European Risk Insurance Company HF v McManus & Others  Lloyd’s Rep IR 169 was a case concerning the validity of a ‘blanket’ notification of circumstances potentially giving rise to a large but indeterminate number of professional indemnity claims. The Court of Appeal rejected the insured’s appeal against the decision of the judge at first instance not to grant declaratory relief (i.e. to make an order stating that the notification was valid for all claims which might arise) and also rejected the defendant insurer’s appeal for the insured to be refused costs.
The Claimants were partners in Bradford-based law firm McManus Seddon Runhams (MSR), the successor practice to Sekhon Firth (SF), a residential conveyancing firm. MSR had a professional indemnity insurance policy with European Risk. It was a ‘claims-made’ policy requiring it to give notice as soon as reasonably practicable of any “…circumstances of which any Insured first becomes aware during the period of insurance…Circumstances means an incident, occurrence, fact, matter, act or omission which may give rise to a claim in respect of civil liability”.
In November 2011 MSR received a claim from a former client of SF alleging breaches of contract and duty arising out of a mortgage transaction. This was notified to European Risk and the notification accepted as valid. Over the next six months, a further 17 similar claims relating to SF’s matter handling had been made. All were notified to European Risk and the notifications were accepted.
In September 2012, shortly before MSR’s policy with European Risk was due to expire, MSR undertook a review of a limited number of SF’s conveyancing files with the assistance of a third party consultant. The consultant concluded that there had been a consistent pattern of breaches. As a result MSR sought to make a ‘blanket’ notification to European Risk, citing:
- the 17 claims already notified;
- similarities between the files giving rise to the 17 claims and a number of other conveyancing transactions carried out by SF;
- disciplinary proceedings against the former members of SF which had resulted in a Solicitors Disciplinary Tribunal (SDT) judgment noting various concerns about the way in which SF conducted its business;
- confirmation by SF fee earners that the practices referred to in the SDT judgment had been “endemic”; and
- a “random review of over 100 files” which had confirmed MSR’s “worst suspicions of shortcomings”.
The notification letter concluded that every file conducted by SF was more likely than not to contain examples of malpractice, negligence and breach of contract such that “each and every file…should properly be notified to you as individually containing shortcomings on which claimants will rely for the purposes of bringing claims against this firm as successor practice”. A spreadsheet listing the many hundreds of SF files was attached.
European Risk accepted notification of the files highlighted in the consultant’s report, whilst expressly reserving its rights. However, it rejected notification of the matters listed in the spreadsheet on that basis that MSR had not identified the specific issue or circumstance which would give rise to a claim on each individual file. MSR sought a declaration that the notification was valid.
At first instance the Judge, basing her decision on that of the Court of Appeal in HLB Kidsons (a firm) v Lloyd's Underwriters  Lloyd’s Rep IR 178, concluded that European Risk had been wrong to reject notification, notwithstanding that the notification letter did not identify any particular clients or transactions which might have been affected by the breaches identified. However, she stopped short of declaring the letter to be an effective notification of the circumstances that MSR was seeking to notify. She concluded “with some reluctance” that “almost inevitably any declaratory relief would be either too narrow or too broad” and would prejudice one side or the other in future proceedings. She found that the question of the validity of the notification was best left to be determined as and when any claims arose.
European Risk had sought an order that MSR should pay European Risk’s costs, on the basis that MSR’s claim for declaratory relief had failed. The Judge, however, observed that this submission “airbrushes out of the judgment the main finding, which was that the…rejection [of the matters listed in the spreadsheet] was clearly wrong, and the stance that the defendant has maintained throughout these proceedings can go no further than the specific files identified in the letter and that future claims will only be covered by the defendant if they arise from these files, was not correct”. In such circumstances she found that MSR was “clearly entitled to a proportion of their costs”.
European Risk did not appeal the Judge’s finding that European Risk had been wrong to reject MSR’s notification, but did appeal the Judge’s decision to grant MSR 60% of its trial costs. MSR cross-appealed against her refusal to grant a declaration.
European Risk argued that the 60% order did not properly reflect the outcome of the trial, arguing that the Judge had attached too much weight to the wording of the rejection email and not enough to the basis on which she refused declaratory relief. That argument was dismissed by the Court of Appeal; MSR “had had a degree of success” and it was a matter for the Judge’s discretion as to (i) the appropriate apportionment of costs to reflect that “degree of success”, and (ii) whether any adjustment was appropriate in view of the fact that MSR had delivered its trial bundles very late.
The Court also rejected MSR’s cross-appeal, holding that there was no basis for interfering with the exercise by the Judge of her discretion to withhold declaratory relief, for which she had given “detailed and rational explanations.” Significant disputes had emerged over the accuracy of some of the statements made in the notification letter (albeit those represented MSR’s honestly held view at the time). It was not appropriate to grant declaratory relief, which would have the effect of treating those statements as truly representative of the circumstances which might lead to specific claims.
The Court of Appeal unreservedly endorsed the Judge’s exercise of her discretion on both the points appealed, and it seems likely that, had European Risk appealed her decision that its rejection of the blanket notification was wrong, the Court would have endorsed her on that point as well. The approach taken by the Court of Appeal in Kidsons, that quite broad notifications of circumstances are likely to be legitimate for claims made policies, therefore remains in force.