The Court of Appeal’s judgment in HLB Kidsons v Lloyds Underwriters is important because it provides authoritative guidance on the operation of the deeming provision, including an examination of what constitutes a valid notification of circumstances and the effect of late notice. We analyse the fundamental points arising from this seminal judgment and answer the key questions that arise for claims handlers and underwriters alike.
Insurers’ liabilities under professional indemnity policies are limited to those claims that are first made in the policy period, subject to the operation of the deeming provision. The deeming provision confers an extension of cover, potentially opening out the policy to claims made over an indefinite period, provided they arise out of a notified circumstance.
The relevant provision
A huge number of claims were made against Kidsons after the policy expired. The crucial question was whether Kidsons’ notification of circumstances triggered the deeming provision, such that these claims would be covered. The relevant provision stated:
“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 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 [policy period] shall be deemed for the purpose of this Insurance to have been made during the [policy period]".
This provision has two limbs. The first limb describes what constitutes a valid notice of circumstances and the second limb describes the effect of that notice being given, namely the extension of cover for claims that are made outside of the policy period.
The question for the Court of Appeal was whether a failure by the insured to comply with the first limb, deprives the insured of the extension to cover afforded by the second limb, even though it is not stated as being a “condition precedent”.
Is it a condition precedent?
The Court of Appeal answered this question: “yes”. Rix LJ (with whom Sir Richard Buxton agreed) upheld the decision of the trial judge (Gloster J) that the extension of cover conferred by the deeming provision can only be triggered if insurers received valid notice of the circumstance giving rise to the later claim. In other words, the giving of a valid notice of circumstances is a condition precedent to the extension of cover for later claims. This is because the trigger for the extension is “such notice having been given”. Rix LJ described this formulation as being “a paradigm example of a condition precedent”. Although he did not say so, it is trite law to say the draftsman does not need to use the magic words of “condition precedent” to invest the clause with the same effect.
It follows that, where the notice is not given “as soon as practicable”, the extension of cover is not triggered, and the policy does not cover claims made outside the policy period. This result was potentially disastrous for Kidsons, who had made a number of notifications. The early notifications were found to be limited in scope and therefore did not embrace all of the claims subsequently made. Kidson’s widest notification was made later than “as soon as practicable” and as a result the policy did not extend to cover the claims, which could be said to have arisen from this wider notification. This aspect of the decision highlights the importance of an insured giving a comprehensive presentation of what he knows when notifying circumstances to insurers.
What is the effect of the minimum terms?
Kidsons’ policy was an accountants’ professional indemnity policy. The policy was subject to certain minimum terms intended to protect insureds from the potentially draconian consequences of noncompliance with policy terms under English insurance law.
One of the minimum terms provided the insurers’ remedy for the insured’s breach of “any condition” is limited to reducing the indemnity by an amount equal to the prejudice suffered by insurers. As a result, Kidsons argued it should be entitled to cover even though it had given its notice late, because there had been no prejudice to the insurers.
The Court of Appeal agreed with Gloster J in rejecting this argument and finding the minimum terms did not apply to condition precedents in the policy. The effect of a breach of a condition precedent is that the insurers are not liable at all to the insured, and so there is no indemnity at all to reduce by an amount equal to any prejudice suffered.
What constitutes “notice”?
Gloster J held that cover would not be extended unless the communication purporting to give notification was such that it left “the reasonable recipient in no reasonable doubt” that the insured was intending to notify circumstances for the purposes of triggering cover. The Court of Appeal did not go this far: Rix LJ preferring, in place of “no reasonable doubt”, the more general formulation “reasonably clear” (Toulson LJ not expressing a view on this point). Not much turns on this. It remains the case that cover will not be extended if the insurer (in the guise of either an underwriter or claims handler) could not reasonably have appreciated that the communication was intended to give notice of circumstances for the purposes of triggering policy coverage. This might arise where the circumstances are notified to the placing underwriter as part of renewal and where it is not obvious that the notification is to serve this dual purpose.
Is the insured’s view that the circumstance might give rise to a claim enough?
The Court of Appeal agreed with Gloster J that cover will not be extended unless, at the time of the notification, there was objective justification for the insured’s view that the circumstance might lead to a claim.
What is a “circumstance”?
This case was all about the notification of circumstances. Remarkably, even though the parties spent weeks arguing subtle points before two courts, there was no finding on what constituted the circumstance that required notification.
Gloster J held that to qualify as a “circumstance”, the subject of the notification needed to be “a fact, event, happening or state of affairs”. The Court of Appeal did not disagree, and this definition is likely to be adopted in subsequent cases.
In this case, the concern of one of Kidson’s employees relating to tax avoidance schemes designed and implemented by Kidsons was notified to insurers as a circumstance. Rix LJ questioned whether this could, in itself, constitute a circumstance which “may give rise to a loss or claim”. This point, which we believe to be important, was neither argued nor resolved, so there remains some uncertainty as to what constitutes a circumstance in the absence of an intimation of a complaint by a third party.
Toulson LJ held that a notified circumstance might be too vague to be a matter that could be said to have given rise to the claim. Cover will not therefore be extended if the insured purports to notify a circumstance but does not provide sufficient details for insurers to appreciate the nature of the claims that might arise as a result.
Is there a duty of good faith?
Toulson LJ suggested that “it is…incumbent on the insured to see that any…notification is a fair, if summary, presentation of what the insured knows” and that “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 being invalid”. These comments were made without the points being fully argued before the court and as a result the judges refused to express a firm view on whether the insured was subject to such a duty, including a duty of good faith.
Two further practical points
Blanket or block notifications are by their very nature vague. The first instance decision in Kidsons was useful to the extent that it confirmed that claims teams are not expected to make an immediate decision on the validity of the notice and it is not necessary for them to make a “w/p” scratch in order to maintain a policy defence. It is also clear from other recent cases that it is not possible to waive a breach of condition precedent, and the combination of the above factors raises the question whether it is necessary or in any way advantageous for the claims team to reserve their rights on receiving a blanket notification. This issue was not argued before the Court of Appeal. Even taking into account the authorities on waiver, we believe insurers may be opening themselves up to an estoppel argument unless they consider the validity of any block notification and where they are in doubt as to its validity, reserve their rights using appropriate language. Having put in place this reservation, insurers are not then under an obligation to request further and better particulars of the notification - the onus is always on the insured/the broker to ensure that the notification is valid.
Rix LJ gave consideration to the interplay between a standard claims notification condition precedent, which requires notification “as soon as practicable”, and a non-standard clause which enabled the insured to notify claims made within 15 days of expiration of the policy. Surprisingly, Rix LJ seems to have interpreted the latter clause as preventing the former from operating as a condition precedent, such that claims notified to insurers within 15 days of expiration of the policy would be covered even if they were not notified “as soon as practicable”. Insurers with policies containing similar clauses who did not wish for this to be the result may wish to make appropriate drafting amendments.