The Court of Appeal recently allowed RSA's appeal in Euro Pools Plc (in administration) v Royal & Sun Alliance Insurance Plc  EWCA Civ 808 (click here for the full judgment). Overturning the first instance decision, the Court of Appeal's decision provides further valuable guidance on the key principles relevant to the question of whether there has been a notification of circumstances to a claims made liability insurance policy.
The Claimant, Euro Pools Plc (in Administration) (Euro Pools), was a company specialising in the installation and outfitting of swimming pools. In particular, it fitted a system of movable "booms" in swimming pools. Booms are vertical walls that rise and sink and which are used to divide a pool into different swimming zones. Euro Pools was insured by the Defendant, Royal and Sun Alliance Insurance Plc (RSA), under two materially identical professional indemnity policies providing cover between 30 June 2006 and 29 June 2007 (the First Policy) and 30 June 2007 and 29 June 2008 (the Second Policy).
The issue in dispute was whether expenses incurred in installing a new hydraulic system to power the booms at several pools were incurred to mitigate potential claims arising from circumstances notified under the First Policy or whether the potential claims in respect of which the expenses were incurred arose from circumstances notified under the Second Policy.
Euro Pools contended that the expenses attached to the Second Policy; RSA contended they attached to the First Policy. The judge at first instance found in favour of Euro Pools (see our article on the first instance decision here). RSA appealed against that decision. The Policies
Both policies provided cover for the costs of remedial works intended to mitigate the risk of claims by third parties. The limit of indemnity under each policy was £5 million. The limit of liability under the First Policy had been eroded by other claims up to £4.3 million. Both policies imposed an obligation on Euro Pools to notify RSA of any circumstances that might give rise to a Claim:
"[Euro Pools] shall as a condition precedent to their right to be indemnified under the insurance give written notice to [RSA] as soon as possible after becoming aware of circumstances… which might reasonably be expected to produce a Claim… for which there may be liability under this Insurance. Any Claim arising from such circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given."
The policies also excluded RSA from liability in respect of:
"the consequence of any circumstance 1) notified under any insurance which was in force prior to the inception of this Insurance [or] 2) known to [Euro Pools] or which should have been known to [Euro Pools] at the inception of this Insurance which might reasonably be expected to produce a Claim."
By February 2007 Euro Pools had been informed of problems with the steel tank system used in booms that it had installed at two sites. A notification of circumstances was made to the First Policy as a result and Euro Pools informed RSA that it would attempt to fix the problem by installing inflatable bags in the booms.
In June 2007 Euro Pools sought to renew its insurance with RSA. The completed proposal form referred to the problem with the steel tanks and the intention to fix these with inflatable bags. Euro Pool's broker, Aon, noted to RSA that it was anticipated that the costs of the remedial works would fall within the policy excess but that “the insured wish to ensure the matter is logged on a precautionary basis should there be any future problems”.
Euro Pools soon identified problems with the inflatable bag system and in May 2008 it notified RSA of the same. Euro Pools thereafter attempted to use a number of different methods to fix the original problem of the booms failing to rise and fall, none of which were successful. In August 2008 Euro Pools contacted RSA noting that it had concluded that the only realistic option was to install a hydraulic system. RSA consented to costs of the remedial work of installing hydraulic systems under the First Policy. RSA made regular interim payments in respect of the same.
In May 2013, Euro Pools and RSA met, and Euro Pools expressed the view that its claims for indemnity for mitigation work attached to the Second Policy (which had not been eroded by other claims made by Euro Pools).
Euro Pools' position was that its notification in February and/or June 2007 related only to the use of steel tanks, whereas the indemnity claimed related to the replacement of both bags and tanks in favour of a hydraulic system and it should therefore attach to the Second Policy.
RSA's position was that the costs of remedial works in respect of which an indemnity was claimed arose from the circumstances notified in February and/or June 2007 and that the claim therefore attached to the First Policy.
The judge at first instance held that in February 2007 Euro Pools was only aware of a problem with some (not all) of the stainless steel tanks installed in the booms and not the wider problem with its air drive system. Accordingly, Euro Pools could not have notified RSA of the circumstances leading to the decision to adopt a hydraulic system. The mitigation costs attached to the Second Policy in light of the notification made in May 2008.
In a unanimous decision, the Court of Appeal allowed RSA's appeal and determined that the mitigation costs attached to the First Policy.
The key principles on notification of circumstances
The legal principles from the authorities applicable to the question of whether there has been a notification of circumstances under a claims made liability insurance policy were not substantially in dispute between the parties. However, Dame Elizabeth Gloster, giving the leading judgment, helpfully summarised the key principles from the authorities:
- A deeming provision in the policy is to be construed and applied with a view to its commercial purpose which is to provide an extension of cover for all claims in the future which flow from the notified circumstances (HLB Kidsons (A Firm) v Lloyds Underwriters Subscribing to Lloyds Policy No 621/PKID00101 & Ors  EWHC 1951 (Comm)).
- The test that notified circumstances "may" give rise to claims set a deliberately undemanding test. It required only a possibility of claims in the future (J Rothschild Assurance Plc v Collyear  1 Lloyds Rep IR 6). Dame Elizabeth Gloster did not consider that the materiality threshold was impacted by the word "reasonably".
- The insured may give a "can of worms" or "hornet's nest" notification i.e. a notification of a problem, the exact scale and consequences of which are not known (Kidsons).
- The insured does not need to know or appreciate the cause or all the causes of the problems which have arisen, or the consequences which may flow from them (Rothschild and McManus v European Risk Insurance Co  Lloyd's Rep IR 533).
- There has to be some causal, as opposed to merely some coincidental, link between the notified circumstances and the later claim (Kajima UK Engineering Limited v The Underwriter Insurance Company Limited  EWHC 83 (TCC)).
- When construing a communication to determine whether it is, or its scope as, a notification, one applies conventional principles of interpretation (Kidsons).
Application of the principles
(i) Scope of the circumstances notified by Euro Pools in 2007
Dame Elizabeth Gloster concluded that the circumstances notified in 2007 were that the booms, which were powered by an air drive system, were not rising and falling properly, rather than that there was a problem with the steel tanks. She concluded that it would not be appropriate to "over-analyse" the problem by dissecting every potential cause of the problem as a different notifiable circumstance. The fact that Euro Pools did not know at that stage what the fundamental cause of the problem was with the air drive system did not make any difference. It was sufficient that Euro Pools knew that there was a problem in that the booms failed to rise and fall properly and that it might face potential claims from third parties as a result.
She also concluded that the potential third party claims in respect of which Euro Pools undertook the mitigatory works were claims based on booms in supplied pools failing to rise and fall, rather than claims in respect of failure of the booms to rise and fall because of defects in the steel tanks. In her judgment, it would not have mattered to the claimant what the technical reason for the non-functioning boom was.
(ii) Was there a sufficient causal link between the circumstances notified in 2007 and the potential third party claims?
Dame Elizabeth Gloster was satisfied there was a sufficient causal link. Given her conclusions on the circumstances that had been notified, and the nature of the potential third party claims, she was comfortable that the claims "arise from" the circumstances notified in 2007. Applying the test in Kajima, she found it impossible to say that there was no more than a "purely coincidental" connection between the problems notified in February and June 2007 and the work carried out from mid-2008 to install hydraulics, which was intended to solve the same problem as had been notified in the 2007 policy year. She concluded that there was an "air of unreality" about Euro Pools' suggestion that there was no such causal connection and indeed internal meeting and loss adjuster notes traced the decision to install hydraulic cylinders back to the failures in early 2007.
(iii) Does notification of circumstances under the First Policy preclude indemnification under the Second Policy?
Dame Elizabeth Gloster also concluded that the effect of the exclusion in the Policies (quoted above) in respect of any circumstance previously notified was that, if a potential third party claim (or mitigation costs to avoid such a claim) arises from circumstances notified under the First Policy, it is also a "consequence" of that circumstance. Accordingly, the Policies precluded Euro Pools from demanding an indemnity under the Second Policy in respect of costs incurred mitigating such a claim.
The Court of Appeal's judgment provides not only a useful summary of the key legal principles relating to notification of circumstances under claims made liability policies, but also valuable insight into their proper application. While the insured must be aware of the circumstances in question, it may be able to do little more than point to the fact that something is not working for a reason which has not yet been ascertained (a "can of worms" or "hornet's nest" notification). There is no reason why in principle a notification should not be made in these terms provided that the circumstance might reasonably be expected to give rise to a claim. The Courts will not "over-analyse" or "dissect" the problem that has been notified. Once there has been a notification of such circumstances, the question will be whether any future claim which materialises is one arising from such circumstances. This requires some causal link but is not a demanding causation test.