Directors' & Officers' (D&O) liability insurance policies dictate that buyers of insurance notify their insurers following a Claim, and many policies give insureds the choice to notify following an incident or circumstance that could reasonably be expected to develop into a Claim. Many consider the notification process to be laborious or unnecessary, particularly when only a small percentage of notifications develop into pay outs.
However, to avoid the potential of a costly outcome down the line, insureds may be wise to err on the side of caution when it comes to notification. As one UK court case has underlined, insurers have the right to reject indemnity on the basis of late notice.
Learning from public liability case law
In Arch Insurance v Philip McCullough (Arch) [2021] EWHC 2798 (Comm) a young child crashed while racing a motorbike on a racetrack, suffering serious injuries. The insured, who owned the facilities, did not notify their Public Liability insurer following the incident, nor when they later received a Letter of Claim, nor two further letters. It was only when proceedings were issued that the insurer was notified, some 11 months after the accident took place.
The terms of the policy were reasonably standard in that timely notification was a condition of cover. The insurer went to court to seek a declaration that they did not have to indemnify on the basis of late notification. The court ruled in their favour, stating that the insured could have notified their insurer at the time of the accident (when it was a circumstance) and certainly should have when they received the Letter Before Action (when it was a Claim).
Arguably, this ruling is out of proportion to the error – to have no cover at all because of a breach of notice requirement is a serious outcome. However, the court clearly decided to prioritise the rights of an insurer to know of a matter, consent to decisions, and participate in defence, over the rights of a somewhat naive insured.
All cases are unique
Despite the outcome of the Arch case, there are a few caveats which insureds should consider in conjunction with the ruling:
This ruling is persuasive rather than binding – it does not have to be applied in the next case, and will only be applied at a court’s discretion
Timely notification was a condition precedent in this policy, but it may not be in others
This case relates to Public Liability Insurance – where the determination of what constitutes a Claim or circumstance is typically less nuanced than with D&O liability matters, albeit receiving a Letter of Claim or Pre-Action Notice is a hard stop in any matter
The policy was subject to law and precedent of England and Wales – other policies might be subject to other jurisdictions, which of course changes the way a court may rule
Arch’s court application for the declaration was unopposed – had the application been contested, the court’s ruling might have been different
Err towards caution
For some insureds, notifying all potential D&O matters as circumstances may be considered as overkill, particularly for larger multi-national corporations who may become aware of numerous such matters throughout a 12-month period. They may feel that they could simply wait until a circumstance becomes a Claim to notify their insurer; especially if the language around circumstance notification contained within their D&O policy implies an element of discretion.
Nevertheless, when debating whether to notify an insurer, it is advisable for insureds to err on the side of caution, or at least to reach out to their broker to discuss the situation and its implications. It is entirely within the client’s interest to ensure that timely notification is made due to the claims made nature of D&O policies.
A clear consequence of delaying notification, as we saw in this case, is an insurer denying indemnity. If an insured is considering moving insurer, this risk is heightened as new insurers are more likely to take a hard line on late notification. Insureds should take particular effort to notify their current insurer of any Claims or circumstances prior to moving insurer, and be aware of any retroactive dates, prior and pending dates, or specific matters exclusions applied by the new insurer.
Even where an insured is renewing with the same insurer, it is still in their interest to notify any Claims or circumstances to their insurer prior to renewal. Aside from notification conditions detailed within an insured’s D&O policy, insureds are also obliged to meet their duty of fair presentation that any such matters be disclosed to insurers when seeking a quotation.
It should be noted that just because something hasn’t been notified as a circumstance, it does not mean it falls short of the materiality threshold for disclosure as part of the renewal information. If an insured discloses a matter to insurers but doesn’t notify it, they do however run the risk of the insurer applying a specific matters exclusion which would enable the insurer to deny liability should that specific matter develop into a claim later on.
This is particularly relevant for D&O matters as they have a long tail, meaning that a circumstance can take many years to develop into a Claim. By notifying a circumstance, it is effectively “locked” to that policy period so that if it does develop into a Claim later down the line it will not erode the limit of a future D&O policy.
Perhaps the strongest lesson that insureds should take from Arch v McCullough is that the claim denial, painful court process, and costs associated with this could have been avoided had the insured sent in a two-paragraph notice of the incident to their broker. If in doubt, contact your broker and they will provide guidance.
For further information, please contact:
Melissa Hickey, Vice President
T: +44 (0)20 7933 1188
E: melissa.hickey@lockton.com (opens a new window)
Richard Corkery, Claims Advocate
T: +44 (0)207 933 2856
