In this two part guide we will be looking at issues that frequently arise when considering whether a professional indemnity policy responds to a claim against a construction professional.
In Part 1 we consider whether there is cover. In particular:
- Prior claims – when will a “new” claim fall within an existing notification?
- The obligation to notify circumstances
- Insolvency of the Insured
The majority of professional indemnity policies are written on a claims-made basis, under which indemnity is triggered when the insured becomes aware of a claim and notifies its insurer. An insurer of a claims-made policy will require a prospective insured to provide details of existing claims (or potential claims) made (or intimated) in the previous policy year. The provision of that information will assist the underwriter to assess the risk, set the premium, and establish the scope of cover to be offered, and ensure that known claims or circumstances will be indemnified by the insured’s existing insurer. Accordingly, most claims-made policies also contain exclusions relating to existing claims or circumstances which were, or should have been, notified in a previous policy year.
An issue can arise if a claim or circumstance is validly notified in one policy year, but the claim then broadens in a later policy year to include new allegations. When will the original claim or circumstance encompass the new allegations, and when will the new allegations be treated as a separate claim falling within the later policy year?
The starting point is to identify the true substance of the “claim”, as opposed to the causes of action which the claimant pleads or the remedies it seeks. As Devlin J noted in West Wake Price v Ching  1 WLR 45, “if there is only one object claimed by one person, then there is only one claim, however many may be the grounds or the causes of action which can be raised in support of it”. That said, the way the claimant chooses to formulate its claim is not necessarily determinative of the number of “claims” for policy purposes: it is the underlying facts and the substance of the allegations which will which determine the number of “claims” against the insured: Haydon v Lo & Lo  1 WLR 198.
Consequently, if the underlying act, omission or default was validly notified as a claim or circumstance, if the claim which is eventually pleaded includes additional causes of action or remedies which relate back to the original act, omission or default, then the “expanded” claim may well still attach to the original notification.
By contrast, if new allegations give rise to substantive new heads of loss, those new losses will constitute a fresh claim which must be separately notified. For example, in Thorman v New Hampshire Insurance Co  1 Lloyd’s Rep 7, a claim concerning an architect’s allegedly defective design and supervision was broadened to include allegations relating to additional defects which had subsequently come to light. The Court ruled that the first insurers were liable to indemnify losses arising from the original claim, but the additional defects constituted a “new claim” and therefore fell to be indemnified by a later policy.
When to notify a “claim” or “circumstance”?
A claims-made policy normally requires that a claim or a circumstance is notified to insurers as soon as the insured becomes aware of it. It can be fairly straightforward to identify when a “claim” is made, but the definition of “circumstance” can vary considerably between policies.
A “circumstance” is often defined in a policy as a matter which “may”, “might”, “could” or “is likely to” give rise to a claim – each of which imports a different degree of appreciation or awareness on the part of the Insured of the risk of a claim eventuating. The test is based on the objective likelihood of a claim arising which takes into account the insured’s actual (ie, subjective) knowledge.
Broadly speaking, the more tenuous or fanciful the potential claim,
the more onerous the insured’s obligation to notify:
- “may” give rise to a claim – means a real as opposed to a fanciful risk of the underwriters having to indemnify the assured: Aspen Insurance v Pectel  EWHC 2804.
- “could” give rise to a claim – likely to be regarded as less than 50% but, greater than “may”.
- “likely to” give rise to a claim – more than 50% chance: Layher Ltd v Lowe  Lloyd’s Rep IR 510.
Would an insured’s subjective concern, without more, that it may have made a mistake trigger the obligation to notify? Obiter comments in HLB Kidsons v Lloyds Underwriters  EWCA Civ 1206 suggest that concern, without more, is not a notifiable circumstance. However, if the insured’s concerns are based on objective material which suggests that they are well-founded, that might constitute a notifiable circumstance (para 73).
Most professional indemnity policies contain aggregation clauses which may operate to the advantage of both an insured and insurers where there is more than one claim under the same policy.
Purpose of aggregation clauses
The purpose of an aggregation clause is:
“to enable two or more separate losses covered by the policy to be treated as a single loss for deductible or other purposes when they are linked by a unifying factor of some kind”
How do claims aggregate?
Whether two or more claims will aggregate under the same policy will depend on the precise wording of the policy and the facts and circumstances of the case.
Common wording for aggregation clauses may include that all claims should arise out of:
- the same or similar act, omission or occurrences; and
- a series of related acts, omissions or occurrences
- to be deemed to be one claim.
In deciding the above, a party should consider whether there is:
- a “unifying factor”, ie a common origin, linking the claims. This might be a particular design defect in a building; and
- a causal relationship between the unifying factor(s) and the losses or claims. In that regard, common phrases in aggregation clauses include claims “arising from” and “resulting from”. This requires more than a weak causal connection, but a significant causal link.
When faced with a situation where two or more claims have been brought against an insured, aggregation will need to be explained. It may be difficult to aggregate if the description of an act or event is specific and narrow.
However, in cases where wider or more general acts or omissions are reported, it may be easier to argue that the claims should be aggregated.
Insolvency of the insured
In the current uncertain economic climate, the construction industry has seen a number of companies in financial difficulties being forced into insolvency.
Professional indemnity policies will often contain an exclusion clause providing that Insurers will not have any liability directly arising out of the insolvency or bankruptcy of an insured and/or that the policy is automatically cancelled on the insolvency of an insured.
Exclusion of claims arising out of the insured’s insolvency
Such an exclusion will only trigger if the claim being brought against the insured relates to losses which arise out of an insured’s insolvency during a construction project, ie someone in the supply chain claiming for unpaid work. However, if the claim stems from an insured’s negligence (ie defective design) regardless of whether the insured is insolvent, the claim could be covered under the policy obviously subject to the consideration of other policy issues.
Third Parties (Rights Against Insurers) Act 1930 (the Act)
As we explain above, professional indemnity policies are usually written on a claims made basis and will operate to indemnify an insured in respect of a claim brought against it (ie the insured will be reimbursed in respect of sums it is held liable to pay to a third party).
However, in certain circumstances a third party can seek to step into an insured’s shoes and make a claim directing under the policy. Under the Act, regardless of whether the policy has been cancelled upon the insolvency of an insured, Insurers may still be liable if a claim is covered under the policy.
Two conditions must be established in order for third party claimants to obtain coverage under the Act:
- the insured must actually be insolvent; and
- the existence of the insured’s liability, i.e. by agreement, arbitration award or judgment.
If a third party claimant is in principle entitled to an indemnity under the Act, the third party claimant cannot be in a better position than the insured (ie the claim must have been properly notified and no admissions as to liability should have been made).
Failure to disclose insolvency?
Insurers may be entitled to refuse to indemnify a claim and/or avoid the policy ab initio on the basis of non- disclosure and misrepresentation if the insured failed to disclose on a proposal form that one of its group companies was insolvent at the inception of the policy.
When a potential third party claimant wishes to make a claim under the Act it needs to check whether the insured is technically insolvent and that a liability has been established in accordance with the Act. Prior to these conditions being met, third party claimants have no legal interest or any rights in respect of the ‘insolvent’ insured’s policy.
If Insurers have already declined to provide an indemnity to an insured who becomes insolvent (ie for some other policy reason), other parties in a construction project, who are being pursued by the same claimant, may wish to approach Insurers and request an explanation for the declinature of cover. Under the Act, Insurers are not obliged to communicate the reason for the declinature to the third party claimant or another construction professional as this information is confidential. There is however some limited prescribed information that the third party claimant may be entitled to so it is worth requesting this information.
It should be noted that the Act is likely to be repealed during the course of 2015 when it is hoped that the Third Parties Rights Against Insurers Act 2010 will be brought into force in an amended form.