Contemplate what is, for some, an all too familiar scenario. It’s late evening, you’re just about to ‘clock off’ for the night and the phone rings. Your irate colleague explains that a problem has arisen, that this brewing crisis could prove very costly to the business and that your immediate help is required to stem the tide. In between the cries for help are vague references to mitigation of loss. “Can we just pay to make this problem go away?”. Goodbye comfy evening on the sofa. Your job is to assess the problem and provide answers fast.
In our experience, one of the first questions that often arises is how to control the situation and contain any potential loss. The second is “will our insurance respond?”. The purpose of this article is to look at the issues that arise when considering both of these common questions.
Containing the Crisis
Mitigation costs cover enables the insured, in the early stages of a dispute, to seek an indemnity under the policy for the costs of resolving that dispute. That indemnity may encompass costs, the potential loss or both.
It is worth highlighting, at the outset, that the issue of crisis and loss containment is often raised first with the insurance policy being a secondary consideration. We would recommend that these items are given parity and that the insurance policy should be considered at the earliest stage possible so that an informed view can be taken as to what coverage is available and the role it will play in your mitigation strategy.
The “Duty” to Mitigate
It is often said that a claimant, in any dispute, has a duty in law to mitigate (avoid or reduce) loss. In legal terms this is not quite correct. There is no actionable duty as such and a claimant cannot be forced to mitigate. Unfortunately, however, should the matter become litigated the courts can and do look at what steps claimants take in mitigation when assessing damages. If a claimant has failed to take reasonable steps to mitigate then its recovery of damages will be impacted by that failure. Therefore, in practical terms, there is little real difference between the need to mitigate, to avoid prejudicing any recovery of damages, and a perceived ‘duty’ to do so.
Mitigation and Reasonableness
A claimant is required to act reasonably when mitigating loss. The question of reasonableness is fact specific and will depend upon the circumstances of the case at hand. In our experience, in cases where mitigation is undertaken as part of an insurance recovery this is often a key area of contention with insurers, i.e. whether the steps taken by an insured were reasonable and/ or necessary. Issues of apportionment can also arise in this context, namely were the steps taken to avoid or reduce loss or were the insured’s actions motivated by other concerns such as reputational issues or brand protection. This is a complex area, often fraught with difficulty, and early recourse to advisors (lawyers, brokers etc) is sensible.
The burden of proving that the claimant failed to take all reasonable steps to mitigate rests with the defendant. That said, there is merit in keeping a record of all actions taken by way of mitigation, and the reasons for taking those steps, as this may prove useful if the issue of reasonableness is raised at a later date.
Your Insurance Policy
We have recommended that your insurance policy should be your first port of call when formulating your mitigation strategy. Indeed, prior to any crisis brewing, there is merit in reviewing your policy and talking to your broker about what mitigation cover is available.
It is an important point, and therefore worth noting, that absent express provision, the courts will not imply mitigation cover into a liability policy. As such if an insured is to avail itself of mitigation coverage there must be express provision for it in the insurance policy. If the policy is silent such coverage will not be implied.
The Nature and Extent of Cover
Assuming mitigation cover is present in your wording, it is important to be clear as to the nature and extent of that cover. The variety in the form and substance of the wordings used for mitigation costs coverage in the London insurance market is striking. The cover may be found in the main insuring clause or, more commonly, by extension or even by endorsement. The nature of the cover and the means by which it can be triggered can also vary considerably and, in the case of larger insureds is often dictated by the insured’s risk profile and the type of coverage that insurers are comfortable granting.
It is critical to be clear as to the scope of the coverage available. It may be provided solely for costs and expenses incurred by the insured when mitigating or, in certain circumstances, may extend to potential or actual losses suffered. The trigger for engaging the policy may also vary considerably. It is not unusual for insurers to require the insured to prove that the circumstances that have arisen ‘would’ or ‘might’ give rise to a claim under the policy were a third party claim to be made and in those circumstances there are often a series of requirements for the insured to meet before the policy is engaged. It is also important to look at policy conditions to ensure that you are aware of the conditions that pertain to mitigation as they can be stringent. Seeking insurers prior consent before mitigation costs are incurred is just one example and the conditions, therefore, merit careful attention.
It is also important to be cognisant of any financial limits. Most wordings now contain provisions to the effect that in coverage mitigation insurers will be liable for no more, in monetary terms, than if a claim had been made. The coverage may also be sub-limited.
In our experience it is crucial to try and “carry your insurers with you” on any mitigation journey. Failure to keep insurers informed may at best lead to delays in obtaining confirmation of cover and at worst lead to a question mark over whether coverage is available and/ or whether insurers position has been prejudiced by any actions that you have taken. In the heat of the moment it may be all to easy to take steps to contain the problem without reference to insurers. Noting that a situation such as this may also be a notifiable circumstance it makes sense to advise insurers of the problem, notify if necessary and then to keep them appraised of all actions taken by way of mitigation. It is, of course, also in insurers interests for mitigation to take place at an early stage. A well executed mitigation strategy can save insurers both time and money.
Early mitigation of loss has obvious potential benefits, not least the prospect of averting a costly and perhaps public crisis. That said there are also obvious benefits in being forearmed. Review your policy early, preferably before the cover is needed, and be clear as to the scope of mitigation cover available to you and what steps are needed in the event that you may have to call on the policy. In that way, should an issue arise, you will be fully informed as to the scope of cover available and whilst we can’t promise an end to those interrupted evenings hopefully they will be fewer and far between.
Should any questions arise from your policy review do not hesitate to contact the author or your usual Aon contact.