Notification of circumstances - timely clarification of the law

The long awaited Court of Appeal decision in H L B Kidsons-v-Lloyd's Underwriters and Others (judgment dated 31 October 2008), on notification of circumstances has, except in one important respect, upheld the decision of the court of first instance in favour of insurers. However, it tones down the exacting position taken by the lower court and provides welcome clarification of the law for the industry as a whole.

The case involved thorny issues about the validity and scope of notifications in claims made policies. The difficulties in identifying circumstances that may give rise to a claim, and what counts as effective notice, have long vexed the industry and the subject has wide relevance in the context of the uncertain and speculative side of the claims environment in the fallout of the credit crunch. Insurers need to assess their exposure - and early notification of circumstances is an important way to be able to do this. But insurers don't want to be bombarded with fanciful possibilities. So what does notification have to be of? And what happens if it is late?

The facts in outline
Kidsons was a firm of accountants. It marketed and advised on tax avoidance schemes through a subsidiary. The tax avoidance schemes turned out not to avoid tax at all and were worthless, so a number of claimants made substantial claims against Kidsons. They allege Kidsons:

1) was negligent in advising its clients in relation to tax avoidance schemes
2) made false representations about the schemes
3) failed to give their clients adequate warning of the risks to do with the schemes.

Kidsons sought an indemnity under its professional indemnity policy. None of the claims against Kidsons were first made during the period of the policy but Kidsons contended it was covered because before the period ended it had notified the circumstances which gave rise to the claims.

The policy wording in question contained a very standard notification clause on which everything in this case turned.
"The assured shall give to the underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the period…..which may give rise to a loss or claim against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the period…shall be deemed…… to have been made during the subsistence hereof."
The case centered around various presentations to underwriters during the currency of the policy and the effectiveness of these as notifications of circumstances such as might cover subsequent claims or some of them.

The scope of notification
The Court of Appeal upheld the first instance decision that the notifications were potentially broad enough to cover claims arising out of criticisms of the implementation of the schemes but did not extend to concerns or criticisms about the schemes themselves or their mis-selling. The scope was limited to the concerns actually notified.
The first instance judge had suggested the notification should identify some sort of error, act or omission or potentially wrongful conduct, and identify a possible claimant or victim and the loss they may suffer. But it is clear that the Court of Appeal did not require the insured to be nearly as precise. The notification clause said nothing about how a notification was to be made, other than it must be in writing and given as soon as practicable. That was, on the face of it, a fairly loose and undemanding test.

What counts as notification?
All sorts of information may be passed to insurers prior to inception or renewal. The test of what counts as formal notice, and what it is notice of, is objective. It is objective as to what a reasonable insurer would understand. As long as the information presented is sufficiently clear to make a reasonable insurer think that a circumstance is being notified, that is enough.
It did not matter in this case that a letter sent by the insured to its broker had been deliberately "coy", so as not to alert the insurer to a more fundamental risk about the schemes (whilst still hoping the language might later be relied on as wide enough to cover the risk). There was no serious suggestion of bad faith by the insured and so the Court of Appeal decided, by a score of 2 to 1, that the first instance judge ought not to have rejected a concession by the insurer that the letter had been an effective notice of certain limited concerns. The concession was properly made because what mattered was what the letter said, not what it did not say. It was effective in so far as it communicated concerns about the implementation of the schemes. If, which was not argued here, the insured had been deliberately misleading or economical with the truth, so that the insurer was not given a fair picture of what the insured knew, that would have provided a good argument that the notification was to be treated as invalid.

"Awareness" of circumstances
The Court of Appeal rejected the notion that the insured must have a genuine belief that claims would ensue from the notified circumstances. The requirement in the wording of "awareness" of the insured was satisfied by the insured merely envisaging the possibility that a known circumstance may give rise to a claim.

Lateness of notification
Of particular interest for the industry is the Court of Appeal's agreement with the first instance decision that the requirement in the policy that notification be made "as soon as practicable", although not expressed to be a condition precedent to liability, should be treated as one nonetheless. The rationale was that this was a claims made policy where ordinarily all claims have to be made within the policy period. But in this case there was a provision that gave the insured a grace period - an extension of coverage beyond the policy period - and this grace period only existed because of the notice provision. For that reason it had to be exactly complied with in order for there to be coverage.

Comment
This case will no doubt lead to greater focus and formality in the crucial but thorny area of notification of circumstances in claims made policies. Insureds and their brokers need to take care to comply with notification clauses exactly as drafted. If in doubt, notify as soon as possible, and include all known information. But insurers too need to be careful to ensure that notifications couched in vague language do not sneak in unnoticed. If insurers want clear specifics about circumstances they should require this in the notification clause.