The Court of Appeal has clarified the scope of an insured’s notifications of circumstances in a decision which is likely to help reduce the number of disputes between insureds and insurers over policy years’ claims coverage.
The main point at issue was whether a claim for remedial works by the claimant was attached to the first or second of two successive professional indemnity (PI) policies.
The claimant, Euro Pools specialised in the installation of swimming pools. In 2007 it became aware of problems with moveable booms which divide a pool into different areas. Euro Pools notified RSA as the PI insurer in February 2007 and sought an indemnity under the policy for the mitigation costs. At this stage Euro Pools thought that the problems with the booms rising and falling could be dealt with by replacing the tanks of the air-drive system with inflatable bags. This view was maintained to RSA at policy renewal in June 2007. In May 2008 RSA was advised that the inflatable bags solution had failed and the intended remedy was now the installation of a hydraulic system.
The issue arose over whether the policy to respond was the 2006/7 one as contended by RSA or the 2007/8 policy as contended by Euro Pools. Policy terms were identical but the limit of indemnity under the first policy had nearly been reached. The Court of first instance held in favour of Euro Pools triggering the second policy on the basis that the notifications could be distinguished from one relating to the tanks in the first policy period to one of installing a hydraulic system in the second period making RSA liable for £2.4M in claims.
The Court of Appeal examined the implications of circumstances which “might reasonably be expected to produce a claim” under a professional indemnity policy and reversed the first instance decision. It held that there was a causal connection between the problems notified in 2007 and the work carried out to install the hydraulic system and thus the claim fell into the first policy period. The Court of Appeal commented that it was not appropriate “to over-analyse the problem by dissecting every potential cause of the problem as a different notifiable circumstance”.
Decisions on the scope of notifications of circumstances under professional indemnity insurance policies have led to regular disputes affecting crucial questions such as which policy should respond, which insurer should pick up the claim, and, consequently, which policy limit and excess is applicable.
“The decision confirms that a policyholder can notify a general problem which may give rise to a claim without having complete knowledge of the issues behind the problem or the possible consequences,” says Tom Maughan, Claims Executive/Vice President at Lockton. “After issues which may give rise to a claim are reported, any claim with a causal link to those issues will be deemed to fall within the earlier period of insurance,” Maughan explains.
The Court of Appeal stated that a requirement to notify circumstances that may give rise to a claim was subject to a “deliberately undemanding” test and that there need only be a possibility of claims in the future. The Court did not draw a distinction between the wording “may give rise to claims” and “be expected to produce a claim”. The RSA wording here was “might reasonably be expected to produce a claim”. The Court of Appeal stated that the use of the word “reasonably” did not affect the low materiality threshold of the test.
For further information please contact:
Tom Maughan - Claims Executive | Vice President
Direct Tel: + 44 (0) 121 232 4589 | E-mail: tom.maughan@uk.lockton.com (opens a new window)
