When Insurers Must Reimburse The Cost Of Mitigating A Potential Loss

The natural reaction of many policyholders faced with a potential catastrophe is to seek to avoid or minimise potential problems of which they become aware.  It seems sensible to attempt to remedy a situation which is otherwise likely to cause loss and damage, rather than do nothing and allow the damage to occur.  A proactive response to looming problems can also be a regulatory expectation, as well as saving expense in the long run and protecting reputation. 

Express wording required covering mitigation expenses – However, even though action to mitigate loss may well save insurers money, in the absence of express wording, cover cannot be implied into an insurance policy for costs to mitigate a loss that insurers might have to meet at a future date. An express provision is needed in the policy wording. Such wordings often require any mitigation expenses to satisfy a strict test of being ‘reasonably and necessarily’ incurred.

Many property insurance wordings do contain some form of loss mitigation or ‘sue and labour’ provision, although there is a notable variety of wordings providing for the expense of loss mitigation. By contrast, such provisions have been less common in liability policies.

Insurers must be notified in advance – In liability policies, the point of departure for claiming the cost of mitigating a potential loss is the provision for notifying circumstances which might reasonably be expected to give rise to a Claim by a third party against the insured.  In this briefing note, third party Claims are referred to with a capital ‘C’, to distinguish them from claims (with a lower case ‘c’) under an insurance policy.

Once notified, any Claim subsequently arising from such circumstances will be deemed to have been made in the period of insurance in which the notification was given. The cost and expense incurred will attach to the policy year in which the notification is given and will therefore be subject to the limit of cover applying to that year of cover. Later policies are likely to contain an exclusion of claims arising as the consequence of any circumstance notified under an earlier policy.

Restrictions on the circumstances that can be notified  – “Circumstances” is a broad term. Sometimes the insured will be able to specify precisely what it is that gives rise to the possibility of a Claim.  However, the notification does not need to refer to a specific transaction from which a Claim may arise. Nor does it need to identify a specific defect in relation to the handling of the insured’s client as likely to give rise to a Claim. On some occasions, the insured may be able to do little more than point to the fact that something is not working for a reason which has yet to be ascertained, this sometimes being referred to as a ‘can of worms’ or a ‘hornet’s nest’ type of notification. Nor is it a question of whether the characterisation of a circumstance as one which may give rise to a claim can be made subjectively by the insured or must be assessed objectively. Provided that the circumstance notified may reasonably be regarded in itself as a matter which may give rise to a Claim for which the insurer may (but not necessarily will) be liable under the policy, the notification will be effective.

Whether any subsequent Claim must be of the nature anticipated – The approach of the courts is to avoid characterising notifications in unduly narrow terms. The issue of whether a Claim arises out of circumstance notified is assessed objectively but the test here is not demanding. Some causal link is required. Provided that there was a reasonable expectation that the circumstance in question may produce a Claim insured under the policy, it does not matter if it later transpires that the problem is something which is not covered under the policy.

Entitlement to recover the expense of mitigating loss expected to arise from a potential Claim – As discussed above, the insured may decide not to wait for a Claim to materialise but instead to incur costs and expenses in avoiding, circumventing or reducing the loss that may otherwise arise from a Claim and form the subject of a claim under the insurance. 

The claim for recovery of the cost of mitigating a loss becomes a claim in its own right under the policy. Subject to the precise terms of the policy wording, the insured will be entitled to an indemnity for costs and expenses necessarily incurred in such mitigating action, provided that (a) the insurer has agreed to the course of action proposed and (b) the claim under the policy is for cost and expenses incurred in order to mitigate or avoid a Claim which might reasonably be expected to arise from the circumstances notified.

Examples of cases on mitigation of loss:

For advice on insurance matters or further information on mitigation of loss clauses, please contact Wendy Miles, Chris Earl or William Sturge at Lovetts.

1 April 2022