Standard Life Assurance Limited v Oak Dedicated Limited and others
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Standard Life claimed from its professional indemnity insurers in respect of its liability to customers mis-sold mortgage endowment policies. By the time of the judgment, Standard Life had paid out over £100 million in compensation to over 97,000 investors. The individual claims, however, were relatively small, averaging under £10,000.
The policy provided liability cover of £75 million in excess of £25 million for claims made during the policy period (1998 to 2001). As is fairly typical, it allowed claims arising from "any one originating cause or source" to be aggregated as one claim which, in turn, would give rise to one indemnity limit.
Standard Life argued that there was a single originating cause – a systematic failure on its own part (and generally within the financial services industry) regarding the sale of mortgage endowment policies.
The issue at this hearing was the excess. The policy stated that in respect of each and every claim the insured would bear the amount stated in the schedule at its own risk. The schedule described the £25 million excess as applying "each and every claim and/or claimant". The same "and/or claimant" wording also appeared on the slip that preceded the policy wording.
Insurers argued that "and/or claimant" meant that a separate excess of £25 million applied in respect of each one of the 97,000 claimants. Only if an individual claim exceeded £25 million would the cover respond.
Standard Life sued the insurers. It also sued its brokers for arranging cover that did not clearly meet its requirements.
Mass retail claims
The judge agreed that, if insurers were right, it was virtually inconceivable that a claim by a single claimant would ever exceed the excess. Since Standard Life's principal exposure was to mass retail claims, the cover would be of very little use.
The insurance market had been alerted to the potential scope of such claims by the pensions review, which continued until mid-1998. In response, professional indemnity insurers began routinely to exclude claims arising from pension transfers and/or opt outs from occupational pension schemes.
But the judge found no evidence of a common market practice that imposed a blanket per claimant excess. The soft market conditions at the time would have made this very difficult to get away with.
Nevertheless, had insurers wished to limit their liability for endowment mis-selling, they could easily have included a specific exclusion, as they did with pensions claims.
In the judge's view, neither party gave any real attention to the phrase "and/or claimant" when it first appeared in the schedule to the insured's 1996 policy, even though it was not a standard or common wording.
During the 1998 placement, the phrase appeared on the slip circulated to insurers. In the policy wording subsequently issued, it appeared again, though relegated to the schedule.
Although it is generally assumed that, where a slip is followed by a policy wording, the parties intend the policy to supersede the slip, the slip can still form part of the surrounding circumstances against which the policy wording is construed. In this case, insurers subscribing to this risk would have had the slip, not the policy wording, in front of them when they made their decision.
The judge also had to take account of the actual words used. The "and/or claimant" wording had no recognised market meaning. The only plausible purpose for it was to achieve a per claimant excess.
He concluded that the policy did not allow related claims by separate claimants to be aggregated. The excess applied per claimant.
The claim against the brokers
Whatever his conclusion on the application of the excess, the judge would have found the broker negligent in placing the cover on these terms.
A broker has a duty to obtain insurance cover that clearly meets his client's requirements. Coverage is clear if it leaves no room for "significant debate".
The judge found that a reasonably competent broker would have concluded that the words "each and every claim and/or claimant" were insufficiently clear to avoid exposing the insured to an unnecessary risk that insurers might argue the excess applied on a per claimant basis.
The broker would also have appreciated how important it was in this type of policy to be able to aggregate similar claims from different claimants together for the purposes of the excess. There would have been no difficulty finding equivalent cover where the excess applied per claim.
The case shows how dangerous the copy and paste school of drafting can be. The phrase – which it appears no-one really understood – was first introduced in the schedule to the insured's 1996 PI policy and was simply reproduced on renewal.
The judgment is also a reminder of the broker's duty when obtaining insurance cover to avoid exposing the insured to an unnecessary risk of litigation. The judge saw this as a clear-cut case of unclear wording giving rise to significant debate so did not need to explore the limits of this duty.