Australia: FI: UK decision provides guidance for FIs with Mitigation Costs clauses

Insurance update

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


Standard Life operated a Life Pension Sterling Fund, which included a substantial proportion of asset backed securities. From 2007, asset backed securities became increasingly illiquid and, with effect from 14 January 2009, Standard Life took the decision to switch to a different source of prices. This led to a one-day fall of 4.8 per cent in value of units in the fund. Following complaints by customers, Standard Life concluded that some 64 per cent (by value) of customers (worth £124 million) would have mis-selling claims. Standard Life decided that it would restore the 4.8 per cent fall and then invite claims, and it paid those sums into the fund.

Standard Life sought to recover the payments from its liability insurers. The policy was for £100 million and covered Mitigation Costs defined as "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". There was a deductible of £10 million in respect of a single claim, defined as "All claims or series of claims (whether by one or more than one claimant) arising from or in connection with or attributable to any one act, error, omission or originating cause or source, or the dishonesty of any one person or group of persons acting together". The assured claimed that its payment constituted Mitigation Costs. Eder J gave judgment for Standard Life.

  1. The payments were a "cost" and/or a "payment of loss". The Clause did not import the concept of "purpose" but was concerned only with whether the intended effect or result was to reduce the number of claims. It would suffice that the payment was reasonably and necessarily incurred in taking action to avoid or to reduce one or more third party claims otherwise covered by the policy.
  2. On the evidence, the payments were made in order to avoid or to reduce third party claims of a type which would have been covered under the Policy within the meaning of "Mitigation Costs".
  3. The sum recoverable was not to be apportioned by the consideration that Standard Life may have had the mixed motive of reducing claims (insured) and protecting its own reputation (uninsured). The argument for apportionment was novel outside the field of marine insurance and, in particular, in the context of liability insurance, and was largely derived from the principle of average which applied to under-insurance
  4. All of the actual and potential claims could be aggregated so that Standard Life had to bear only one deductible. All of the claims that Standard Life faced arose out of the (actual or alleged) misrepresentation of the nature and risk profile of the fund and that was a "unifying factor" justifying aggregation. Clause 2 was very widely worded and it was difficult to envisage a more widely drawn form of aggregation clause. The phrase "in connection with" was extremely broad and indicated that it was 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 was all that was required.

The liability insurers have been given leave to appeal. However, the case is unlikely to be heard until autumn.


Financial institutions in Australia are regularly faced with a similar dilemma – where they become aware of circumstances and a claim has not materialised so the Insuring Clause is not yet triggered. Given the role of regulators in Australia and the breach reporting legislation, having to settle matters without actual complaints or claims by customers is more than a choice for many insureds subject to regulatory supervision.

The broad interpretation of the Mitigation Costs Clause in this case would give the financial institutions some comfort should a similar clause be found in the policy. Justice Eder in giving the clause a broad construction favoured the insured, however, each case will of course turn on the particular clause in question and the relevant facts. We await the outcome of the appeal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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