EWHC 1951 (Comm)
Kidsons, a firm of chartered accountants which merged with Baker Tilly in 2002, claimed under its professional indemnity cover in respect of claims made against it arising out of the tax avoidance schemes marketed by its subsidiary Solutions at Fiscal Innovation Ltd (S@FI). The policy period ran from 1 May 2001 to 30 April 2002. The claims against Kidsons were made outside the period of cover so it relied upon General Condition 4 (GC4) of the policy which enabled the insured to obtain an extension of cover for claims made after expiry of the policy provided the claim arise out of a circumstance of which the insured became aware during the policy period and in respect of which he gave notice to the underwriters “as soon as practicable”.
Kidsons purported to give notice of the circumstances giving rise to the claims under GC4 by, in particular, two letters sent within the policy period on 31 August 2001 and 28 March 2002. Underwriters did not accept that any of the purported notifications complied with GC4.
A plethora of issues concerning notification were decided by Gloster J. The findings concerning some of the most significant are set out below.
The judge held that there was no effective notification to the underwriters by the presentation of the August 2001 letter and other documents. The presentation to the Lloyd’s Lead Underwriter of the March 2002 letter and other documentation was a valid notification as was the slightly later notice given to the underwriters in the company market. However, these notifications related only to two particular schemes and not to the whole range of tax avoidance products marketed by S@FI. The issue as to whether the claims which have arisen against S@FI fall within the scope of the circumstances notified remains to be decided on the basis of sample claims.
Was GC4 a condition precedent?
Despite the fact that the notice clause for claims made within the period of cover (GC3) was stated to be a condition precedent and GC4 was not so described, the judge held that compliance with GC4 was a condition precedent to liability. Notification in accordance with GC4 was necessary to obtain an extension of cover which would not otherwise exist and it would be “linguistically superfluous” to include the words “condition precedent” in these circumstances.
Interrelationship between GC4 and the Minimum Terms
Kidsons argued that the effect of the Institute of Chartered Accountants of England and Wales’ (ICAEW) Minimum Terms as reflected in the policy was to limit underwriters’ remedy for breach of the notification provision to compensation for prejudice. The judge rejected this argument. The Minimum Terms deal with the reduction of cover which exists rather than the creation of cover which would not otherwise exist.
Interrelationship between GC3 and the Minimum Terms
This somewhat surprising part of the judgment is obiter but of significance nonetheless. Gloster J concluded that the Minimum Terms did not apply to the condition precedent in GC3, the notice clause for claims made within the period of cover. A failure by the insured to give notice in writing as soon as practicable of a claim in accordance with GC3 means that there is no coverage in respect of that claim. The public policy underlying the Minimum Terms does not preclude insurers stipulating in their contracts of insurance that cover will not obtain where the insured fails to give prompt notice of claims made or losses discovered. The opposite conclusion would effectively transform the policy into something akin to an occurrence policy and not a claims made policy.
Is the subjective intention of the insured relevant to the interpretation of the notice?
The fact that a document is not intended by the insured to constitute a notice does not preclude it from qualifying as a notice. However the insured’s state of mind is relevant to determine the extent to which it was aware of and, hence capable of notifying, circumstances which might give rise to a loss or claim. If the insured is not aware of a relevant circumstance at the time he purports to give notice, the notice is ineffective.
Can the awareness of one partner be imputed to another under a composite policy?
Kidsons argued that the composite nature of the policy meant that awareness of any individual partner cannot be imputed to any other partner. This argument was rejected for various reasons, not least because Kidsons had presented its case on the pleadings as the Kidsons’ partnership seeking a declaration entitling it to an indemnity from underwriters with no suggestion that only some of its partners had been aware of circumstances at the relevant times. The judge also rejected the argument as a matter of principle. Knowledge on behalf of the partnership secretary or the relevant managing organ of a partnership can be imputed to all the partners. This means in turn that notice under the policy can be given on the partners’ behalf. The responsibility is on all partners to ensure that adequate notification procedures are in place once the firm is made aware of the relevant circumstances.
What does an effective notification of circumstances look like?
It should be in terms which leave the reasonable recipient in no reasonable doubt that it is purporting to notify a circumstance that might give rise to a claim. It should be made to the insurers’ claims representative or possibly to a placing underwriter in the context of renewal where the same information will be relevant for claims and placing purposes. It should refer to circumstances – the 31 August 2001 letter referred to “material information for insurers” which was not the same thing, particularly not when addressed to the placing underwriter. It should identify an error, act or omission or potentially negligent or wrongful conduct on the part of the insured, identify a possible claimant or victim and the loss they may suffer as a result. Where a bordereau is presented as part of the purported notification it must be read together with the information presented in the underlying claims files which constitute the primary notification material.
What does “as soon as practicable” mean?
Gloster J took 27 March 2002 as the start date for the purpose of working out the period that was “as soon as practicable” since at that date Kidsons had all the information it needed about the circumstances which were to be notified. Notice given a month or so later was held to be “as soon as practicable” since the market permits some latitude. However, notice given to the following market on 24 July 2002, almost three months after the expiry of the policy period and four months after the judge’s start date, was not “as soon as practicable”.
To whom must notice be given?
GC4 referred to notice being given “to the Underwriters”. Such a term requires notice to be given to each underwriter or its duly authorised agent unless agreed otherwise between the parties or in a Market Agreement. The presentation to the following Lloyd’s market in this case was not made until July 2002 and was not made as soon as practicable. Although in practice this point would rarely be taken where effective notice had been given to the lead underwriter and company market, the judge held that underwriters were entitled to take it and to insist on strict compliance with the policy.
Comment: this is self-evidently an important decision which will be scrutinised at length (the judgment is 228 paragraphs long) in the next few months. The judge has granted permission to appeal but it is not yet clear how many and which of the issues will be reviewed by the Court of Appeal. Whether or not all or part of the judgment is upheld, it will be referred to for years to come for the wealth of its content about the operation of the market and the policy issues surrounding minimum terms and notification provisions.