EWCA Civ 1206
The Court of Appeal has denied the appeal of HLB Kidsons in relation to the correct interpretation of a notification provision in a “claims made” policy. This case highlights the importance of timely compliance where notification is required to be given “as soon as practicable”. Further, although the notification clause in question was not expressly stated to be a condition precedent, the Court of Appeal held that it must be so interpreted to avoid making a nonsense of the policy.
The principal issue on appeal was whether there had been compliance with a notification provision in a professional indemnity policy issued to accountancy firm HLB Kidsons. The policy wording extended cover to claims made after expiry of the policy but arising out of circumstances notified to the insurers during the policy period.
The policy concerned incepted on 1 May 2001 and expired on 30 April 2002. Kidsons owned and managed a company called Solutions @ Fiscal Innovation Limited (S@FI) which marketed tax avoidance schemes. Problems with the efficacy of these schemes were revealed and a number of Kidsons’ clients pursued negligence claims against the firm who then sought indemnity against the losses under the policy. The case depended upon whether a series of letters and documents shown to the insurers in the course of four presentations constituted valid notification of the claims made against Kidsons.
The policies included a general condition (GC4) which provided that cover was granted after the expiry of the policy term where the assured had given underwriters notice: “as soon as practicable of any circumstance of which they shall become aware during the period specified ... which may give rise to a loss or claim against them”.
At first instance, Gloster J held that no notice had been given until April 2002 (when the third presentation was made) and that such notice related only to the Lloyd’s market and was limited to specific S@FI products. Rix and Toulson LJJ (Buxton LJ dissenting in part) did not agree with the whole of Gloster J’s decision; the majority of the Court of Appeal accepted that effective notification had been given to underwriters at an earlier stage. The first presentation, consisting only of a letter written by Kidsons’ partnership secretary expressing concern about the validity of the S@FI schemes, was held to be too vague to be an effective notice to underwriters of relevant circumstances. Underwriters themselves had conceded that the second presentation would constitute effective notification, albeit limited to the implementation of the S@FI schemes. Gloster J had rejected this concession entirely: the majority of the Court of Appeal ruled that, in its limited form, it ought to have been accepted. The third presentation extended notification to the companies market that claims might arise out of the implementation of the schemes; both Gloster J and the Court of Appeal (albeit for slightly different reasons) held that this presentation was effective. The fourth presentation, which was not made until July 2002, was however held not to have been made “as soon as practicable” and was therefore ineffective.
The Court of Appeal held that GC4 was a condition precedent even though not explicitly described as such. Kidsons had sought to rely on the inclusion in the policies of “General Institute Conditions”, which provided that a breach of any conditions of the policy should result only in a set-off for any prejudice suffered by the underwriters against the amount of indemnity otherwise payable. The Court of Appeal held that such an interpretation would “turn a claims made policy on its head" by leaving the policy entirely open-ended and allowing the insured to continue to make claims for an indefinite period in the future. Notification “as soon as practicable” must therefore be a condition precedent to recovery.
This decision is a reminder to insureds of the intention behind communications with insurers. Any notification of a “circumstance which may give rise to a claim” must be sufficiently specific to convey to the insurer, with a reasonable degree of clarity, the nature of the circumstance in question (and why it may give rise to a claim). A notice in terms that are vague and nebulous may result in a failure to recover under the policy. Further, the absence from a policy of the words “condition precedent” in relation to the notification of claims or circumstances does not necessarily mean that the insured’s obligation to notify is not in fact a condition precedent: the nature of the policy (i.e. where it has been written on a claims made basis) and the importance to the insurers of timely notice may lead to the interpretation of notification clauses as conditions precedent to the insurers’ liability.