A recent decision by an English court throws light on what circumstances may require notification under a claims-made policy.

Background

As its name implies, cover is triggered under a 'claims-made policy' when the insured receives a notice during the policy period of a claim that he or she is liable. The notice can be oral or in writing. (In Australia, the Insurance Contracts Act 1984 (Cth) governs notifications, especially in sections 40 and 54.)

In the UK, the insured must notify the underwriter that the insured has received the notice during the same policy period, or within the days of grace given after it ends.

Claims-made policies are also triggered by notifying the underwriter of a circumstance the insured becomes aware of that may lead to the insured receiving a claim of liability. Once a circumstance is notified to the underwriter, it 'anchors' cover during that policy period. Subsequently, if the insured receives notice of a claim in relation to the circumstance, the cover that existed during that policy period potentially responds, even after the policy period has ended.

What amounts to a circumstance requiring notification to the underwriter is a critical issue for insureds. On the one hand, underwriters do not want to be bombarded with fanciful possibilities. On the other, a failure to notify a qualifying circumstance can be fatal to the insured's cover. Most policies exclude from cover a circumstance that existed in a prior policy period (although some have extensions that cover this, if the insured is continuously covered with the same underwriter over that period).

The case

The recent English decision of HLB Kidsons v Lloyd's Underwriters [2007] EWHC 1951 (Comm) provides some useful guidance in this area. The Court was required to examine very closely what amounted to a circumstance requiring notification under a claims-made policy. The Court made the following findings:

  • A circumstance which may give rise to liability is one which, 'objectively evaluated, creates a reasonable and appreciable possibility that it will give rise to a loss or claim against the assured'.
  • A document that is not intended by the insured to constitute notice to an underwriter of a circumstance, but which meets the objective criteria, takes effect as a valid notice if it is, in fact, communicated to the underwriter.
  • A policy requiring a notice to be in writing must be, 'sufficiently clear and unambiguous that it leaves the recipient in no reasonable doubt that the assured is by the communication purporting to give notice of a circumstance'.
  • The notice must not be premature. If at the time the insured purports to give notice, 'he is not aware of a relevant circumstance, then the notice is ineffective'.
  • The liability must be causally related to the circumstance notified.
  • A notice requiring notice 'to the Underwriters' meant each underwriter directly, subject to any prior agreement to give notice to just the lead or an agent.

Implications

This is a welcome clarification of the legal requirements in this critical area. All brokers placing cover under claims-made policies, and all underwriters issuing such policies should take note.

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