The Judgment of the Court of Appeal last week in HLB Kidsons (a firm) -v- Lloyd's Underwriters subscribing to Lloyd's Policy Number 621/PK1D00101 and Others  EWCA Civ 1206 provides further guidance on notification provisions under professional indemnity policies.
Professional indemnity policies invariably include notification provisions relating to notification of claims and circumstances. Typically such provisions will say something about the timeliness of such notifications. In the case of notification of circumstances the requirement may range from notification having to be made quickly (for example as soon as practicable) to there being no timing requirement at all. Professional indemnity policies also generally contain "deeming" provisions which deem that claims that arise, after the expiry of the policy period and out of the circumstances notified, attach to the policy under which notification of circumstances was given.
The Judgment of the Court of Appeal re-affirms the need for insureds to give timely notification of circumstances. Otherwise claims arising after expiry of the policy period out of those circumstances will not necessarily attract cover. The decision means that there is scope for yet further arguments on notifications (an already fertile ground for disputes).
HLB Kidsons ("Kidsons") issued proceedings against their primary layer professional indemnity insurers (the "Underwriters") seeking a declaration that they are entitled to be indemnified in respect of all claims brought against Kidsons by their clients in relation to the activities of Solutions @ Fiscal Innovations Limited ("S@FI"), a company managed by Kidsons' partners which sold tax avoidance products.
It is Kidsons' case that they made effective notification of circumstances which may give rise to a claim to Underwriters and that such notification embraced the full extent of concerns relating to the whole of S@FI's work both as regards the tax schemes marketed and as regards the implementation of such schemes, which had been raised by a tax manager employed by Kidsons called Iain Torrance.
First instance decision
Mrs Justice Gloster at first instance ( EWHC 1951 (Comm)) held that there had only been effective notification to the first and second lead Lloyd's syndicates and the company market (but not the Lloyd's following market) in relation to procedural defects in the implementation of Discounted Option Schemes ("DOS") being only one of a range of tax schemes marketed by Kidsons.
The effective notification was made in April 2002 with the communication having observed that there might be problems about the implementation of DOS. She found that earlier communications were not effective notifications at all (including an October 2001 presentation which consisted not only of a letter of 31 August 2001 but also of other documents presented in a claims file with an accompanying bordereau).
The Appellants (including Kidsons) sought an order that: (a) Kidsons' letter of 31 August 2001, with accompanying documents, as presented to Underwriters on 17 and October 2001 and on later dates constituted valid notification under General Condition 4 ("GC4") of Kidsons' professional indemnity policy of circumstances which might give rise to claims against Kidsons in relation to tax planning work and advice provided by S@FI and/or Kidsons; and (b) that Underwriters are bound to indemnify Kidsons in accordance with and subject to the terms and limits of the policy in respect of any claims made against it falling within the scope of the notification.
The leading judgment in the Court of Appeal was given by Rix LJ with Toulson LJ supporting his views and Sir Richard Buxton (effectively) dissenting on the issue of notification.
Decision of the Court of Appeal
There were two main issues in dispute being (i) the effect of presentations made to Underwriters in October 2001, April 2002 and July 2002 and (ii) the construction of GC4. The construction of GC4 was principally relevant to the July 2002 presentation (it was made after the expiry of the policy period) and the application of the deeming provision as set out in the second sentence of GC4.
GC4 provides: "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 period specified in the Schedule which may give rise to a loss or claim 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 period specified in the Schedule shall be deemed for the purpose of this Insurance to have been made during the subsistence hereof".
It was necessary for the Court to consider the three presentations made to Underwriters (the Appellants did not appeal the judge's findings below that the September 2001 presentation was ineffective as a notification of circumstances).
The Court of Appeal held that the two lead Lloyd's syndicates and the company market received effective notification relating to the implementation of S@FI products generally (not limited to DOS) under the presentations made in October 2001 and April 2002. They concurred with the judge below that the July 2002 presentation to the Lloyd's following market was not made "as soon as practicable" given that the real starting point for the July 2002 presentation went back to August 2001.
The judge below had concluded that there were defects in communications to Underwriters and, in particular, in a letter from Mr Patten of Kidsons of 31 August 2001 which was "coy in the extreme". Rix LJ stated that the 31 August letter was not a satisfactory letter but, it was, on all objective criteria, intended to be a notification of circumstances; it was presented by the claims side of Millers to the claims side of the first lead Lloyd's underwriter with accompanying bordereau. He agreed with the judge that a bordereau cannot go further than the essential letter of notification but, going further than the judge, said that: "it has to be read together with that letter, and it can clarify, even if it cannot extend".
Rix LJ railed against applying a strict Delta Vale test ("sufficiently clear and ambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate") as to the quality of the notification required under GC4. He said that the requirement under GC4 is a fairly loose and undemanding test; it must be in writing and given as soon as practicable after awareness of circumstances which may give rise to a claim. "..as for the experts' view that a notification should be " fair, comprehensive and comprehensible".. a non-comprehensive notice of circumstances of which an assured is aware carries its own penalty in that it is unable to give notice of that which is omitted…".
The Court did not go behind Underwriters' acceptance (save in respect of a separate awareness point which we do not deal with here) that subjective factors are irrelevant to the giving of notice. Hence, Kidsons' intention as to what it was intending to notify to Underwriters was not relevant; the Court had to consider the objective interpretation of the purported notifications from the perspective of the reasonable recipient. However, obiter Rix LJ expressed the view that in certain exceptional circumstances intention may not be irrelevant to a unilateral question such as the giving of notice. (This is echoed and amplified by Toulson LJ: "If the insured chooses to be deliberately misleading or economical with the truth, so that the insurer is not given a fair picture of what the insured knows, I can see a good arguable case for saying that the notification should be treated as invalid. But like Rix LJ, I would not wish to express a firm view on the matter when it has not been fully argued".) Rix LJ suspected that the judge's views about the underlying merits (and he was sceptical that subjective factors might be relevant as part of the "underlying merits of the case" to the question of construction) may have misled her when dealing with an objective appraisal of the October 2001 presentation.
In the light of the finding that the July 2002 presentation to the Lloyd's following market was not made "as soon as practicable" it was necessary for the Court to go on to consider the effect of the delay in notification under the policy terms (primarily under GC4).
The Court held that the second sentence of GC4 (the deeming provision) was a condition precedent to liability notwithstanding that it is not expressly stated to be a condition precedent (they held that the first sentence was not a condition precedent). As "Such notice" was not given to the following Lloyd's market under the second sentence of GC4, they escape liability for the claim.
Rix LJ viewed the second sentence of GC4 as an extension of the policy, extending the claims made policy to cover claims outside the policy year where such claims arise out of the circumstance of which notice has been given. The extension is achieved by deeming such post-expiry claims to have been made during the policy year. However, the "price" of this extension is the giving of proper notice. "Since the essence of the extension granted is concerned with the timing of claims made to the assured, it is only to be expected that the timing aspect of the notice of circumstances to be given by the assured is an important part of the provisions concerned". Earlier Rix LJ stated: "..the language of GC4 reflects the functional and purposive basis of the insurance as a whole by making the extension or deeming of cover depend on the giving of the notice defined in GC4's first sentence. That is a paradigm example of a condition precedent. Without the notice, there is no extension of cover. If, on the other hand, the only remedy for a late notification of circumstances were to be a liability in damages…[…], then the "claims made" policy is turned into an open-ended policy which covers claims made at any time".
The Court then went on to consider General Institute Condition (b) ("GIC(b)") which provides: "Where the Assured's breach of or non-compliance with any conditions of this Insurance has resulted in prejudice to the handling or settlement of any loss or claim the indemnity afforded by this Insurance in respect of such loss or claim (including costs and expenses) shall be reduced to such sum as in the Underwriters' opinion would have been payable by them in the absence of such prejudice." It was contended by the Appellants that this would operate to excuse the late notification under GC4 and give the Lloyd's following market only a remedy in damages for prejudice suffered by reason of the delay in notification (as opposed to escaping liability for the claim).
GIC(b) was held not to assist here as the Court construed "conditions" as not including conditions precedent. This seems to us an artificial construction of "conditions".
It remains an anomaly that non-compliance with the notification requirement under GC4 will not disentitle an insured from recovery where a claim is subsequently made in the policy period but will do so where a claim comes in after the expiry of the policy period. The implications for an insured are very serious; by way of example, if the insured becomes aware of circumstances in the first month of the policy but does not notify circumstances until the seventh month and a claim is made after the expiry of the policy then the insured cannot recover at all. Rix LJ at paragraph 120 of the Judgment states: "I agree that an assured who makes a late notification of circumstances under a year 1 policy may therefore possibly be even worse off than an honest insured who in error gives no notice at all.." .
The case turns on its unusual facts and also the policy wording (of which their Lordships were critical). Nonetheless it re-emphasises the need for insureds to comply strictly with notification provisions.
Insureds should also seek to ensure when notifying a circumstance that the notification cannot be criticised for not giving insurers a fair (if summary) presentation of the insureds' knowledge given Rix and Toulson LJ's obiter comments that the subjective intent of an insured when giving notice may not always be irrelevant.