If Jane Austen had been an Insurance Claims Manager, she might have said, it is a truth universally acknowledged, that a policyholder who sustains an insured loss must take all measures reasonably within its power to mitigate it. Quite so, but what does this mean in practice? Must the insured incur an uninsured loss in order to avoid or reduce a claim upon insurance? Just how far is the insured obliged to go in mitigating its loss, at common law or pursuant to an express policy obligation and what, if anything, can it claim from its insurer in respect of the costs of doing so?
It is sometimes said that the obligation cast upon the insured to mitigate an insured loss is properly regarded as a manifestation of the law relating to causation: the point being that a failure to mitigate when it was reasonable to expect the insured to do so means that subsequent loss will not have been proximately caused by the happening of the event insured against. This analysis is based ultimately upon the notion of contingency, the point at which the insured could effectively intervene to prevent further loss being the last point at which such loss remains a possibility, as opposed to an inevitability.
This approach treats inaction on the part of an insured as, effectively, an intervening cause. Mere inertia, however, does not sit well with the concept of a supervening operant or proximate cause, severing the chain or interrupting the flow of causation from an earlier, insured event. If, on the other hand, the insured is cast in the role of an actor with the power to influence events or their outcomes, and the decision whether or not to exercise that power as an active choice, then the analysis makes sense. Some limits must be set to the principle, though, or causation would be interrupted and cover lost every time an insured failed to exercise an effective power of intervention, irrespective of what the ancillary consequences of that intervention might have been.
It is here that the alternative concept of loss mitigation as a duty on the part of the insured comes into play, since duties may be placed in context and appropriately circumscribed. In this writer's humble opinion, the concept of loss mitigation is better formulated as an obligation or duty on the part of the insured, whether under contract, pursuant to statute or both, rather than as a manifestation of the law of causation, if only to enable proper limits to be set. Most of the case law involves policies in which an obligation to mitigate is a feature of the contract, either as an express term or implied by statute.
There is a distinction to be drawn between prevention of a loss from arising and mitigation of a loss which is already in progress: between the situation where the event insured against, which triggers the policy, has already occurred and when it is still in prospect. In the case of Yorkshire Water Services Ltd v Sun Alliance and London Insurance Ltd , the insured's sewerage containment facilities were in imminent danger of failure which would have resulted in substantial third party property damage, for which the insured would have been liable. The policy would have covered such a liability. The necessary works were carried out and the insured made claim under its liability policy for the cost of them, on the basis that they had been incurred for the purpose of averting a more substantial loss in the form of a liability for which the insurer would have had to indemnify.
It was held by the UK Court of Appeal, in an analysis of the purpose and manner of operation of the liability policy, that the insured was required to bear at its own expense the cost of taking all reasonable steps to avoid or minimise third party damage which had not yet occurred. There was no express term in the policy providing cover for such mitigation costs nor any basis upon which to imply one. An important distinction was drawn between an insured's liability to pay compensatory damages for third party property damage, which a liability policy covers, and amounts paid to avert or minimise such a liability. The latter are of a different order from damages or compensation and a legal liability policy will not cover them in the absence of an express extension. Other authorities consistent with this principle are referred to in the judgements.
By contrast, in Orica Australia Pty Ltd v Limit (No. 2) Ltd , the insured chartered a vessel to carry a cargo from a Canadian port to one in Northern Queensland. Not long into the voyage the cargo shifted in stow, threatening the safety of the ship and forcing it to make port of refuge in the United States. This resulted in a lengthy delay to the voyage while the cargo, which was of a hazardous nature, was unloaded, partially containerised and restowed. Substantial costs were incurred by the vessel's Owners in the form of Port charges, stevedoring charges, vessel maintenance costs and detention fees, all of which were claimed against the Charterers who were insured under a Charterer's Liability policy.
Relatively early during the vessel's sojourn at the port of refuge, when it had become apparent that the stowage of the cargo would be a difficult and protracted exercise, the Owners offered to treat the voyage as terminated if the insured would accept delivery of the cargo at the port and allow the ship to depart. This would have truncated the detention and other costs from the date of departure but left the insured with the problem of disposing of approximately 6,500 tonnes of highly dangerous cargo, which the United States authorities did not wish to see permanently landed and which, moreover, the insured urgently needed for its plant in Australia.
The Owner's offer accordingly was rejected and eventually the ship made it to its original destination with the greater part of its cargo. Underwriters of the Charterer's Liability policy, however, contended that the insured ought to have accepted the offer, which would have substantially reduced the claim upon their policy. They argued that the failure to do so amounted to a breach of the insured's duty to mitigate loss or, alternatively, an intervening cause between the occurrence of the peril insured against and the balance of the detention and related costs. This submission, was rejected by the Victorian Supreme Court which held, essentially, that the insured's obligation to its Underwriters did not require it to sacrifice its own commercial interests in favour of the insurer, the event triggering the policy having occurred and the resultant losses being already in train. Again, other consistent authorities were referred to in the Judgement.
It is interesting to speculate on how these competing scenarios would play out in the context of claims-made liability insurances in which the trigger of coverage, the event insured against, is the making of a claim against the insured in respect of an alleged civil liability. Put simply, if a claims-made financial liability policy contained a term requiring the insured to take, at its own expense, all reasonable and necessary measures to avert or minimise claims against it arising from its breach of professional duty or other civil liability, could such a condition be construed as requiring the insured, before or after an actual claim had been made against it, pre-emptively to settle or otherwise make good third party losses so as to preclude further, covered claims against it from arising? Or would the term merely require the insured to rectify the conditions which gave rise to the losses, so as to avoid adding to the number of putative future claimants? The question once again is how far is the insured obliged to go in complying with such a provision, in effectively converting future insured losses into present uninsured ones for the benefit of its insurer?
In Standard Life Assurance v Ace European Group the insured, which had mitigation costs cover in the relevant policy, made the decision to restore a drop in the value of one of its investment funds by means of a capital injection, in order to preclude claims from investors based upon allegedly misleading product information literature. The reasonableness of this decision was not challenged and it certainly prevented a number of possibly meritorious claims from being brought against the insured, and probably also conveyed a windfall benefit upon an indeterminate number of other investors who would not have had such claims. The questions were whether the top up payment met the policy definition of a mitigation cost in light of the fact that it also served to protect Standard Life's brand and if it did, whether averaging should be applied on the basis of the collateral purpose.
The Court at first instance and the Court of Appeal found for the insured on both these points, however, the real interest of the case for present purposes lies in the counterfactual. If Standard Life had had no mitigation costs cover in its policy but merely a term requiring the insured to take all reasonable and necessary measures to avoid or mitigate losses arising from circumstances giving rise to covered claims against it, then had it chosen not to make any remediation payment but merely to sit back and wait for covered claims to be made against it, whether in the form of a class action, regulatory initiated process or whatever, would it have been in breach of that term in failing to mitigate its loss?
On the one hand, under a policy with an actual claims-made trigger, the event insured against has not occurred and the Yorkshire Water scenario would seem to be applicable. On the other hand, it is one thing to require the insured to take reasonable measures to avoid liabilities which may give rise to claims: it is quite another to require the insured to prevent claims from being made effectively by restoring, at its own expense, the losses which might otherwise be the subject of them.
The better view, it is suggested, is that notwithstanding the claims-made principle, in a Standard Life v Ace type scenario the event insured against should be regarded as in progress once circumstances which have the potential to give rise to claims against the insured have arisen and been notified to the insurer, notwithstanding that the claims themselves have not yet been made. On that basis, it becomes no longer a question of what it is reasonable to expect the insured to do, at its own cost, to prevent insured occurrences from happening (Yorkshire Water), but rather one of how far the insured is expected to go at its own cost in mitigating loss once the insured event is in progress (Orica Australia v Limit No. 2). That would be consistent with the operation of a claims-made policy which contained a circumstance deeming clause the effect of which in Australia, according to the High Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd , is that the event which triggers coverage under such a policy is the insured's awareness of the likelihood of future claims against it arising from a known circumstance. The same effect would arise by virtue of Section 40(3) of the Insurance Contracts Act 1984 (Cth), provided that timely notification of the circumstance had been given to the insurer.
What then should be the response of insurers and policyholders to these questions? Assuming that it is an option for an insured simply to wait to be claimed against, notwithstanding that by making a pre-emptive payment it could avoid a future, insured claim against it which would almost certainly be larger than the payment if only by the amount of legal costs and interest, it could scarcely be in the interests of the insurer for the insured to have an incentive to do so. Commercial reality is such that that will probably be only an option for liquidators in any case. The insurer could, presumably, insert a very onerous express term into the policy effectively requiring the insured, upon becoming aware of grounds for claims to be made against it, immediately to make good the losses thereby removing the basis for the claims and preventing them from arising. A policy, however, which was potentially breached every time the insured became aware of a notifiable circumstance and failed to extinguish its liability before a claim could be made against it arising from the matter, would be of very little use to any responsible professional organisation.
The obvious alternative would seem to be for the insurance market to step up and provide suitable cover in these circumstances, whether by way of a mitigation costs extension or an expanded trigger of coverage. An extension ought to apply up to the full policy limit, not merely for a fractional sub-limit. Such coverage is becoming increasingly necessary, for at least those categories of liability insurances offered to industries and occupations in which pre-emptive restitution or making good is a necessary element of the insured's legal or social obligation, in the event of breaches of duty or other legal derelictions of the sort to which the insurance is intended to respond. As long as the prerequisite cover remains the existence of a legal liability on the part of the insured there is, it is submitted, no greater element of moral hazard entailed in this than in any other form of liability insurance.