A recent US case referred to an interim payment to injured third parties as ‘strategic response costs’ covered under the policy. That is a neat phrase to use instead of an ex gratia payment.
‘Ex gratia’ is always controversial because it implies a payment without a lawful obligation. Ex gratia payments are often made for strategic reasons, and made without prejudice and without admission of liability for all sorts of good commercial reasons. It does mean that the payment may have to be explained to reinsurers to show that it was not made without there being a lawful obligation under the policy.
In the US case, sulphuric acid had been transferred into the wrong storage tank of the insured containing sodium hypochlorite resulting in a chemical reaction that released toxic emissions into the air which injured more than a hundred people. The insurers paid ‘strategic response costs’ of $325 000 to the local hospital where the injured were treated for medical bills without calling for release of claims. Under an endorsement in the policy there was cover for “strategic response costs arising from a strategic management event” namely an event that ‘might result in significant adverse media coverage’.
A strategic response can be used for many reasons including media attention, incurring uneconomical costs relating to the claim, or because of no certainty of proving a defence. It’s a phrase worth considering.
[MGPI Processing Inc v Allied World Assurance Co case number 2:20-cv-2228 District Court of Kansas]
First published by: Financial Institutions Legal Snapshot
