Loss Prevention Alerts

Loss Prevention Alert No 44

Notifying Insurers

This Loss Prevention Alert concerns the obligation to notify insurers of claims and circumstances giving rise to claims, the hazards of late and premature notification and the consequences of there being several claims relating to the same or similar subject matter.

Introduction

Professional indemnity insurance is the insurance cover that specialists invariably take out against claims for negligence or other breach of retainer that arises in the course of their work.  It is often a condition under specialists' appointments with their clients that the specialist has and maintains professional indemnity insurance.

Professional indemnity insurance is written on a claims made basis which means that the insurer that indemnifies is the insurer who has provided policy cover during the period when a claim is made against the professional. The policy is itself is an annual contract. A number of clauses in professional indemnity policies provide more guidance on when notification to insurers should be made and by what method.

Claims Notification Clauses
As an example, a typical claims notification clause would be as follows:

"The Insured shall as a condition precedent to their right to be indemnified hereunder give to the Underwriters notice in writing as soon as practicable:
(a)       of any claim made against them or any of them; and
(b)       of the receipt of notice from any party of an intention to make a claim against them."

As well as an obligation to notify claims, typically professionals will be under a duty to notify circumstances that are likely to give rise to claims.  This is normally provided for, in a professional indemnity policy, by a clause as follows:

"The Insured shall give to the Underwriters notice in writing as soon as practicable of any circumstances of which they shall become aware during the Period of Insurance 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 of Insurance, shall be deemed for the purpose of this insurance to have been made during the subsistence thereof."

The obvious danger with late notification is that the insurer can deny liability for the claim even if the late notification has not caused any prejudice to the handling or settlement of the claim/loss [HLB Kidsons v Lloyd's Underwriters [2008] EWCA Civ 1206].

This can have devastating consequences for a professional practice which will then have to meet the claim without the benefit of insurance cover.
The content of a notification will be important. The notice should be sufficiently broad to cover all potential losses or claims that are real risks to the business and which are likely to flow from those circumstances.  If this is not done then the insurer could conceivably impose an exclusion or restriction that could eliminate coverage for an anticipated loss or claim.  It may therefore be important to update the notification from time to time, but particularly before renewal.

That said, premature notification also raises potential difficulties for a professional.  It may be, for example, that insurers will refuse to accept the notification on the basis that it is not of circumstances likely to give rise to a claim.  In such a situation the professional may find that the Insurer seeks to put in place an exclusion on renewal that would exclude precisely the claim that the Insured may wish to make. This again could have alarming consequences for a professional practice.

Aggregation clauses
A policy will contain a deductible which the insured will have to pay "for each and every claim".  Policies invariably include aggregation clauses that provide that a series of claims resulting from an act or omission, or from a related series of acts or omissions, would be considered to be a single claim and aggregated for the purpose of the deductible.  It is not always easy to determine whether claims should be aggregated but, as deductibles get larger, this can be an important issue.

For example, a specialist working in a professional services firm provides a report to a client that covers geotechnical issues and then another report to the same client that deals with contaminated land remediation.  Because the specialist has failed to understand the nature of the hydrogeology he makes errors and the client suffers loss from reliance on both reports.  These two errors should have been picked up in the firm’s internal peer review but were not.  In addition, the peer review process failed to pick up seven other errors by different specialists in the firm advising other clients. 

While it might suit the firm to argue that aggregation means that these nine claims are essentially aggregated into one, and so only one deductible applies, it is likely that the court will find that there are eight deductibles because, at most, the two claims against the specialist can be aggregated.  The leading case on aggregation is Lloyd's TSB v. Lloyd's Bank Group [2003] UKHL 48 but slight differences in aggregation wording can have a dramatic effect on the outcome of particular cases and facts.

This Loss Prevention Alert is, of necessity, generic and is not intended to be a complete or comprehensive statement of the law, nor does it constitute legal or specialist advice.  It is intended only to highlight issues that may be of interest to AGS members.  Neither the writer, nor the AGS, assumes any responsibility for any loss which may arise from accessing, or reliance on the material and all liability is disclaimed accordingly.  Professional advice should be taken before applying the content of the Alert to particular circumstances.

This LPA was prepared by Steve Francis of Reynolds Porter Chamberlain LLP in July 2010.