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Risky Business A U.S. and Bermuda Under 40s (Re)Insurance Collaboration Inaugural Edition |
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Claims Notification: How do Problems Arise? By Joanne Staphnill
The English courts have recently decided a number of cases involving late notification of claims or circumstances to insurers and reinsurers. Joanne Staphnill of Robin Simon LLP1 considers what light these cases throw on the practical problem of ensuring compliance with notification clauses. Almost all (re)insurance contracts contain a clause that requires the (re)insured to give notice of a loss, claim or circumstance within a given timeframe. In England, if a notification term is an ordinary (or ‘innominate’) term of the policy, then breach of the notification clause by the insured will only entitle the (re)insurer to damages if it can prove that the late notification caused additional loss. However, notification clauses are often drafted as conditions precedent to liability. In these cases, breach of the notification clause will result in the claim being declined, regardless of any prejudice suffered by the (re)insurer. It is important to ensure compliance with notification condition precedents as the English courts have, in recent years, reconfirmed that such terms will be enforced despite declinature sometimes appearing to be disproportionate to the breach. The Hornets’ Nest Problem The recent case HLB Kidsons v Lloyd's Underwriters and others [2008] EWCA Civ 1206 (“Kidsons”) involved a detailed consideration of a notification clause in a professional indemnity (PI) insurance policy which was a condition precedent to liability. The case focused on a practical problem faced by many (re)insureds, namely, what (re)insureds should do when they become aware of a circumstance that may result in many claims, the so called “hornets’ nest”2, but the specific claim(s) or loss that could arise from that circumstance are unknown. Kidsons were a firm of chartered accountants and had PI cover, on a claims made basis, under a 12 month policy incepting on 1st May 2001. As part of its operations, Kidsons marketed and sold a range of tax avoidance products. One employee of the firm, Mr Torrance, developed grave concerns about the products and expressed wide-ranging criticisms of the firm’s tax avoidance operations. He was of the opinion that the products were doomed to failure and would lead to claims from clients and investigations into the firm by the Inland Revenue - a hornets’ nest of problems. These concerns were brought to the attention of the Board of Directors by means of a number of memos. However, the Board regarded Mr Torrance’s concerns as largely ill-founded, exaggerated and unsubstantiated and gave them only cursory attention. Before the renewal of the firm’s PI policy, Kidsons had to decide whether or not to notify insurers of the concerns raised by Mr Torrance. On 31st August 2001, Kidsons wrote to insurers stating that "a tax manager… has expressed the view that the Inland Revenue, if minded, could be critical of some procedures followed in certain cases" and that the Board intended to investigate. The letter continued: "this might be regarded as material information for insurers". An investigation ensued, and in March 2002 Kidsons sent a further letter to insurers stating that the "technical efficiency" of the products was accepted, "but in some instances there might be procedural difficulties involving the trustees for each scheme". The letter was accompanied by a claims bordereau referring to "Possible tax errors in fiscal engineering work". In a later policy year, a number of substantial claims were made against the firm by their clients as a result of the invalidity of the tax avoidance schemes. The issue arose as to whether or not the firm had validly notified insurers of circumstances which they had became aware of during the policy period, as required by the notification clause of the PI policy. The first instance judge commented that the letters to insurers were “coy in the extreme” and the notification appears to have been made somewhat grudgingly by the Board. The Court of Appeal commented that in a normal case (where the circumstances arises outside of the insured itself, rather than by an employee raising concerns), the court has to consider the following questions: Did circumstances as defined by the clause arise? Did those circumstances come to the attention of the insured during the policy period? Are the circumstances such that they “may give rise to a loss or claim…” (as the wording was in this case)? The last question is to be determined objectively. Both the first instance and appeal court referred to expert evidence that a notification should be in “fair, comprehensive and comprehensible terms” so an insurer can understand what the insured knows and that the purpose of the communication is to notify a circumstance. It was doubted that an employee’s concern in of itself could be a notifiable circumstance, but in this case Mr Torrence had brought a hornets’ nest of real problems to the Board’s attention. The appeal court concluded that a reasonable person would understand that Kidsons had only notified insurers that the Inland Revenue could be critical of some of the procedures followed in the implementation of the firm’s products, not that the schemes as a whole might be invalid. This case demonstrates the importance of ensuring that notifications to insurers are as clear and as full as possible and not in vague, “coy” or over-cautious terms. Do organisational problems cause late notifications? The organisational arrangements within Kidsons may have contributed to its inadequate notification to insurers. The Board probably allowed personal views regarding the likelihood of a claim (and, perhaps, about Mr Torrance!) to influence the notification. The case demonstrates that a court will look at an alleged notification of a circumstance objectively and therefore those responsible for notification should not allow subjective views to affect it. Kidsons would have benefited from procedures to ensure that timely advice from a more objective adviser such as the firm’s broker was sought. The case also highlights the need for proper and robust procedures to enable employees to pass on any concerns for consideration by a suitably qualified officer of the firm. One wonders what organisational failures resulted in Mr Torrance having to send repeated memos in order for his concerns to receive even cursory consideration. Robin Simon LLP recently acted on another case which highlights similar issues in the reinsurance context. The original insureds were the directors and officers of a large company that went into liquidation due to fraudulent accounting. Very large claims were soon intimated against them. One of the excess layer D&O insurers decided it needed to investigate the hornets’ nest further to get better details of the potential claims before notifying reinsurers, our clients. Consequently, reinsurers were only notified of the circumstance a number of years later and the reinsured was forced to drop its claim for an indemnity. Even if the (re)insured is only aware that a hornets’ nest may exist and is unable to identify the precise basis for potential claims, such a circumstance should still be notified as fairly and comprehensively as possible. The notification can then be updated as the investigation progresses. Claims handlers should also note that early communication with other departments is important to prevent mistakes. For example, reinsurance departments within insurance companies can give specific guidance as to what reinsurers require. Good communication links between those who may become aware of claims and those responsible for notifying insurers or reinsurers are vital. What if the notification clause is not clear? Kidsons emphasises the importance of strict compliance with notification clauses in claims made policies, but what if it is not clear how the clause should be interpreted? In AIG Europe (Ireland) Ltd v Faraday [2006] EWHC 2707 the court had to interpret a notification clause in a reinsurance policy which was expressed to be a condition precedent. The court decided that the word “loss” in the clause meant actual, proven loss, even though this did not match the underlying policy, which was written on a claims made basis. In AIG v Faraday, the court noted with disapproval in the first paragraph of the judgment that the claims cooperation clause had been used in liability reinsurance whereas it had been designed for use in property damage policies, so the clauses did not fit well together. By contrast, the condition precedent in the recent case of Laker Vent Engineering Limited v Templeton Insurance Limited [2009] EWCA Civ 62 was appropriate to the type of reinsurance and “matched” the underlying policy. There was no scope for arguments about the effect of the clause, only whether it had been triggered in the particular facts of the case. The insured tried to escape the consequences of breach of the condition precedent by arguing that the reinsurer had waived the breach, but did not succeed. Reinsureds should therefore check carefully when entering the reinsurance, that any conditions precedent are appropriate in the context of the class of business and “match” the underlying policy. If, despite these efforts, the reinsurance still does not match the underlying, then the relevant personnel (especially the claims handler) need to be made aware of this. The claims handler should recognise that there may be scope for argument about how the notification clause operates, and that notifications to reinsurers should therefore be made prudently early to help protect against declinature of the claim. Summary Notifications to (re)insurers may appear to be a fairly simple administrative step but as recent case law in England and Wales demonstrates significant difficulties can surround notifications. These can arise from the wording of the notification clause itself, hornets’ nest circumstances or the insured’s organisational failures. It is vital for insureds to address these issues in order to ensure compliance with strictly drafted notification clauses, particularly where these are conditions precedent to liability.
About the author: Joanne is a solicitor in Robin Simon LLP’s London office, where she practices in policy coverage and insurance/reinsurance law, including reinsurance arbitrations. She also undertakes professional indemnity defence work for a variety of professions, but particularly solicitors and insurance brokers. If you have any questions, you can contact Joanne at joanne.staphnill@robinsimonllp.com or +44 (0)333 010 2885.
Robin Simon LLP is a specialist insurance law firm, with a national presence in the UK and an international reach. Please visit us at www.robinsimonllp.com. To use the phrase adopted by Akenhead J in Kajima UK Engineering Company Limited v The Underwriter Insurance Company Limited [2008] EWHC 83 (TCC)). |
