Over the years, issues of attachment and which policy responds has been a great source of contention in professional and financial lines, with issues around notification frequently being the source of such disputes. Liability policies are particularly susceptible to notification disputes due to the claims made nature of such policies, providing cover for claims which are made against the insured in the policy year, even though the alleged negligence may have occurred in earlier years.
Whether a current or previous policy responds to the claim can centre on whether the claim arose out of circumstances previously notified. However, where a problem develops over time, ascertaining whether an earlier notification actually gave rise to the ultimate claim can be difficult to assess. This was one of the issues to be decided in the recent case of Euro Pools Plc (In Administration) v Royal & Sun Alliance Insurance Plc  EWHC 46 (Comm) (we touch on the other issues to be decided below).
The insured claimant was a company which specialised in the installation and fitting of swimming pools, providing movable floors in order to vary the water depths for different pool activities and “booms’, being walls that separated the pool into different zones. An air drive system raised and lowered the booms.
In February 2007, the insured notified its insurers of a problem with the movable floors which needed to be urgently remedied and it also stated that there was a problem with some of its booms; a problem had been identified with the stainless steel tanks which, when filled with air, raised the booms. However, the insured believed at that stage that the problem was fixable with the use of bags and, in any event, the costs involved were below the excess on the professional indemnity policy. The insured replaced the tanks in some of the pools with inflatable bags but these later failed and it notified its insurer in May 2008 that the boom system would have to be changed to a different system. The insured claimed, amongst other things, for the mitigation costs of replacing the system.
The February 2007 notification was made to the 2006/07 policy (the First Policy) and the May 2008 notification was made to the 2007/08 policy (the Second Policy). Both policies were written by the same insurer on the same terms and required the insured to notify the insurer "as soon as possible after becoming aware of circumstances…which might reasonably be expected to produce a Claim…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."
There were several issues to be decided at trial but in relation to the booms claim the Court had to decide whether there was a valid notification in May 2008 under the Second Policy. Further, what the scope and effect of the notification in February 2007 was and whether the mitigation costs fell to be covered under the First Policy or the Second Policy?
The insured argued that there was a valid notification to the Second Policy as the notifications made by the insured in February 2007 could not extend to the booms claim because by June 2007 no booms fitted with bags had failed. Therefore it was not possible for the insured to know that there was a problem with the bags. Counsel for the insured relied on the dicta of Akenhead J in Kajima UK Engineering Limited v The Underwriter Insurance Company Limited : “It is only circumstances of which the Insured is actually aware which can be the subject matter of a notification…The factual context is important, not only as a matter of interpretation of the notification but also, because it is only matters of which the insured is aware that can form the basis of a valid notification.”
The insurer sought to argue that all the losses fell within the First Policy, with Counsel submitting that the test of materiality for notice is a weak one (J Rothschild Assurance Plc v Collyear ) and it is possible to give a blanket notification (McManus v European Risk Insurance Co). It should be noted that the total loss in this case exceeded the policy limit of £5 million for both years.
The Judge agreed with the insured. Whilst circumstances involving the booms had been notified to the insurer under the First Policy in February 2007, the scope of the notification was not such so as to mean that the later claim that arose should attach back to the First Policy. The Court found that, on the evidence, as the insured was not aware at the time of the notification in February 2007 of the exact problem with the system, it could not form the basis of a valid notification to the First Policy. The problem identified by the insured in February 2007 was that there was a failure of the original bracing and it was considering options to install a bag; at that stage the insured did not know of problems with the bags. The insured also only knew there was a problem with the tanks at some but not all sites. It was in May 2008 that the insured obtained the requisite awareness of the problem with all the booms and that its bag solution had failed (and, in fact, the cause of the failure of the system was only identified through expert evidence at trial).
Further, the Court held that there was no causal link between the booms failures and the decision to change systems; according to expert evidence, the system would have worked if the cause of the problem had been properly pinpointed.
As such, the claim had been validly notified to the Second Policy.
Notification was just one of the points in issue. Another question was whether the costs incurred in respect of a claim brought against a third party were covered by the policy. The policy provided that the insurer "shall be entitled to … prosecute in the name of the Insured for its own benefit any Claim" and a dispute arose as to whether there was an implied obligation for the insurer to pay the insured's costs and expenses for any such claim.
The Judge noted that the clause was not limited to subrogation claims once the insurer has paid out under the policy. She also found that proceedings against a third party (brought in the insured's name but not wholly for its benefit) had been approved by the insurer. However, she did not believe that it was necessary to imply a term that the insurer would indemnify the insured for any costs and expenses which the insured incurred. However, that was only because "there was no reason why the [insured] should incur any costs and expenses if the [insurer] took proceedings in the name of the [insured]… Payment could be made directly by the [insurer] of costs and expenses and therefore there is no necessity to imply a term that the [insurer] would indemnify the [insured] for costs and expenses the [insured] incurred".
Although she did find that there was an implied term that the insurer would indemnify the insured in respect of any adverse costs orders against the insured, that was only for so long as the insurer was prosecuting the claim. The insured excluded the insurer from the conduct of the proceedings after August 2013. Accordingly adverse costs orders made after that date were not covered, even if they related to costs incurred before that date.
The policy also contained the following clause: "The Company will indemnify the Insured against costs and expenses necessarily incurred in respect of any action taken to mitigate a loss or potential loss that otherwise would be the subject of a claim under this Insurance". When does limitation for a claim for such mitigation expenses start to run? The Judge held that, although there was no direct authority on the point, a mitigation of loss clause is a third party financial loss clause, with the result that "the insurer has agreed to hold the assured harmless against a specified loss or expense and once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense. Accordingly the right to an indemnity (and the cause of action) arises immediately the expense is incurred to mitigate a loss or potential loss".
However, where that right to be indemnified arose more than 6 years before the issue of proceedings (i.e. here before 28th January 2010), it would be time barred. This then led to a further discussion of whether the insured was entitled to allocate lump sum interim payments from the insurer on account of its costs and expenses in chronological order (i.e. paying the insured's earliest costs and expenses first), in order to ascertain what the insurer had paid so far in satisfaction of its obligation to indemnify the insured. The Judge concluded (by analogy with an allocation case) that "if the appropriation is made bona fide and without collusion, the claimant has a choice as to how to appropriate the monies received between the different claims".
However, the insured had not established a right to appropriate payments to a time barred debt. So payments made after 28th January 2010 had to be divided pro rata between expenses incurred before and expenses incurred after that date (and payments made after 28th January 2010 could not be treated as discharging only obligations after that date).
Reference was made in this case to Teal Assurance v WR Berkley in which it was noted by the Supreme Court that a freedom to adjust the order of payment of claims "cannot in the present context readily be reconciled with the basic philosophy that insurance covers risks lying outside an insured's own deliberate control". However, that case differed from this one in that the insured here was not seeking to control the order in which claims were presented to insurers: it was instead seeking to control the order in which payments received from the insurers were allocated in order to ensure that the overall liability of the insurer was not reduced (i.e. because allocations were made to the time-barred elements of the claim first). The insured was said to be entitled to control that, save that it could not allocate payments to time-barred expenses.
In relation to notification, whilst the oft-quoted dicta in Kajima states that it is possible to notify a "can of worms"-type situation (i.e. awareness of a general problem), the Court here interpreted this narrowly. As the insured did not know the exact cause of the problem at the time of the first notification, the claim, the Court held, could not attach to the First Policy.
It is an essential premise of claims made policies that they are designed so that circumstances can be notified to insurers; these being matters of which the insured is aware which may give rise to a claim. Without that provision, the insured would be placed in an impossible position, as it would be required to disclose on renewal a situation which had not yet become a claim, but which would then likely be excluded from cover. The majority of policies do not seek to define a “circumstance” but, in general terms, it is a fact or situation which, objectively evaluated, creates a reasonable and appreciable possibility that it will give rise to a loss or claim against the insured. Here, the “situation” was a problem with the air drive system. Whilst the exact cause of the problem was not yet known, that does not take away the fact that there was a problem of which the insured was aware.
The Court’s decision, therefore, applied Kajima restrictively to the facts in this case. Whilst on the facts of the case the insured wanted the claim to attach to the Second Policy, the effect of this decision may be that insureds may consider making less precise notifications of circumstances in order to ensure that later claims fall within the scope of an earlier notification; the more specific the language used to describe a circumstance, the greater the risk of the notification being construed narrowly. More circumstances notifications will also likely be made, as the defects emerge and develop, rather than the insured just relying on a single circumstance notification.
This is all especially so if the insured is changing carrier. If the insured knows of circumstances in an earlier year and does not notify that year's insurer, the insurer in a subsequent year is likely to exclude cover on the basis of a "prior known circumstances" exclusion. While the policy may have a "continuity of coverage" clause which is designed to overcome a failure to notify in an earlier year, those clauses generally do not apply where there has been a change in insurers and, in any event, are not yet that common in the UK. Further, if the insured knows of circumstances in an earlier year and notifies that year's insurer, the insurer in a subsequent year can use the notification to exclude a claim arising from it regardless of whether or not the first insurer accepted the notification or covered the claim.
As a closing point, the case further illustrates, in line with previous case law on the subject, how fact-sensitive the issue of notification can be.