This article considers the principles to be applied when assessing the scope of a notification of “circumstances” by an insured, and looks at the recent decision of Euro Pools Plc. v Royal and Sun Alliance Insurance Plc.  EWHC 46 (Comm).
An objective interpretation of the policy wording in the factual context of a claim is necessary when assessing an insured’s notification of “circumstances” under a professional indemnity policy; in reaching the recent decision of Euro Pools v Royal Sun Alliance the court did so in the context of a complex and developing set of facts, with arguably surprising results.
In the context of claims-made policies, the question of whether a claim made within one policy year falls within the scope of a notification of circumstances to a previous policy year is often in contention between insurers and their insureds. This is particularly true where an insured notifies a circumstance in respect of a problem which continues to evolve over time.
In Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd the court dealt with this issue in detail. Kajima had initially notified its insurers of a problem with “ponding” in the walkways on a housing development, but investigations into the problem over subsequent years revealed a number of other serious and extensive defects, unconnected to the original “ponding” issue. Akenhead J held that the notification was only effective in relation to the specific circumstances which were notified in it; it was insufficient that there was a historical “continuum” of investigation by various parties which coincidentally revealed a number of other defects that did not relate to the circumstances notified. He summarised the principles to be applied when considering the scope of a notification of circumstances:
- “It is only circumstances of which the Insured is actually aware which can be the subject matter of a notification……..The claim which is later pursued must arise not only from the notified circumstances but also only from the circumstances of which the Insured was aware” (our emphasis), and
- “There must be some causal, as opposed to some coincidental, link between the notified circumstances and the later claim.”
Euro Pools Plc. v RSA
Euro Pools specialised in the installation and outfitting of swimming pools and was insured under two design and construct professional indemnity insurance policies provided by RSA for the periods June 2006 to June 2007 (the First Policy) and June 2007 to June 2008 (the Second Policy), each with a limit of indemnity of £5 million. Both claims-made policies required notification by the insured “as soon as possible after becoming aware of circumstances…which might reasonably be expected to produce a Claim”.
Euro Pools sought cover for mitigation costs and third party claims arising out of a number of design issues. Several issues were in dispute, but we are looking in particular at the scope of the notification of circumstances in relation to defects in the insured’s “booms” (ie vertical walls that are used to divide the pool into different swimming areas) (the Booms Claim). The Court had to decide to which of the two policy years the Booms Claim attached.
The Booms Claim
The “booms” were intended to operate with an “air drive” system which consisted of steel tanks which, when filled with air, would raise the “booms” in order to divide the pool into the desired configuration. The booms were, in turn, lowered to their original position by releasing air from the steel tanks and allowing them to fill with water.
Euro Pools first discovered a problem with the “booms” in February 2007 and discussed it with RSA during a meeting. RSA’s meeting note records that: “the bottom of the ballast tanks in the booms has failed….looks like failure is of original bracing….Other option is to install what looks like a balloon/bag into tanks”. The problem (described as “tanks on booms”) was later noted by Euro Pools in their Proposal Form for renewal as circumstances which may give rise to a claim but they indicated that they were “fixing these with inflatable bags”.
During renewal, the broker emailed insurers stating that: “The issue [with the tanks on the booms, notified in February 2007] was a simple one, in that the floating cuboids used as booms were letting air out and so water in, and were not therefore floating. The insured were installing inflatable bags as liners and no claims were anticipated….”
RSA noted the matter as a circumstance under the First Policy at this stage (the 2007 Notification). Subsequent problems with the inflatable bags led to Euro Pools contacting RSA in May 2008 to explain that they wished to change to a hydraulic system and sought cover for the costs of doing so.
The Court held that Euro Pools’ substantial claim for mitigation costs in relation to the failure of the “booms” and change to a hydraulic system was validly notified in May 2008 (to the Second Policy) and did not fall within the scope of the 2007 Notification, as Euro Pools “was not aware in February 2007 of problems with the air drive system such that it could not notify the circumstances which led to a claim for the expenses of the move to a hydraulic system”.
This is, in our view, a surprising decision. In holding that the costs of replacing the original air drive system with a hydraulic system did not fall within the 2007 Notification (and thus did not attach to the First Policy) the court seems to have applied the Kajima principles very restrictively. The court’s reasoning was that Euro Pools did not correctly identify at the time of notification the cause of the problem with the air drive system. With respect to the court on a complex issue, however, in our view this is to confuse the circumstance itself (a failure of the air drive system due to some as yet unidentified design defect) with its cause.
It is well established that claims-made policies, in order to operate, have to contain provisions enabling the insured to notify circumstances which may give rise to claims which would have to be disclosed as being “material” to prospective insurers upon renewal. Such provisions would not be workable if, in order to be an effective circumstance, the insured not only had to identify the problem (here, a defective air drive system) but also had to identify correctly the cause of that problem.
As the Court pointed out in Kajima, the circumstances being notified may be specific or general, and may relate to damage, symptoms of damage, or actual, potential or perceived defects, liabilities or losses; it is possible for the insured to give notice of a 'hornets' nest' or 'can of worms' type of circumstance. The insured must, however, be aware of the circumstances which it is notifying, and the claim which is later pursued must arise not only from the notified circumstances but also only from the circumstances of which the Insured was aware. Practically speaking, it is often the case that an insured may encounter a problem, the cause of which is unknown at the time of the notification but will subsequently emerge through further investigations. The fact that the cause of a problem is not known at the time of the notification should not prevent a subsequent claim in respect of that problem falling within the scope of the notification, as long as the problem itself (ie the circumstances) is clearly identified.
In the Euro Pools case, it is notable that the cause of the failure of the system, failure in the welds in the tanks, was only ultimately determined at trial in 2017, following disputed expert evidence. The essential difference between Kajima and Euro Pools, and the reason that the former is not (in our view) a direct analogy with the latter, is that in Kajima the investigation following notification led to the discovery of wholly unconnected defects in a building. In Euro Pools the emerging claims related to the same defect, ie a defective air drive system, albeit that the cause of that defect was initially not known. Euro Pools identified, during the currency of the First Policy, the fundamental problem with the “booms”, which was that “[they] were letting air out and so water in, and were therefore not floating”.
Leaving aside the details of the Euro Pools case, the judgment is a reminder of the need to consider carefully the precise nature of the circumstance or problem being conveyed by the words of the notification. The more precise the notification as to the cause of the defect, the greater the risk that later claims or losses may not fall within its scope if the cause of the problems later turns out to be different. The implication of the Euro Pools judgment appears to be to encourage vaguer, rather than more precise, notifications.
RSA’s application to the Commercial Court for permission to appeal has been refused, but they have until 09 February 2018 to make an application to the Court of Appeal.