August 2007

Notification of circumstances - Court gets tough on Assureds

Remarkably, notice of a circumstance (which may give rise to a loss or claim) was held to be invalid in the very recent judgement in HLB Kidsons v Lloyds Underwriters (judgement dated 9 August 2007) on the grounds that it was not given "as soon as practicable" even though the notice provision was not expressed to be a condition precedent to liability. It might normally be expected that the remedy for such a breach would be damages, not an outright disqualification from indemnity.

The decision also gives interesting consideration as to what constitutes valid and effective notification of a circumstance.

The claimant K, a firm of chartered accountants, relied on the following standard provision in a composite professional indemnity policy:

"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."

K contended that various letters and documents sent to Lloyd's underwriters constituted valid and effective notice under this deeming provision. Whilst these were not all sent "as soon as practicable", the provision was not expressed to be a condition precedent, so K argued that claims should not be disqualified on that ground.

However Gloster J decided that it was an essential characteristic of the notice that it be given "as soon as practicable", if there was to be an extension of cover beyond that provided in the Insuring Clause of the policy. It did not matter that the wording was not expressed to be a condition precedent to liability. It was not an ancillary provision of the type considered in Friends Provident v Sirius 2005, where the remedy for breach lies in damages based on prejudice suffered by insurers. It was a provision that entitles the assured, upon, but only upon, the happening of a stipulated event, to obtain an extension of coverage which otherwise would not exist under the Insuring Clause in the policy. The assured had no contractual right to be indemnified in respect of post policy period claims unless the stipulated contingency occurs. It would be linguistically superfluous to spell out that it was a condition precedent to insurers' liability for post policy period claims that the requisite notice had been given.

The judge considered what other requirements had to be satisfied for notice under such a deeming provision to be valid and effective.

It did not matter, as insurers argued, that the documents were not intended by the assured to constitute notice. The test was objective, i.e. as to what a reasonable insurer would understand. The information presented must be sufficiently clear to put a reasonable insurer on notice that there is a circumstance which may give rise to a claim or loss.

On the facts it seems the assured had not wanted to let it be known that there may have been unlawful trading under the FSA by a company ("S") under its management as losses relating to such activity would not be covered by virtue of policy exclusions. In one instance, the assured deliberately communicated to insurers in such way as not to cause alarm, so insurers would not react by disputing coverage. No "circumstances" were referred to at all. Reference was made merely to "material information for insurers". The communication was also deliberately sent to the underwriter, not the claims department. Whilst it is possible that notice to the underwriting/placing side might be valid, in this case the underwriter did not understand it to be notification of a circumstance. He thought it was providing information which the assured thought might be material to the risk. If he had thought it was a notification, he would have made it clear to the broker that it should be advised to the claims dept. His reaction was judged to be that of an objectively reasonable underwriter.

It is also important, if it is to be covered, that any claim or loss that may eventually arise falls within the scope of the circumstance that was previously notified. In other words, it must be one to which the notified circumstance has given rise. In this case, the assured argued it became aware of wide ranging concerns held by an employee of S in relation to tax advice being given by K and S, and that it conveyed these concerns to insurers. However, apparently the assured itself did not share these concerns or consider they might give rise to a claim and the judge decided that the reasonable insurer on reading the documentation in question would not have concluded that the assured was giving notice of circumstances which may give rise to a claim.

There was only one discrete area where the reasonable insurer would have concluded the assured was giving notice of circumstances that may give rise to a claim. This was in respect of procedures followed in certain cases relating to Discounted Option Schemes. Since in that case the notice was given as soon as practicable, a claim or loss arising out of that limited circumstance would be covered, but not otherwise.

This decision will be welcomed by insurers. The significant additional protection afforded to an assured under a claims made policy in respect of claims potentially made long after the policy has expired justifies the reciprocal obligation of the assured to clearly notify circumstances strictly within the time period described in the policy.