments in whole or in part from the defendants, less its deductible and for such further payments as may be made arising from these events.
There is no dispute as to the validity of the policy but only as to coverage. In summary, SLAL says that all or some of these Remediation Payments in excess of the deductible are covered under Section 1 of the Policy as "Mitigation Costs". This is denied by the Insurers. In addition, the Insurers say that any claim is in any event excluded by Clause 18(iii) or otherwise falls within the deductible.
B. The Policy
"The Policy" consists of (i) a primary policy covering up to £25 million ("any one claim and in the aggregate, including costs and expenses") above a self insured deductible of £10 million ("each and every claim/loss including costs and expenses") and (ii) 3 excess policies for a total of a further £75 million. The excess policies adopt the wording of the primary policy. The Policy covers SL and all its subsidiaries (together, or where specificity is not required, "Standard Life") including SLAL.
The Policy contains a Schedule and three main sections. Section 1 is entitled "Professional Indemnity". The opening words state: "The indemnity provided by this Section of the Policy applies to the Assured's legal liability to third parties, all as more fully provided for herein." The Insuring Clause of Section 1 of the Policy states:
"This Policy provides an indemnity to the Assured in respect of the Assured's Civil Liability for any third party claims made against an Assured during the Policy Period, provided such claims arise out of the provision of (or failure to provide) Financial Services by the Assured …
This Policy shall also indemnify the Assured for Mitigation Costs."
The term " 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."
At the commencement of the trial, SLAL relied upon subparagraph (c). In particular, SLAL contended originally that the Remediation Payments were "compensatory damages" made pursuant to a "recommendation" of the FSA within the meaning of sub-paragraph (c) and recoverable on that basis. However, SLAL abandoned that part of its case after the close of the oral evidence and before closing submissions. In the event, SLAL advances its case simply on the basis that all or some of the Remediation Payments constituted "Mitigation Costs" which are defined in Clause 9 as follows:
"…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)."
Condition 6 of the Policy in effect required SLAL to seek the Insurers' consent to any proposed payments. It provides in material part as follows:
"The Assured must seek the consent of the Underwriters as soon as practicable if any proposed payment of Mitigation Costs exceeds the Deductible...
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