You should use an experienced broker to help manage your program of insurances, including reviewing the details of the insurance cover annually, immediately prior to renewal.
In the first part of this article we outlined, at a high level, some of the key features of common insurance policies purchased by organisations. In this second part, we set out some practical guidance on notifying and settling a Claim and renewing a policy.
When do you have to notify your insurer of a potential Claim?
When something goes wrong, in-house counsel should consider whether there is any need to notify one or more of its insurer under a particular insurance policy that might respond. Notifications under occurrence-based policies such as an ISR policy should be made when an occurrence covered by the policy occurs. Knowing when to notify an insurer under claims-made liability insurance policies is not as straightforward.
For example, in the case of a PI policy, an insured should notify an insurer if it becomes aware of an error it has made in the design of a building. Likewise, under a public liability policy, the insured should notify if it becomes aware of, for example, a customer slipping and injuring his/her leg on the insured’s premises.
You will observe from these examples that circumstances or facts which might give rise to a Claim against the insured should be notified to the insurer even before any Claim has been formally made by a third party, whether it is a written demand for compensation or allegation of civil liability. This is because of the application of section 40(3) of the Insurance Contracts Act 1984 (Cth). This section applies so that if a circumstance or fact is notified during the policy period, the insurer cannot refuse to indemnify an insured in respect of a Claim resulting from the matters notified if such Claim is not made during the policy period. If a notification is not submitted before the policy expires, the insured will not have the benefit of this section, unless there is a deeming clause in the policy and the insured is able to rely on section 54 of the Act (which is a topic for another day).
In the case of circumstance notifications, the insured should tell the insurer of the precise facts or circumstances that it reasonably believes might give rise to a Claim against it. It is generally accepted that an insured cannot notify a shopping list of all potential circumstances and the circumstance notification needs to be specific enough to put the insurer on notice. However, courts have also said that if a matter notified subsequently gives rise to a Claim, then, ipso facto, at the time of notification, it must have been a matter which might give rise to a Claim. So, even if an insurer purportedly rejects a “blanket” notification of circumstances, it may still be a valid notification if a Claim is made in the future which is referrable to the circumstances notified. As a general rule, the approach of a prudent risk manager is to notify early and notify often.
It is often a requirement of a policy that the insured notify the insurer of a potential Claim “as soon as reasonably practicable”. Australian courts have variously held:
- “as soon as reasonably practicable” does not mean “as soon as possible”;
- what is “as soon as reasonably practicable” depends on the circumstances of each case, to be determined when all the evidence has been placed before the court;
- it does not mean that a person must act as “soon as the first germ of a suspicion occurs”;and
- determining what is reasonable involves a consideration of the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities which the defendant may have.
A complete failure to notify circumstances of a potential Claim can result to no insurance cover because of the application of the “prior known circumstances” exclusion contained in the renewing policy. If the insurer is not notified in a timely manner, the insurer is entitled to reduce its liability under the policy by the monetary equivalent of any prejudice which it can prove it sustained due to the late notification. In this case, close consideration of the precise terms of the policy (including the presence or otherwise of a deeming clause) and the application of section 54 of the Act is required, which is beyond the scope of this article.
How effectively to renew an insurance policy
Each year, a company renews its insurance policies. While it is tempting to treat this as a tick-the-box exercise, it is vital that proper consideration be given to the terms of insurance policies at renewal.
Section 21 of the Act provides that a corporate insured has a duty to disclose to the insurer a matter that would be relevant to the insurer’s decision to underwrite the risk. This duty arises before a contract of insurance is entered into, as well as when a policy is being renewed. If an insured does not comply with the duty of disclosure, the insurer can cancel the contract of insurance or refuse to pay a claim. Accordingly, it is good practice for a company-wide email to be sent asking whether there are any issues, problems, circumstances or facts which need to be notified to the insurer prior to renewal.
Renewal time is also a good time for in-house counsel to consider whether the details of the insurance policy, usually contained in the Schedule to the policy, need to be updated. This includes, but is not limited to:
- the limit of liability — this is the maximum liability of the insurer under a particular policy. If a company grows or contracts in size, the insurance limits of liability may need to be updated to reflect this. The limit of liability should always reflect the money that a company expects would cover the costs associated with any loss;
- the insured — it is vitally important, especially for companies with many related entities/subsidiaries, that the “insured” is correctly identified in the Schedule and the policy wording. If a certain company or subsidiary is not listed as an insured or a noted interest beneficiary, it will not receive the benefit of the insurance policy; and
- the business — consideration should be given to whether the types of activities listed in the policy Schedule remain an accurate summary of the business activities actually undertaken.
How to settle a Claim when the insurer has not granted indemnity
It is common for insurers to reserve their rights and not make a final decision on indemnity for some time. In this scenario, the insurer is sometimes referred to as a “fence-sitting insurer”.
In circumstances where the insured wishes to settle liability and the insurer has reserved its rights or not yet responded to a request for indemnity, it is good practice to write to the insurer informing it of the company’s intentions and provide details of the terms of the proposed settlement. Where a term of the policy requires it, the insured should seek the consent of the insurer to any settlement.
While an insurer is on the fence, the insured should be aware that if it settles any liability and intends to seek indemnity under the policy in respect of the settlement, it will need to establish not only that the liability falls within the ambit of the policy but also that:
- the settlement related to, and resolved an underlying legal liability to, a third party; and
- the settlement was reasonable in all of the circumstances.
What is reasonable is determined objectively and by reference to all circumstances surrounding the Claim. The insured has the onus of establishing the existence of an underlying liability and the reasonableness of any settlement. In most cases, evidence of legal advice which recommends the settlement will be vital to proving that the settlement was reasonable. Before providing a response on indemnity, the insurer will likely instruct the insured to act as a prudent uninsured, which simply means that it should take reasonable precautions to avoid further loss.
Key lessons for in-house counsel
To get the most out of policies of insurance and avoid unpleasant surprises, in-house counsel should:
- engage the services of an experienced broker to help manage the company’s program of insurances;
- review the details of the insurance cover annually, immediately prior to renewal, with assistance from a broker;
- ·notify the insurer early and often of facts or circumstances which you believe might give rise to a Claim against the company or its officers; and
- beware of settling any liability in circumstances where an insurer has reserved its rights. Consideration should be given to whether the insured has an obligation first to seek the insurer’s consent to any settlement and whether coverage will be afforded if the settlement goes ahead, without the consent or knowledge of the insurer.