HLB Kidsons v Lloyds Underwriters and Others

Ambiguous notifications and conditions that can be described as conditions precedent

16 August 2007

In a refreshingly commercial judgment Mrs Justice Gloster, DBE determined whether or not certain circumstances – which led to claims after expiry of the policy - had been validly notified to underwriters during the policy period. The case is important because it casts judicial light on how to approach ambiguous notifications and it is of particular significance for insurers who underwrite professional liability risks subject to regulatory minimum terms.

Facts

The claimant in the case, Kidsons, was a firm of chartered accountants. Lloyds underwriters provided Kidsons with professional indemnity insurance cover on a claims made basis (the "Policy"). Kidsons issued proceedings against its insurers for a declaration that they were bound to indemnify it in respect of claims made against it by clients in relation to a company owned and managed by Kidsons, called Solutions at Fiscal Innovation Limited ("S@FI"), which marketed tax minimisation schemes.

Kidsons contended that it was entitled to be indemnified in respect of the claims first made against it following the expiration of cover by reason of having notified the circumstances giving rise to each of the claims in accordance with the following condition of the Policy (which is typical of many professional indemnity policies):

"The Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the period specified in the Schedule shall be deemed for the purpose of this insurance to have been made during the subsistence hereof." (the "Relevant Condition")

Kidsons relied principally upon two letters sent to underwriters during the currency of the Policy as constituting valid and effective notice of the circumstances giving rise to the claims made in respect of S@FI. They also relied on a number of other documents communicated to underwriters up to 18 months after the expiration of the Policy. Underwriters disputed that the documents purported to constitute or, in fact, constituted valid and effective notices under the relevant condition of the Policy. Underwriters' also argued that the notices were not served "as soon as practicable", from the date of Kidsons' awareness of the relevant circumstances.

The arguments

The arguments put forward on behalf of Kidsons included the following:

a) In the Policy, the clause preceding the Relevant Condition was clearly stated to be a condition precedent to insurers' liability. The Relevant Condition was not. Where consecutive clauses of an insurance policy described both as conditions and the first, but not the second, as a condition precedent, the inference that the second is not a condition precedent is overwhelming (support for this proposition is to be found in Friends Provident Life & Pensions v Sirius [2005] 1 Lloyds Rep IR 135)

b) The ICAEW special conditions provide a remedy to the insurer who has suffered prejudice as a result of a breach of condition – namely, a reduction in the value of the indemnity afforded by underwriters. Accordingly, the special condition provides an exhaustive remedy for a breach of, or non-compliance with, the condition in the notification clause

c) The notification clause in the policy was materially different to the notification clause in the ICAEW minimum wording, which, properly constructed, it was argued, provided cover notwithstanding the giving of a notice that was served later than reasonably practicable – which trumped the notification clause in the policy

d) A notice is proper if it is in proper form, regardless of its timing

e) The Policy was a composite policy and, therefore, "innocent assureds" should not be denied indemnity as a result of the carelessness of others, or, alternatively, could not be fixed with the "awareness" of one of the other assureds under the policy

The decision & analysis

Mrs Justice Gloster, DBE held that the natural meaning of the Relevant Condition was that an extension of cover in relation to claims made after the expiry of the Policy would only be provided where notice had been given of the relevant circumstances "as soon as practicable". Taking a commercial view, the Judge recognised underwriters' needs for finality of exposure, enabling insurers to calculate reserves with more accuracy and avoiding or ameliorating the difficulties of estimating contingent liabilities for long-tail claims, which would be the consequence of the claimant's contentions.

The Judge recognised that where notification of circumstances is not given as soon as practicable and those circumstances subsequently led to a claim being made during the policy period, the ICAEW special conditions and ICAEW minimum wording would apply so that the assured would be entitled to indemnity, subject to a reduction to the extent of any prejudice suffered. However, Mrs Justice Gloster, DBE drew a sharp distinction between that situation and the situation in this case, where the Relevant Condition provided an extension of cover in relation to claims made after the expiration of the Policy, but arising out of circumstances of which the assured became aware within the Policy period.

The Judge considered that such special conditions apply to the cover that exists, rather than the creation of cover which does not otherwise exist. Accordingly, the remedy of reducing the indemnity under the Policy afforded by the ICAEW special conditions did not apply. This point is likely to be applicable to other classes of professional indemnity insurance where minimum wording applies.

The Judge dismissed Kidsons' attempt to rely on Friends Provident to argue that the Relevant Condition was merely an "ancilliary provision" rather than a condition precedent to indemnity. She did so by once again highlighting the important difference between those claims that arise during the policy and those that arise after its expiry. She said: "a breach of [the Relevant Condition] in relation to a post policy period claim does not deprive the assured of a right which would otherwise accrue to him under the terms of coverage in the policy." Although the Relevant Condition was clearly not stated to be a condition precedent, that did not stop the Judge finding that the requirement to give notice as soon as practicable "can be described as the satisfaction of a condition precedent, since, unless the pre-condition is satisfied, no liability is imposed upon underwriters."

The Court considered the authorities relating to the approach to be adopted when considering the quality of any purported notification. Two questions should be considered. First, whether the notice is "sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when [it is] intended to operate" (see Delta Vale Properties v Mills [1990] 1 WLR 445). Second, how would a reasonable recipient with knowledge of the terms of the relevant policy and the contextual scene have understood the notice?

The Court ultimately held that a bundle of communications presented to underwriters (including a number of letters and the broker's claims file and a bordereau that referred to the S@FI notification) within the Policy period just met the relevant quality to validly notified defects in the sale of two tax minimisation schemes sold by S@FI. The Court rejected Kidsons argument that the presentation of those communications to underwriters amounted to a much wider notification of the whole range of tax minimisation schemes and products marketed and sold by S@FI.

Notifications checklist

It is possible to discern from Mrs Justice Gloster, DBE's judgment a useful checklist when considering whether or not a purported notification is valid and also whether claims that have arisen after the expiration of a policy fall within the scope of a purported notification made during the policy period:

1. What requirements must be satisfied for a notice to be valid and effective for the purposes of the relevant condition in the policy?

2. As a matter of fact, of what circumstance or circumstances was or were the indemnified aware during the policy period

3. Does the particular communication satisfy the relevant requirements of the condition in the policy?

4. If so, what, if any, circumstances does the particular communication notify?

5. If none of the questions below can be answered in the affirmative, the communication is unlikely to be a valid notification:

a) Do papers include identification of any error, act or omission, or potentially negligent or otherwise wrongful conduct on the part of the assured?

b) Is the victim or possible claimant identified?

c) Is there any mention of the possibility that a client or any assured, or other individual, might suffer loss as a result of any identified error, act or omission, or potentially negligent or otherwise wrongful conduct on the part of the assured?

d) Is there a statement in the heading of any of the letters or in the body of the communications that the assured is in fact by means of those letters notifying a circumstance which may give rise to a claim?

For more information or advice, please contact Jonathan Newbold or Nik Carle.

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