Insurance: Notification of Circumstances

• United Kingdom

• Insurance and reinsurance
• Technology, Media and Telecoms - Technology

14-06-2019

Introduction

The following article is an example of how the Court of Appeal recently handed down a decision concerning the issue of notification of circumstances to professional liability insurers. Although the decision related to parties in the construction sector, it will be of interest to businesses in the TMT sector as the principles as to when to notify circumstances under technology agreements are likely to be very similar.

Factual Background

Euro Pools specialised in the installation of swimming pools. It entered into two professional indemnity policies with RSA Insurance for the periods 2006-07 and 2007-08.

Euro Pools identified defects in the operation of pool equipment, which it notified to RSA in 2006-07 as concerning problems with steel tanks which would be remedied using air bags. During the policy period 2007-08, Euro Pools notified RSA of a new proposed remedial scheme, namely the use of a hydraulic system rather than air bags.

The remedial works fully eroded the limit of indemnity under the 2006-07 policy. RSA argued that the new remedial works arose from the circumstance notified in the 2006-07 policy period, such that Euro Pools was not entitled to a further indemnity.

Euro Pools argued that the need for more extensive remedial works was not known at the time of the 2006-07 notification and the costs of those works was therefore a new issue notified under the 2007-08 policy period which, if correct, would have given Euro Pools another limit of indemnity.

At first instance, the Court found that:

a. the defects had not arisen at the relevant time for the notification of a circumstance under the 2006-07 policy year

b. Euro Pools did not have the knowledge of the defects, and accordingly, could not notify something of which it was not aware; and

c. Euro Pools was therefore entitled to a further £5,000,000 indemnity under the 2007-08 policy year.

RSA appealed on the basis that the Court was incorrect in finding that there was no causal link between the remedial works required and the circumstances notified under the 2006-07 policy. The Court of Appeal found that the Court at first instance had erred, and that it was not necessary to consider whether Euro Pools could have been aware of the fundamental flaw in 2007.

It was not appropriate to “over-analyse the problem by dissecting every potential cause of the problem as a different notifiable circumstance” and the issue was whether, objectively speaking, the potential claims from third parties arose from the circumstances notified in the first policy period.

The Court then considered whether there was a causal link; did the claim arise from the circumstance notified? The answer was yes, because all that was required, was a connection that was other than “purely co-incidental”, and the Court of Appeal concluded that the first notification encompassed the possibility that the proposed remedial scheme may not work, in which case other remedies would need to be considered.

The Court of Appeal therefore found that the entirety of the remedial works fell within the scope of the circumstance notified under the 2006-07 policy, and that Euro Pools was not entitled to cover under the 2007-08 Policy.

Impact for the TMT Sector

The case is unusual in that it was the insured who was arguing that the original notification should be construed narrowly, so that the circumstances subsequently notified would fall to be covered under a new limit of indemnity; frequently, it is the insurer who argues that circumstances are not within the scope of the original notification so that it is not liable for subsequent issues.

Nevertheless, the case reaffirms principles set out in HLB Kidsons v Lloyds [2008], in particular that it is possible for an insured to notify a “hornet’s nest” of issues.

The position under building contracts is frequently analogous with that under complex technology contracts, where issues with the delivery of a project can arise, the precise cause of which is unknown at the point of notification. Whether subsequent claims arise out of the notified circumstances will invariably be a fact specific exercise, but generally speaking this decision encourages insured parties to (i) submit notifications early and (ii) to draft them so they are as broad as possible in order to try to capture subsequent claims.

The Insurance and Reinsurance team at Eversheds Sutherland specializes in advising supplier and customer clients in the technology sector in relation to their rights and obligations under insurance policies (professional indemnity, product liability, cyber etc) and pursuant to the insurance provisions in technology agreements. Please do not hesitate to contact Chris Ives for more information.