How well do insurers and insureds understand their policies? Do the policies fit the business needs of the insured? Recent cases in Canada and in the United Kingdom demonstrate the importance of knowing and understanding insurance policies and ensuring that policies are appropriate to the insured's needs. In each case, a "claims-made" policy was in dispute and both courts' rulings turned on the precise details of the insurance policies. The implications of these judgments illustrate the importance of knowing and understanding your insurance policy – as with many insurance cases, millions of dollars may be at stake.
Types of Insurance Policies
Two general types of insurance policies are available that provide coverage to insureds, (e.g. guaranteeing a defence and providing partial or full indemnification).
"Claims-made" policies cover insureds according to when a claim is filed by a third party against the insured. If the claim is made during the policy period, the insurer is required to indemnify the insured, regardless of when the act giving rise to the claim occurred. Claims-made policies offer a degree of certainty to insurers and insureds: after the expiration of the policy, they know that no new claims may be made based on that policy, and insurers can calculate future premiums with extra certainty.
In contrast, "occurrence-based" policies cover insureds according to when the act giving rise to the claim occurred. If the act occurred during the policy period, the insurer is required to cover the insured. Occurrence-based policies offer insurers and insureds a different sort of predictability: each party knows the term during which the insurer is liable for coverage, providing them with time to work together to mitigate risk as much as possible.
Other policies – such as those which blend elements of claims-made and occurrence-based policies – also exist; however, "claims-made" and "occurrence-based" policies are the two principal types of insurance policies.
Claims-Made Policies Interpreted in Canada
The Supreme Court of Canada's ("SCC") recent ruling in the case of Jesuit Fathers of Upper Canada v. Guardian Insurance Company of Canada and ING Insurance Company of Canada (the "Jesuit Case") adds new context to the treatment of claimsmade policies.
From 1913 to 1958, the Jesuit Fathers of Upper Canada operated and administered a school in Spanish, Ontario (the "Spanish School"). The Spanish School was operating under a federal policy to educate and assimilate Aboriginal children in Canada. The Spanish School closed in 1958.
As early as 1988, rumours and news articles suggested that improper activities – including harsh discipline and sexual abuse – took place at the Spanish School. In January 1994 a lawyer informed the Jesuits of a claim by her client who alleged physical and sexual abuse, and offered to settle the claim (the "1994 Letter"). By the end of January 1994, the Jesuits knew of other general claims of abuse at the Spanish School.
Counsel for the Jesuits wrote to the Jesuits' insurer on March 18, 1994 (the "March Letter"), advising the insurer of the possibility that the Jesuits may, in the near future, face claims other than those in the 1994 Letter. After the conclusion of the term of the insurance policy, approximately 100 additional claims were made, making allegations similar to those outlined in the March Letter, including claims of abuse resulting from the lack of proper supervision. Even though the claims themselves were made after the conclusion of the Jesuits' insurance policy, the Jesuits sought indemnification against these claims as the general facts underlying the claims were communicated to the insurer during the policy period.
The Jesuits had purchased from two insurers (the "Insurers") a general liability insurance policy (the "Policy") that expired on September 30, 1994 and that provided insurance with respect to professional services offered by the Jesuits, such as those at the Spanish School. The Policy was a claims-made policy that differentiated between a "claim" and a "circumstance or occurrence." This distinction was made in various sections of the policy.
Prior case law has established that a "claim" requires a clearly communicated intention by an alleged victim (the "Third Party") to hold the insured responsible for certain damages. The required communication, at minimum, is a clear intention by the Third Party to hold the insured responsible for the damages. This clear intention could include a demand for compensation or another form of reparation.
The SCC found that, with the exception of the 1994 Letter, the notification given to the Jesuits did not meet the standard of a claim as these notifications did not include an intent to hold the insured responsible for specific damages. The Jesuits' general knowledge of events that may have given rise to potential claims did not, of itself, constitute a claim. As a result, there was no duty for the Insurers to defend against any other claims against the Jesuits, as the duty to defend relates only to claims and complaints that fall within the coverage period of a policy. The SCC held that, while the general circumstances giving rise to the other claims were known to the Jesuits prior to the expiration of the Policy and were communicated to the Insurers, the specific claims were made only after the expiration of the Policy. Since the Policy covered "claims" and not "circumstances", there was no coverage under the Policy for these later claims.
The SCC also noted that a provision known as a "Notice of Circumstance Clause" (the "NCC") is available in some commercial contexts. An NCC permits an insured to report, during the policy period, circumstances that may give rise to future claims. Any claims based on circumstances brought to the attention of the insurer, but made after the expiry of the policy period, are deemed to be made during the policy period. As the Policy did not include an NCC, even though it was commercially available upon the last renewal, the SCC inferred and determined that the Jesuits did not desire that this coverage be included in the Policy. In the SCC's view, a refusal to take on additional coverage (e.g. an NCC) is an implied rejection of the terms of this coverage and bars the insured from claiming these terms at a future date.
Claims-Made Policies Interpreted in the United Kingdom
The case of HLB Kidsons v. Lloyds Underwriters (the "UK Case") offers a useful international point of comparison against the treatment of claims-made policies in Canada.
A firm of accountants (the "Accountants") owned a company which designed and sold schemes to avoid tax. This firm received claims from its customers in respect of these tax avoidance schemes, on the basis that they did not achieve the purpose advertised. These claims were over a range of tax plans and alleged that the Accountants were negligent in their advice, in making false representations about the tax schemes, and in not providing sufficient warning of the possibility that the government may reject the schemes.
The Accountants' insurance policy (the "UK Policy") was a professional indemnity policy, which operated on a claims-made basis. General Condition 4 of the UK Policy required the insured to provide notice to the insurer "as soon as practicable of any circumstance…which may give rise to a loss or claim against them." Where notice was given prior to the expiration of the UK Policy, the insurer was required to indemnify and defend the insured, even if an actual claim was made after the conclusion of the UK Policy. This policy was different than that in the Jesuit Case, as the notification required in this case is that of a circumstance that may give rise to a claim, while the notification required in the Jesuit case was of a claim itself; however, the policies each required notification to the insurer and offered coverage based on when notification was received by the insured, as opposed to when the insured act took place.
The Accountants argued that proper notification was provided under the Policy. They relied on letters written to representatives of the insurer during the covered policy period, dated August 31, 2001 and March 28, 2002.
The U.K. Court found that notifications should leave a "reasonable recipient in no reasonable doubt" that the insured person was giving notice of a potential claim which would trigger the policy. This notification should be clear and unambiguous. The Court also found that any claim would have to be fairly said to have arisen out of the circumstance that was covered.
The letter of August 31, 2001 was addressed to a placing broker, rather than the claims broker who would normally be sent such notices. As well, the letter was vague about specific allegations made to the Accountants regarding the Accountants' work and failed to identify any specific victim of poor work, or any possible claimant against the Accountants. When this letter was received by the underwriters, it was treated as being for information purposes only and was not considered to be notification of a circumstance, but rather was referred to in the letter as "material information for insurers." In contrast, in prior notifications made by the Accountants in prior years, explicit references were made to "circumstances." As a result of these facts, the Court did not find the letter to be a valid notification of a circumstance.
The letter of March 28, 2002 provided more detail and clarity than did the letter of August 31, 2001. The March 28 letter observed that problems may arise with each scheme that would affect the proper implementation of the scheme, and may lead to future "criticism". The Court found that a reasonable recipient of this letter would appreciate that the Accountants were notifying the insurers of the possibility of claims arising in the future. However, the Court also found that this notification was limited to the problems identified in the letter, and that the notification could not be extended to all of the other tax avoidance plans the Accountants promoted.
The Court found that, for insurers to cover claims made against the Accountants, the circumstances giving rise to these claims would need to have been brought to the attention of the insurers and the loss or claim would have to have been sufficiently causally related to this circumstance such that a reasonable person can fairly say that the claim arose out of the circumstance.
In each of the cases above, the final decision of the relevant court turned on the precise details of the insurance policies. In the Canadian case, notification to insurers required knowledge and receipt of a formal intention by alleged victims to hold the insured responsible for damages. In the U.K. case, notification to insurers required only notification of a circumstance that may give rise to a formal claim. However, in each case, it was crucial for the insureds that the notification given to insurers was clear to a reasonable person, and that this notification related directly to the ultimate claim.
With this case law in mind, insurance companies and insureds are advised to:
- discuss the offerings of insurance companies and clients' business needs, to ensure that the most appropriate insurance is being used in each situation;
- ensure that all notifications are clear and appropriate and meet the standards set out in the insurance policy;
- keep track of timelines in the policy (including policy expiry and notification dates) to verify that claims and notices are made within the prescribed limits; and
- consult with a lawyer when negotiating insurance contracts, when making or reviewing notifications or claims, or if in doubt about their legal rights.