With claims made policies it's crucial to know what to notify, when to do it – and to whom.
A "claims made" insurance policy covers the insured for liability arising from claims made against them during the policy period. The policy may also respond to a claim made after the policy has expired, provided the claim arises from facts or circumstances notified to the insurer during the term of the policy. While that seems simple enough, lengthy and costly disputes about the adequacy of notifications often arise – disputes which quite often could have been avoided if the insured had been more careful in preparing the notification.
Although each insured's situation is different, and other issues might arise, there are ten basic questions you should ask yourself when contemplating a notification of circumstances to insurers.
- Which policies might be relevant and what do they say?
The starting point for any possible notification to insurers should be identifying which of the policies held by the insured might respond. In particular, identifying all of the insurers (including excess insurers) to whom a notification must be sent is critical.
The focus should then shift to identifying what the policies"terms require for them to respond – these requirements may differ between policies.
If there are no express notification requirements in a policy, and the Insurance Contracts Act 1984 (Cth) applies to it, then notification should be given in accordance with subsection 40(3) of the Act.
It is important to note that coverage, or lack of it, is not the main issue at the time of notifying a circumstance. The insurer cannot effectively decline a notification, merely because it does not believe, or cannot see how, a future covered claim might arise from it. That is a matter to be determined if and when a claim against the insured is subsequently made. The important thing in the meantime is to get all the pertinent facts in front of the insurer so that any future claims arising from them are referable to that policy, whatever its terms and conditions may be, since they will likely be excluded explicitly from future policies.
- What should be notified?
The best course of action is to draft the notification explicitly and as widely as possible. The notification should:
- capture all circumstances in respect of which the insured has an awareness of the possibility, however remote that a claim might arise; and
- not be so widely drawn, vague or imprecise that the insurer cannot properly understand what are the nature and origins of the potential claims against the insured.
An insured can notify an indeterminate class of future claims which might arise from a set of facts, without having to specify the nature and source of each of them. However, it must be clear in this "can of worms" notification that the insured is attempting to do just that and the notification must make clear the reason why claims against the insured are to be anticipated from one source or another. What matters is that the insurer is given a clearly identifiable fact, matter or circumstance (or combination of them) to which future claims from whatever source are capable of being attributed.
What is also essential is an awareness by the insured of the circumstance which may give rise to a claim or claims and that the insurer is made aware of that circumstance. The insured cannot give a notification if it is not sufficiently aware of a potential issue, nor can an insurer be notified of a circumstance if no basis of a potential claim arising from it is articulated.
- What does the insured know?
If the insured is a large organisation, it's not always easy to ascertain whose knowledge or awareness of matters is relevant to a notification. Sometimes a policy will specify a particular individual or department whose knowledge of a matter is relevant for the purposes of the policy, but often it will not.
There may be many people whose knowledge of a matter is relevant. The insured should identify them before notifying circumstances to insurers, so that those notified circumstances capture everything of which the insured might ultimately be held to have been aware and which will be excluded, therefore, from cover under subsequent policies.
- Does the relevant policy have a deeming clause?
A deeming clause provides that a claim is deemed to have been made during the period of insurance if it arises from circumstances which were notified to the relevant insurer during the period of insurance. The significance of a deeming clause in a claims made policy is that, if the insured has failed to notify insurers as required and the insurer seeks to deny cover on the basis that the policy was not triggered, section 54 of the Insurance Contracts Act may apply and require the insurer to pay the claim nonetheless. The insurer's liability is reduced only to the extent that its interests have been prejudiced by the insured's failure to notify.
If there is no deeming clause or any explicit language requiring that circumstances be notified to insurers, section 54 of the ICA will not apply. The insured may notify "facts which might give rise to claim" in accordance with subsection 40(3) and this will engage the policy in the same manner as a deeming clause. However, a failure to notify under subsection 40(3) will not be remedied by section 54. It is vitally important, therefore, in the case of a claims made policy without a deeming clause, that circumstances be notified "as soon as practicable" after awareness of potential claims arises, in order to ensure that the policy is attached.
- When should the notification be sent?
The timeframe within which an insured must notify circumstances to insurers will be governed by the policy terms or, if the policy doesn't deal with this, by subsection 40(3).
Subsection 40(3) of the ICA applies only where facts are notified 'as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired'. Where an insured is relying on subsection 40(3) and does not have the benefit of section 54 of the Insurance Contracts Act, it is essential that any notification be provided to insurers strictly in accordance with the legislation.
If the insured subsequently became aware of circumstances which did not have a direct causal connection with previously notified circumstances, a further notification would be required. A prudent rule of thumb is notify early and notify often.
Best practice for an insured is to inquire regularly and at least once per year, of all relevant individuals or departments, whether they are aware of any notifiable circumstances. This should occur before the end of each policy period and would include obtaining updates on existing notified circumstances, to ascertain whether there have been any further developments which require expanded or separate notification.
- Is the insured contractually obliged to notify any third parties?
Commercial agreements often require an insured to let the other party know when a notification has been made under an insurance policy, and to update it on the progress of claims and potential claims. Typically this would occur where that other party is relying to some extent on an insurance policy purchased by the insured, so has an interest in the potential erosion of aggregate limits.
If the other party might also ultimately bring a claim against the insured, there is a potential issue for the insured. In passing on details of the notification to another party, the insured risks breaching confidentiality as between itself and the insurer, regarding the subject matter of the claim. It might also prompt the other party to pursue a claim which otherwise might not have been pursued. Any notification to insurers would need to be carefully drafted with the obligations to the insurer and considerations of legal professional privilege in mind.
- Has a claim already been made?
A claim actually made against the insured, and notified to the insurer, may also constitute a notification or circumstances out of which other claims might arise, if that is apparent from the facts contained in it.
Many – but not all – liability policies will include a broad definition of "claim" which includes, among other things, both the commencement of formal proceedings and a demand for compensation. Surprising as it sounds, it may not always be readily apparent whether there has been a demand and therefore a claim has been made for the purposes of the policy.
It is important to identify at what point the insured has received an actual claim, as opposed to notifiable circumstance. Getting it wrong may have financial consequences for the insured. For instance, an insured may prejudice its ability to recover under the policy if it mistakenly proceeds on the assumption that there is a claim against it and incurs mitigation expenses or pre-emptively settles its liability. Such a settlement can effectively preclude a claim, which would have triggered the policy, from ever being made against the insured and so the insured is refused indemnity for the cost it has incurred in resolving the circumstance.
- What happens after the notification has been received?
After being notified, insurers might accept the notification, reject it, ask for additional information, or do nothing.
If they accept it, the insured will be covered for claims that subsequently arise from the circumstances notified, subject to the terms of the policy. The insured still needs to notify insurers if circumstances change, because the first notification will only be effective for subsequent claims which arise from matters actually notified.
If insurers reject it or do nothing, the insured must check that the notification is valid and effective, or rectify any deficiency in it. A difficulty may arise for an insured if a notification is rejected, the rejection is not effectively challenged, and a claim arises from that circumstance in a subsequent policy year with a different insurer – see the discussion of "prior known circumstances" exclusions below.
An insured may want to anticipate the likely requests for information when it prepares the notification. Whether, and to what extent, an insured is required to comply with requests for information by insurers will depend on the particular circumstances, including the policy wording. A certain minimum amount of information is required for the notification to be effective (see the discussion in items (1) and (2) above).
Provided, however, that circumstances of sufficient detail and specificity are disclosed, any purported rejection by the insurer of the notification, as a notification, will be of no effect. Any claims arising from the facts disclosed will be referrable to that policy, regardless of whether they are or are not covered by it, and excluded from cover under subsequent policies.
- Do steps need to be taken to maintain legal professional privilege in respect of any documents or matters being disclosed?
Ordinarily, by giving to a third party a document in which a claim for legal professional privilege subsists, a party will have acted inconsistently with an intention to maintain confidentiality and therefore will waive privilege in the document. However, there is an exception if the document is given confidentially only to a third party who shares a common interest.
Parties may share a common interest if they are generally exposed to the same consequences and would be inclined to make use of the privileged document in the same way. If each party had an individual interest in the document, there would not be a sufficient identity of interest.
An insured and insurer will typically have a common interest in ensuring that any claim by a third party fails, or in minimising the amount of the claim. However, that assumes that the insurer will indemnify the insured. Their interests may not be aligned before the insurer has granted indemnity. This will particularly be so if the third party's allegations against an insured to establish a liability align closely with those allegations the insurer might need to make against the insured to establish an exclusion has been triggered.
An insured should avoid disclosing privileged documents, such as legal advices or reports commissioned by its lawyers, before the insurer has agreed to indemnify the insured in respect of all relevant claims.
- Will the notification affect future insurance arrangements?
Ideally, claims made liability policies would be structured so that there is a smooth transition from one policy year to the next, and all claims arising from circumstances which became known in an earlier policy year are covered during the year in which they became known. However, for a variety of reasons, the position is not always clear.
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.
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. The insurer would exclude cover on the basis that it arose from circumstances known to the insured before policy inception, whether or not they were disclosed to it.
It is important, therefore, that any circumstance which might give rise to a claim against the insured be notified promptly to the insurer on risk at the time it comes to light, notwithstanding that the insured may not consider it likely that any such claim would actually arise or would have any merit if it did. This is so notwithstanding the protection offered by section 54(1) and doubly so in the case of policies to which that protection does not apply due to the absence of a deeming clause. The risk of a premium increase due to an overly cautious circumstance notification is far outweighed, especially in the present, highly competitive professional indemnity insurance market, by the risk of not obtaining the full benefit of the insurance should a claim subsequently arise.