History tells us that economic downturns lead to increased litigation. If you unfortunately become embroiled in a dispute with a third party, be careful not to compound the problem by jeopardising your insurance cover.
Most funds will have insurance against legal liability which may be incurred to third parties, most commonly Directors and Officers Liability Insurance and Professional Indemnity Insurance. Under such policies, coverage will generally be provided on a "claims-made basis". In a "claims-made" policy, coverage is triggered when the insured first becomes aware, and notifies the insurer of a claim, or circumstances which may give rise to a claim. The insurer whose policy is in force at the time of awareness and notification is the insurer who provides an indemnity.
When a third party issues a formal letter before action, or gives some other notice of its intention to claim against the insured, it will be obvious to the insured that he must notify his insurer promptly. However, the insured will face greater difficulty identifying circumstances which may give rise to a claim, having to look critically at his past actions to determine the potential for third party liability. The danger is that an insured will become aware of certain circumstances, but will fail to notify them immediately or at all. Should those circumstances later give rise to a claim, there may be scope for the insurer to deny an indemnity.
A recent decision concerning the interpretation of a typical "claims-made" notification clause, HLB Kidsons v Lloyds Underwriters & Ors  EWHC 1951 (Comm), suggests insureds will be given little leeway when it comes to identifying and notifying circumstances which may give rise to a claim. We hope that by recognising the implications of this decision, and by following our notification "checklist" which above all urges strict compliance with notification clauses, you will not be left without insurance cover in the face of disputes with third parties.
Kidsons, an accountancy firm which owned and managed a company which marketed and implemented tax avoidance schemes (S@FI), was insured under a claims made professional indemnity policy from 1 May 2001 to 30 April 2002. In 2001, one of Kidsons' partners raised concerns as to the efficacy of S@FI's schemes. Having decided to notify insurers, a letter dated 30 August 2001 was sent to the placing broker stating that "the Inland Revenue, if minded, could be critical of some procedures followed in certain cases." A letter to insurers enclosing a claims bordereau was sent on 5 October 2001, with a further letter dated 28 March 2002 being sent to the Lloyd's underwriter. This final letter recorded that "in some instances there might be procedural difficulties involving…each scheme and this might lead to the possibility of criticism in the future."
The relevant notification clause was as follows:
"the Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the [Policy period]…which may give rise to a claim or loss against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the [Policy period] shall be deemed for the purpose of this Insurance to have been made during the subsistence thereof."
The issue was whether the communications to insurers amounted to notification of a circumstance "as soon as practicable", and whether a failure to notify in this way was fatal to Kidsons' insurance claim. Gloster J held that:
- Although notification was not expressly stated to be a condition precedent, compliance with the notification condition was required if a claim made after the Policy period was to be treated as if made during its currency.
- The 31 August 2001 and 5 October 2001 were insufficiently unambiguous to qualify as notifications.
- The 28 March 2002 letter was valid notification, but was not given "as soon as practicable", being given 4 months after Kidsons became aware and 3 months after the Policy period's expiry.
Implications While this decision seems destined for the Court of Appeal later this year, insureds would still be well-advised to take notice of its potentially far-reaching implications. Importantly, it suggests that notification clauses are to be strictly construed, with a 4 month delay in notification enough to invalidate a notice. It also suggests that the Courts will be inflexible when considering if communications are sufficiently clear and unambiguous that they leave the recipient in no doubt that the insured is giving notice of a circumstance.
The decision may therefore give rise to insurers taking a stringent approach to notification, even within the Policy period, and an increased willingness to contest the validity of notifications
We have devised a checklist which insureds may wish to follow to prevent such disputes from arising:
- Notify circumstances as they arise throughout the Policy period. So-called "laundry lists" or bulk notifications given at the end of the Policy period may be contested.
- Give careful thought to the terms in which a notification is drafted. In particular: (a) Expressly state that the communication is intended to notify a circumstance. (b) Be precise when identifying the circumstance you wish to notify.
- Seek confirmation that a communication is accepted as notice of a circumstance.
- If in doubt, notify.