The recent High Court decision of Justice Thomas in Minister of Education v McKee Fehl Constructors Ltd discusses the important question of exactly when cover is triggered under a "claims made and notified" liability policy.
The McKee case concerned a Correspondence School operating out of premises in Wellington. In 2009 and 2010 work was undertaken to re-roof two of the blocks. A number of contractors and sub-contractors were engaged, including a project management company (RDT), a roofing company and architects (Interact). Interact was insured under a professional indemnity policy written in standard "claims made and notified" terms. The policy period was 1 December 2014 to 30 November 2015. The primary cover was for claims made against the assured and notified to the insurers immediately and within the policy period. The extended cover was in respect of any future claim arising out of circumstances known to the assured which could give rise to a claim and which were notified to the insurers immediately and within the policy period, in which case the claim was deemed to be made within the policy period.
A certificate of practical completion was issued in 2010. In November 2014 the Ministry of Education contacted RDT about leaks in the roof. Thereafter a series of communications between RDT and Interact took place between March and May 2015.
In the High Court, Thomas J, having reviewed the evidence, concluded that as a result of those exchanges:
- Interact had reviewed the initial contractual documents with the roofing contract and was aware that the membrane used did not comply with the contractual documents;
- RDT was pursuing the roofing contractor to repair the membrane; and
- RDT had advised Interact that the Ministry of Education's legal team was looking at the matter.
- Interact did not notify its insurers of these events.
In March 2017 the Minister of Education and the Correspondence School commenced proceedings against a number of defendants, including RDT and the roofing company, seeking damages of at least $1,282,521.
This judgment was in respect of an application by RDT to join Interact to the proceedings. However, Interact had been removed from the Companies Register and could not be joined. Instead, RDT sought leave under section 9 of the Law Reform Act 1936 to commence proceedings against Interact's professional indemnity insurers. It was common ground that leave could be given if three conditions were met:
- there was a prima facie claim by RDT against Interact;
- Interact had a prima facie claim under the policy; and
- Interact was not a perfectly good common law defendant.
The first condition was easily satisfied, and Interact's striking off meant that the third condition was also satisfied. The dispute was as to whether Interact had a prima facie claim under the policy.
Interact would have a prima facie claim under the policy if either a claim had been made against it and then notified to the insurers in 2015; or if Interact knew of circumstances that might give rise to a claim against it and had notified those circumstances to the insurers in 2015. No notifications had been made to the insurers.
However, the lack of notification was not necessarily fatal. Section 9 of the Insurance Law Reform Act 1977 states that:
"A provision of a contract of insurance prescribing any manner in which or any limit of time within which notice of any claim by the insured under such contract must be given shall ... bind the insured only if ... the insurer has in the particular circumstances been so prejudiced by the failure of the insured to comply with such provision that it would be inequitable if such provision were not to bind the insured."
No real thought was given to professional indemnity cover when this provision was drafted, but the New Zealand courts afterwards decided that it meant that the court was given a discretion to extend time if the notification was out of time as long as there had been something capable of notification in the policy period. As was said in Sinclair Horder O'Malley Ltd v National Insurance Co of New Zealand Ltd  2 NZLR 706, section 9 could not breathe new life into the policy, but only rescue a claim that could otherwise have been made.
In the present case it was common ground that no claim had been made against Interact in 2015, so to that extent section 9 could not help. However, if, following the correspondence in the first half of 2015, Interact had knowledge of circumstances that might give rise to a claim, section 9 would permit the court to allow an extension of time, and indeed the insurers did not contend that lack of notification had caused them prejudice. The questions thus became whether Interact had appropriate knowledge and whether the circumstances in question might have given rise to a claim.
Justice Thomas reviewed the various authorities in New Zealand, England and Australia on the appropriate test to be applied in answering this question. She noted that there was no consistency between the authorities, with the English courts adopting a rather laxer approach than that in this jurisdiction. Her conclusion on the correct test was as follows:
"... the test is an objective one, requiring notice when a reasonable person in the insured's position would consider that there was a reasonable possibility of a claim. Notice is not required if the possibility of a claim is remote or unlikely. However, providing there is a real or definite risk of a claim, notice is required even if the claim is not probable."
Applying that test to the facts, Thomas J was satisfied that by May 2015 there were circumstances known to Interact that might give rise to a claim, and that notification should have taken place at that time. Section 9 of the 1977 Act was thereby triggered, and in the absence of any prejudice to the insurers it could be said that there was prima facie case that Interact had a valid claim under the policy.
There are numerous decided cases on the operation of this type of cover. Issues that typically arise are: what is a claim; what are circumstances; what is the test for the assured's knowledge of such circumstances; when can it be said that a claim might be made; and do the circumstances notified to the insurers encompass the actual claims later made against the assured? The cases lay down general principles. There have been two major decisions in England in the last few months - not cited in the present case - that seek to provide further guidance. Inevitably, however, each case necessarily turns on its own facts. It should also be borne in mind that policy wordings differ. Some policies refer to circumstances that "are likely to" give rise to a claim, others refer to circumstances that "may" or "might" give rise to a claim, and the "might" wording obviously sets a lower bar than "likely" wording, as the judgment of Thomas J makes clear.
The most recent English cases make it clear that it is not appropriate for an assured to notify a possible circumstance every time something untoward or unexpected occurs. There is indeed a danger in doing so, in that if there is a premature - and therefore invalid - notification, the assured might not see the need to make a further notification at the right time. Exactly what is notified is also a matter of difficulty: a notification that is in very general terms will not encompass claims that arise from unrelated circumstances that later come to light. This is an area of great difficulty for brokers and insurers alike.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.