McManus and Others v European Risk Insurance Co [2013] EWHC 18

Introduction

The High Court of England and Wales recently handed down its decision in McManus and Others v European Risk Insurance Co which considered whether a professional indemnity insurer was correct to reject a “blanket” notification of claims under a claims made policy.

The facts

McManus Seddon was a firm of high street solicitors which took over another firm (Runhams) resulting in the combined firm of McManus Seddon Runhams (MSR). Prior to the take-over, Runhams had acquired a conveyancing practice called Sekhon Firth.

MSR took out a professional indemnity policy with the defendant for the 2011/2012 policy year. That policy was a claims made policy requiring notification when the insured first became aware of circumstances (defined in the policy as “an incident, occurrence, fact, matter, act or omission which may give rise to a claim” against the insured).

Following inception of the policy, MSR received a claim from a former lender client of Sekhon Firth alleging breaches of contract and tort arising out of a mortgage transaction. MSR notified the claim to its insurers and the notification was accepted as being valid. Subsequently, another 17 claims relating to work conducted by Sekhon Firth in respect of the same borrower were received by MSR. These were also notified to the insurer and accepted as valid.

Given the high number of claims, MSR proceeded to conduct a review of the 17 files as well as another 110 files from Sekhon Firth involving the same borrower and some further Sekhon Firth files selected at random. A third party risk consultant reviewed 32 of those files which were all found to show a consistent pattern of breach of duty by Sekhon Firth. Ex-employees of Sekhon Firth also confirmed mismanagement issues at their former firm. MSR concluded that there was a risk of negligence claims for mismanagement being brought in respect of a number of Sekhon Firth files.

MSR made a “blanket” notification to its insurers under cover of a letter headed “Blanket notification of circumstances which may give rise to claims”. The letter referenced the 17 claims already notified, the similarities between them and the 32 consultant reviewed files and the comments from the ex-employees of Sekhon Firth. MSR also estimated that there were potentially 5,000 other matters which contained these breaches and that “each and every file…should properly be notified to you as individually containing shortcomings on which claimants will rely for the purpose of bringing claims”.

With the exception of the notifications already made in respect of the 17 files and the 32 consultant reviewed files, insurers rejected the notifications on the basis that the notifications were not valid as MSR did not identify “the specific incident, occurrence, matter, act or omission” which could give rise to a claim on an individual file.

MSR sought a declaration that the “blanket” notification was valid and argued that the rejection of the notification had an adverse impact on it in that it had been unable to buy renewal insurance and had been forced to enter the Assigned Risks Pool thereby doubling its premium. The case is unusual in that MSR sought to clarify the issue of the validity of the notification before a claim arising from it had been made.

Decision

Applying the principles laid down in the other English decisions on notifications of J Rothschild Assurance Plc & Ors v Collyear & Ors [1998] CLC 1697 and HLB Kidsons v Lloyd’s Underwriters [2008] EWCA Civ 1206, the Court held that notwithstanding that the “blanket” notification letter did not identify any particular clients or transactions that might be affected by the breaches at Sekhon Firth, the letter constituted a valid notification and insurers were wrong to reject it. This was because there had been a “substratum of underlying external facts, over and above [the insured’s] mere concerns”.

The Court did not however grant the declaration even though the notification was deemed valid. Instead, on the balance of justice, it was held that it would be unfair effectively to bind the insurer to accept all claims in respect of the circumstances covered in the notification letter and that it would be better to see what claims materialised and consider them on a case by case basis.

Comment

The case highlights the difficulty in rejecting a notification purely on the basis that it notifies a large number of potential claims without identifying the precise circumstances that may give rise to the claim.

The decision reinforces the English law position that in the context of professional indemnity claims made policies, “blanket” notifications of circumstances may to be construed in favour of the policyholder making the notification. Although this is a first instance decision, it follows HLB Kidsons which was a Court of Appeal decision.

For Australian insurers and insureds, as the decision may influence the position here, it serves as a reminder to insurers to look very carefully at notifications and ensure that they are not automatically rejected when it appears that an insured has failed to identify the specific basis on which a future claim may be brought.

The most prudent way to handle “blanket” notifications may be to request further information from the insured whilst reserving rights in relation to indemnity until such time as a claim is actually made and its link to the notification of circumstances can be fully considered.