What happens when an insured attempts to notify its current insurer, under a claims made liability policy, of matters likely to give rise to a claim against the insured but the insurer purports to reject the notification, on the ground that it does not contain sufficientlyf detailed and specific information to enable a causal connection to be established between the matters notified and any future claims? Can the insured confidently assume that, the current insurer having repudiated the notification, a future insurer would not be able to apply the prior known circumstance exclusion to any claims arising from it? Insurers justifiably object to generic or ‘shopping list’ circumstance notifications, on the basis that there is no clear causal relationship between the facts disclosed and future claims that may be alleged to have arisen from them. At the same time insured, especially in the financial services sector, have to be able to give effective notification of the potential for an indeterminate number of future claims against them to arise from identified systemic misfeasance, without having to provide details of each individual instance, if claims made insurance is to continue to serve its purpose of enabling insurer and insured to draw a line at the end of the period of insurance and successive insurers to demarcate their respective responsibilities. This article summarises the recent case-law on ambit of circumstance notifications and attempts to extrapolate some general guidance principles.
Introduction
One of the most difficult questions to afflict liability insurance, in recent years, has been the ambit and effectiveness of circumstance notifications to attach coverage under ‘claims made’ insurance contracts, where the matters purportedly notified may give rise to an indeterminate but potentially large number of future claims. It is axiomatic that ‘claims made’ policies must exclude claims arising from matters already known to the insured, at policy inception, as likely to produce them. Likewise a provision, whether contractual or statutory, which enables the insured who becomes aware during the period of the policy of matters which may give rise to claims against him or her at uncertain future times, to notify those matters to an existing insurer and attach the current policy’s coverage to them as though the claims had in fact been made at that time, is essential to the operation of claims made cover. [1]
Without these two factors, the acceptance of a future claim under the insurance in force at the time when the insured first becomes aware of the possibility of it and notifies that possibility to the insurer, and the concomitant exclusion of that claim from any subsequent policy in force at the time it is actually made, claims made insurance simply cannot work.
From the outset, however, the claims made principle has been rendered contentious by two related questions:
1 How much specific, factual detail needs to be provided to the insurer on risk, by way of a circumstance notification, in order to establish the necessary link between the matter purporting to be notified and the future claim; and
2 To what degree is it necessary for the insured to establish the actual legal basis and probability of a future claim, which may or may not be made against him or her, in order to place the insurer effectively upon notice?
Most contractual circumstance notification clauses, and s 40(3) of the Insurance Contracts Act 1984 (Cth), use the phrase ‘facts that might give rise to a claim against the insured’ to designate the contents of an effective circumstance notification.[2] While it would seem axiomatic that a matter which does, in fact, subsequently give rise to a claim against the insured must, at the time it was notified, have been a fact which ‘might’ give rise to such a claim, this merely serves to preclude an insurer from purporting to reject the notification on the basis that the future claim appears improbable or without merit at the time of notification. If, notwithstanding this, such an unlikely claim is subsequently brought, then provided it can be clearly seen to have arisen from the matters notified during the policy period then the policy notified will respond, subject to its other terms and conditions.[3] The fundamental question remains, how much detail and analysis does an effective circumstance notification need to contain, in order to catch and attach all potential future claims arising from it?
The exclusions which claims made insurers commonly place on their policies, in respect of claims arising from matters known or reasonably to be anticipated by the insured, at policy inception, as likely to produce them, tend to be drafted in the widest, most all-encompassing language which lawyers’ ingenuity can contrive. They will certainly catch any matters adverted to, however, obliquely, in the proposal. In addition, the insurer is likely to have a remedy under s 28(3) of the Insurance Contracts Act, to exclude from cover any claim arising from a matter which was not disclosed but which the insured realised or which a reasonable person in his or her circumstances would have realised, at the time of proposal, had the potential to give rise to such a future claim. Accordingly, and again if the insurance is to function effectively in providing seamless cover between policy years, the capacity of the insured effectively to notify ‘facts, matters or circumstances’ to an expiring policy needs to be at least as broad and effective as the capacity of a subsequent insurer to exclude them from an incepting one.[4]
In the case of policies to which Australia’s Insurance Contracts Act applies, the insured who has failed to notify (or has unsuccessfully notified) a circumstance under a claims made policy, which has expired before the making of an actual claim against him or her arising from it which claim is then excluded from renewal or replacement coverage, may be afforded relief under s 54(1) of that Act, depending upon the wording of the expired policy.[5] Section 54(1) is a remedial provision which may relieve the insured of the consequences of having failed to notify a circumstance under a claims made policy which permitted him or her to do so; those consequences being, of course, that a claim against the insured arising from that circumstance after the policy’s expiry is not covered by it. The remedy is of limited application, however, since it depends upon the proper characterisation of the policy in question, in accordance with the reasoning of the Queensland Court of Appeal and the High Court in the Australian Hospital Care case, [6] as providing ‘known circumstance’ as well as ‘claims made’ coverage.
This effectively means that the policy must contain a deeming clause actually incorporated in the contract, with which the insured must comply in order to attach the cover to a subsequent claim, so that should he or she fail to do so it is the ‘effect of the Contract of Insurance’, as provided for by the language of s 54(1), which entitles the insurer to refuse to cover the subsequent claim by reason of the omission of the insured. A claims made policy which contains no circumstance notification provisions in its express terms is providing no ‘known circumstance’ cover and responds, according to its own terms, only to claims actually made upon the insured during its period of insurance. The effect of such a contract of insurance is that the insurer is entitled to refuse to cover a claim made outside that period not by reason of any act or omission of the insured, but because the policy simply does not extend to it. Section 54(1) and the reasoning in the Australian Hospital Care case cannot avail the insured in that situation.[7]
There is also the question of the insurer’s prejudice adjustment remedy under s 54(1), to be considered. In the case of the referral back of a claim made perhaps several years after policy expiry, no prior notice of which had been given to the insurer, the issue of prejudice might not be an insignificant one. In the interval, statutory accounts of the insurer may have been finalised, reinsurance treaties may have expired or been commuted, premium rates set, dividends paid or the insurer may even have undergone a substantial corporate restructuring. All these matters would seem capable of generating prejudice arising from the insured’s omission to notify a major claim circumstance before expiry of the policy period, within the ambit of the High Court’s formulation of prejudice in Moltoni Corporation Pty Ltd v QBE Insurance Ltd.[8] The risk of prejudice would seem to be compounded where the failure to notify involves a circumstance which has the potential to generate claims of a substantial size, or from a large number of claimants, perhaps adding up to a policy-limit loss.
Accordingly, notwithstanding s 54(1) and the possible operation of continuity of cover clauses,[9] there remains a critical question for both insured and insurers as to the ambit and effectiveness of circumstance notifications. Is it possible to distil, from first principles or from case law, the quintessential elements of an effective notification? At one end of the scale there will be clear cut matters involving an event at a known point in time, an identified person who may be expected to sustain loss as a result of it and an obvious basis for attributing responsibility to the insured. At the other end, there may be no more than the looming possibility of an indeterminate number of persons suffering losses, in greater or lesser amounts, as a result of their involvement in some product or service of the insured and for which they may or may not attempt to hold the insured liable to compensate them.
The first scenario presents no difficulties either for insured or insurers: it is with the second that the difficulties arise. A threshold question is whether a notification provided to an insurer must be taken to encompass only the facts expressly stated in it, or whether it may also include other matters adverted to obliquely or which may reasonably be inferred from the notice’s express terms, or even background facts which are neither mentioned in nor apparent from the actual content of the notice but which are known to the insured and form part of the latter’s reasons for giving it. The cases fall broadly into two categories: those requiring determination whether a claim which has been made upon the insured falls within the ambit of a prior circumstance notification; and those which seek to define the scope of application of a circumstance notification to future claims, before they are made. For convenience, these will be referred to as retrospective determination and prospective determination cases, respectively.
Retrospective determinations
In Thorman v New Hampshire Insurance Co (UK) Ltd [10] the insured were architects to whom complaints had been made in 1976, with regard to cracking of brickwork on a number of houses which they had designed as part of a housing development. The insured attributed the blame for these cracks to the project engineers but nevertheless notified their insurer, New Hampshire, and remedial work was undertaken. This work was paid for largely by the engineers, with a modest contribution from the insured which the insured made without admission of liability and without claiming on its policy. The problems, however, were not at an end.
In May 1982, solicitors acting for the building owners wrote the insured a letter before action, in which they complained of unspecified problems with the construction. The insured notified New Hampshire, which was still its insurer. In June 1982, a generally endorsed writ was issued against the insured but not served. At the end of the same month, the owners’ solicitors wrote to the insured purporting to hold them responsible for:
"Serious problems . . . in this development, inter alia, with regard to cracking and defective brickwork."
With effect from 30 September 1983, the insured ceased to be insured by New Hampshire and took out a replacement policy with the Home Insurance Company. In January 1984, the writ was served accompanied by a Scott Schedule setting out a lengthy list of alleged defects and deficiencies with the project, including but by no means limited to problems with the brickwork. New Hampshire argued that it was only responsible for the claim in so far as it related to ‘cracking and defective brickwork’, which was the only matter encompassed by the circumstance notified to it during the period of its coverage, and not for the rest of the litany of problems set out in the Scott Schedule. The Home Insurance Company took the position that the entire claim was excluded from cover under its policy, as having arisen from circumstances notified to a prior insurer.
New Hampshire succeeded before Mr Justice Steyn at first instance, however, he was reversed in the Court of Appeal, the leading judgment of which was given by the Master of the Rolls, Sir John Donaldson. The whole question ultimately turned on those two Latin words ‘inter alia’, so it is to be hoped that someone in the insurer’s claims office at least understood them. As the Master of the Rolls explained the matter:
"what matters is what claim was being made by the building owners, not what claim was perceived by the insured.
The answer to this question is to be found in the terms of the letter of . . .1982 claiming arbitration: ‘serious problems have arisen in this development, inter alia, with regard to cracking and defective brickwork, for which we hold you responsible.’ Note the words ‘inter alia’. This is the clearest possible claim in respect of all serious problems which had arisen by that date and is not confined to brickwork. The fact that it was unparticularized and uninformative is nothing to the point. All the matters listed in the Scott Schedule are in this category and it follows that all were the subject matter of a claim before [New Hampshire Insurance Company] came off risk.
Another answer may be found in the generally endorsed writ. I am inclined to the view that the issuing of the writ also constitutes a claim covering all matters subsequently particularized in the statement of claim and in the Scott Schedule. The only objection to this view is that the writ was not served upon the architects until much later and it could be argued that the letters telling them that the writ had been issued were more accurately to be regarded as notice of intention to make a claim at a later date by serving the writ.
If the latter is the true view, in my judgment the issue of the writ, as distinct from its service, constitutes an ‘occurrence which may be likely to give rise to a claim falling within [the disclosure condition] and, the architects having informed underwriters of that occurrence, any claim against them arising out of that occurrence would be deemed to have been made during the period of the policy. The service of the writ and, a fortiori, the service of the statement of claim clearly arises out of the issue of the writ." [11]
The Master of the Rolls drew a distinction between this type of situation and one in which a series of separate defects became apparent, one after the other, and were the subject of separate notifications. He emphasised that every matter must turn upon its particular facts:
"A single complaint that they suffered from a wide range of unrelated defects and a demand for compensation would, I think, be regarded as a single claim. But if the defects manifested themselves seriatim and each gave rise to a separate complaint, what then? They might be regarded as separate claims. Alternatively, later complaints could be regarded as enlargements of the original claim that the architect had been professionally negligent in his execution of his contract. It would, I think, very much depend upon the facts." [12]
Thorman’s case then would seem to be authority for the proposition that a circumstance notification does not need to contain explicit detail of all of the matters which it encompasses, and may incorporate by reference matters which are not expressly mentioned in it, provided that such an inference necessarily arises from the actual words used. How far then can the notification of a particular demand, issue or problem go in incorporating, by reference, other complaints or concerns affecting the same subject matter? Kajima UK Engineering Ltd v The Underwriter Insurance Co Ltd [13] was another construction defect case. Kajima was the main contractor engaged to design and build a block of 46 flats. The work was commenced in September 1999 and practical completion achieved on 15 June 2000. During the period 20 May 2000 to 19 May 2002, Kajima was insured by the underwriter. The policy contained a standard condition which required Kajima to notify the insurer of:
"Circumstances which might reasonably be expected to produce a claim or on receiving information of a claim for which there may be liability under this insurance."
On 20 February 2001, Kajima provided its insurer with a notification in the following terms:
"Accommodation Pods Settling and Moving Excessively; causing adjoining Roofing and Balconies and Walkways to distort under differential settlement.
Service connections also under risk from movement; Potential Internal damage; Tennant (sic) Risk/Danger, and/or inconvenience.
Foundations believed not to have unduly settled - but to be level checked. Investigation presently underway to identify/confirm cause and potential affect [sic]/risks."
This was the ‘2001 notification’.
By the end of April 2001, Kajima had formed the view that the movement in the structure was within design parameters and that there was no real problem with the pods. Remedial works were considered likely to cost on the order of £13,600. On 10 April 2002, the brokers were informed that Kajima had confirmed stabilisation of the settlement but that the structure had not yet been tested, so the insured requested that the file remain open pending a further report, in 12 months’ time.
Notwithstanding this optimism, as a result of complaints from tenants the owner commissioned a further report, in August 2002. This determined that certain problems had been caused by differential movement between the timber frame and the external posts, together with shrinkage of the timbers. It concluded that the subsidence of the building was unlikely to be attributable to movement of the foundations. A copy of this report was provided to the underwriter. Yet another report, dated 7 April 2003, identified major problems with the structure. There were found to be severe falls and excessive deflection of the floors, numerous construction defects and problems resulting from water ingress while the flats were being built. A copy of this report also was provided to the underwriter.
By the end of 2003, a schedule of defects had been prepared and circulated, identifying 39 discrete problems. Additional defects and deficiencies with the structure emerged over the following 2 years and in turn were all duly notified to the underwriter. In September 2006, a settlement was reached between the owner and Kajima, whereby Kajima bought the flats for £4.75 million.
The issue for Mr Justice Akenhead, of the High Court of England and Wales, was how much of this was recoverable from the insurer. The essential question was the extent to which the defects and damage, which were the subject matter of the final settlement and the interim compromises leading up to it, were encompassed by the 2001 notification.
Kajima’s case was that the investigation to which the 2001 notification referred led over time, including after expiry of the policy, to further investigations by consultants retained by itself and by the owner. Over the following years, additional defects and deficiencies were uncovered leading eventually to the final settlement between Kajima and the owner. Therefore, there was effectively a ‘continuum’ from 2001 onwards and the losses, costs and liabilities incurred by Kajima could all be considered to have arisen from the circumstances contained in the 2001 notification. Kajima argued that it made no difference that as the investigations proceeded, the defects uncovered went far beyond those which were explicitly referred to in the 2001 notification, differing in both nature and severity.
The underwriter argued that the circumstances actually notified to it in 2001 were limited and specific. The ‘investigation’ referred to in the 2001 notification was clearly intended to be an investigation into those particular circumstances, rather than a general enquiry into the possible existence of other defects or deficiencies. The insurer took the position that the coincidental, later discovery of other and more extensive defects and damage had nothing to do with the originally notified circumstances and was not covered by the 2001 notification. In other words, those additional defects and deficiencies had not been notified and any claim arising from them did not arise from the circumstances which had been notified to it during the period of its coverage.
Akenhead J held that the 2001 notification was effective only in relation to the specific circumstances mentioned in it. He set out a number of governing principles for determining this question, which are well worth summarising:
1. there was no restriction in the policy as to what circumstances might be notified. They might be specific or general. It was not necessary that the notified circumstances be seen as likely to give rise to a claim; it was sufficient that they might reasonably be expected to do so (para 99(a));
2. it would be impossible and unhelpful to produce a finite definition of circumstances which might reasonably be expected to give rise to a claim because, given the factual permutations and possibilities, the types of such circumstances might be almost infinite (para 99(b));
3. it was possible for the assured to give notice of a ‘hornet’s nest’ or ‘can of worms’ type of circumstance (para 99(c));
4. the assured must itself be aware of the circumstances which it was notifying to the insurer. It would not suffice to say ‘I think it is possible that there may be some unknown and unidentified design deficiencies in a particular building’ (para 99(d));
5. the fact that notification had to be given ‘as soon as possible after’ the assured had become aware of the relevant circumstances, suggested strongly that the notification only covered those matters of which the assured was actually aware at that time. Further notifications had to be given as soon as the assured became aware of new circumstances (para 99(e));
6. if there had been a proper notification of circumstances, then any claim arising from those notified circumstances, of which the assured was aware, would be considered to have been made within the requisite period of insurance. Any claim which arose consequently upon the notified circumstances, would arise from those circumstances. There had to be some causal, as opposed to merely coincidental, link between the notified circumstances and the later claim (para 99(f));
7. any notification had to be construed objectively but the court was entitled to review subjectively the state of the assured’s knowledge, with regard to the notified circumstances (para 99(g));
8. it was not helpful to talk in terms of a narrow or broad interpretation of the notification. It was to be interpreted objectively on the basis of the words used, having regard to the factual context in which it was served. The factual context was important not only as a matter of interpretation of the notification, but also because it was only matters of which the assured was aware that could form the basis of a valid notification (para 99(h));
9. the claim which was later pursued had to arise not only from the notified circumstances but also from the circumstances of which the assured was aware. It could not arise from any other circumstances which may have happened or been discovered, either after the notification or in any other event after the expiry of the insurance cover (para 99(i)); and
10. the claim subsequently brought could relate to new damage which had not occurred by the time of the expiry of the insurance and nevertheless be covered by it, if it flowed from or was consequent upon the properly notified circumstances, as it would then arise from them (para 99(j)).
Applying these principles, Akenhead J held that the 2001 notification was only effective to attach policy cover to that part of the claim which related to the specific matters referred to in it. These were all which had been notified.
Importantly:
1. the 2001 notification was not effective in relation to any other matters, except in so far as those other matters either caused or contributed to the notified circumstances or were caused by them;
2. the 2001 notification encompassed:
(a) the defects which caused;
(b) the symptoms of; and
(c) the consequences of,
the circumstances mentioned in the 2001 notification;
3. an historical ‘continuum’ of investigations by various parties, which coincidentally revealed a number of defects or deficiencies unrelated or apparently unrelated to the notified circumstances, was not sufficient to expand the original notification.
The investigation mentioned in the 2001 notification was not a separate, notified circumstance in itself, since it was, and at that time could only be, an investigation into the notified circumstances. Accordingly, defects and deficiencies exposed during investigations post-May 2002 were not related to, and any claim in respect of them did not arise out of, the notified circumstances. There had to be a relationship between the subsequent defects, deficiencies and damage and the fact of ‘Accommodation Pods Settling and Moving excessively; causing adjoining Roofing and Balconies and Walkways to distort under differential settlement’, in order for the later-revealed problems to be encompassed within the notification. Such a relationship could not be constituted merely by the fact that later investigations, even if they commenced as an enquiry into the notified circumstances, revealed other defects of an entirely different nature which had no connection with them. To the extent that the settlement, movement or distortion which had been notified neither caused nor was caused by any of the subsequently discovered problems, the claim in respect of the latter was not within coverage.
This final point was critical. In the words of Akenhead J, the investigation referred to in the 2001 notification:
"Was not and was not intended to relate to any other investigation. It was not a ‘stand alone’ or abstract investigation. It was not a general investigation into what was perceived as some general ‘can of worms’. No general problem was known or believed to exist at the time of the Notification or indeed up to the expiry of the TUIC insurance cover . . .
As a matter of fact, the ‘investigation presently underway’ in February 2001 was a relatively limited exercise involving seeking the views of Volumetric, Levitt Berstein and Conisbee. After receiving their comments, little was done by way of further investigation into this problem other, apparently, than Kajima keeping a ‘weather eye’ on whether settlement was continuing. It is informative that Kajima, in writing to their brokers on 3 May 2002, do not hint or suggest that the investigation referred to in the notification was as such continuing. Thereafter, the investigation was limited to checking twelve months after April 2002 whether the notified problems were continuing.
The fact that over the period 2002 to 2006, a number of other defects emerged of more or less seriousness does not enable, somehow, the notified circumstances to be expanded. Many of those defects seem, although I make no final finding about them, to have been discovered coincidentally. The notified circumstances could not be expanded by the later discovery of unrelated defects or damage which were not the subject of the notification. . . .
For instance, the discovery that the wrong panels had been used at the wrong levels or used with inadequate fixings would only be covered by the notification to the extent that such deficiencies had materially contributed to or related to or caused the settlement, movement or distortion which was notified in February 2001." [14]
It may be concluded from Kajima’s case, that a circumstance notification is only effective to corral subsequent claims which arise from the matters actually referred to or adverted to, expressly or implicitly, in its language. The fact that investigation of the matters initially notified may prompt a chain of enquiry leading to further investigations, which then reveal additional problems of a character different from those originally notified, will not suffice to attach those subsequent problems. Identification of defects or deficiencies in one aspect of a project or structure will not be taken to encompass all of the other flaws which may subsequently be revealed in it.
On the other hand, it is possible to give effective notice of a general ‘can of worms’ or ‘hornet’s nffest’ of potential claims arising from an undertaking if, on the actual terms of the notification, that is what the insured has attempted to do. To try to put it in a nutshell, if what the insured is notifying is obviously the tip of an iceberg, then the presence of the submerged remainder of said iceberg may reasonably be deduced from it and held to be implicit in, and therefore encompassed by, the notification. If, however, there is no basis upon which to deduce, from the matters notified, the presence of other defects or deficiencies which an investigation into the notified matters subsequently reveals, then those later-revealed problems will not be caught by the notification and claims in respect of them will not attach to the policy.
What about the situation where a matter notified during a period of insurance, as a potential claim circumstance, is investigated and either found to be groundless or thought to have been satisfactorily resolved? Should the insured’s conclusion that the matter notified is no longer one which might give rise to a claim against him or her prove to be premature, can a subsequent year insurer refuse to meet the claim, on the basis either that it arose from a circumstance notified to a previous policy or of non-disclosure? Clearly, if the current policy contains an explicit exclusion of any claim arising out of a fact, matter or circumstance which has been the subject of a prior year notification, then that exclusion would seem to apply irrespective of the insured’s subjective expectation of a claim arising. Likewise, by the reasoning previously mentioned, [15] the fact that a claim has, in fact, arisen from the circumstance notified means that it must, at the time of notification, have been a matter which ‘might’ give rise to such a claim, within the meaning of s 40(3) and the deeming clause, so the claim attaches to the policy under which the circumstance was originally notified irrespective of perceived unlikelihood.[16] What about non-disclosure? If the policy in force at the time the claim is actually made does not exclude claims arising from circumstances notified to earlier policies, can the insurer nevertheless refuse coverage on the basis of material non-disclosure, exercising its remedy under s 28(3) of the Insurance Contracts Act or pursuant to an exclusion of claims arising from matters which the insured knew, or which a reasonable person in the circumstances would have known, might give rise to a claim against the insured?
In CGU Insurance Ltd v Porthouse,[17] the High Court stated that: The reference to ‘any fact, matter or circumstance’ in [the policy exclusion] is plainly a reference to objective matters and is not a state of mind or belief.[18] The clearest form of ‘fact, matter or circumstance’ plainly would be a complaint by a third party or the express threat of a claim. It is more difficult, however, when it is only the insured’s own, internal awareness of and state of mind with regard to a state of affairs, which must be evaluated against the anticipation or reasonable (constructive) anticipation of a claim.
In FAI Insurance Co Ltd v McSweeney, [19] Lindgren J concluded that the test for whether an insured ‘knew or ought reasonably to have known’ that a circumstance ‘might give rise to a claim’, is an objective one:
"The appropriate connection between the known circumstances and the claim referred to in [the question in the proposal form] is, perhaps, best described by saying that circumstances ‘may give rise to a claim’ if they would . . . immediately suggest to a reasonable person in the proponent insured’s position who reflected upon those known circumstances, that the bringing of a claim against the insured in respect of them was a ‘definite risk’ or a ‘real possibility’ or ‘on the cards’. Perhaps a notion of the ‘springing to mind’ of the making of the claim also appropriately expresses the shade of meaning intended. The expression is concerned with the making of a claim as distinct from the mere existence of legal liability. Ordinarily it can be expected that what will be known will include the fact that the circumstances have actually led a person at least to contemplate the making of a claim. However, I do not exclude the case where the underlying circumstances establishing liability themselves, of their nature, would prompt a reasonable person immediately to foresee the making of a claim as a real possibility. In such a case, the length of time that has passed without any suggestion of a claim and the degree of obviousness of liability may assume importance." [20]
The sentence emphasised at the end of the above quote, from Lindgren J’s judgment in McSweeney, suggests that there may be circumstances where a matter has arisen and been perceived as one which might give rise to a claim against the insured, been notified to the insurer yet no claim is made for a considerable period afterward and it appears less and less likely (perhaps because of limitation periods or other reasons) that one will be made. At what point can it be said that it is no longer objectively reasonable for the insured to believe that those circumstances might give rise to a claim?
In FAI Insurance Co Ltd v Hendry Rae and Court, [21] the question of whether and when a circumstance notification might be considered to have ‘passed into history’ was considered. The question was at what point the prospect of a claim arising from the matters notified might be considered to have become so remote that the insured no longer need have regard to it, in complying with its duty of disclosure in subsequent proposals. The corollary is that a claim arising from those matters would not be caught by an exclusion which referred to matters which the insured knew or which a reasonable person in the circumstances would know, to be matters which might give rise to a claim. [22] In 1986 the insured, a firm of chartered accountants, had prepared a report for their client, Strategic Minerals. In 1987 a newspaper article was published, claiming that parts of the report were misleading and referring to the declared intentions of certain individuals, if they were elected to the Board of Strategic Minerals, to cause it to bring a claim against the insured. Clearly these were notifiable circumstances and the insurer was so informed.
At the subsequent Annual General Meeting of Strategic Minerals, however, the individuals who had threatened legal action were not elected to its board. The insured’s insurance broker informed the insurer of the election results and indicated that no further action would be taken unless the insurer so instructed. In 1988, the insurer closed its file and in subsequent years, when renewing its policy, the insured made no further reference to the matter. [23]
In 1991 a claim was made against Hendry Rae and Court, which was still insured by the same insurer. The claim was by Strategic Minerals and arose out of the 1986 report prepared by the firm and the matters notified to the insurer in respect of it in 1987. The insurer confirmed indemnity for the insured under the 1987 policy, however, the insured wished to claim under the 1991 policy which contained more favourable terms. The insurer, however, refused to entertain the claim under the 1991 policy on the grounds that the failure to disclose on the proposal for it, the 1987 threat of legal action, amounted to a misrepresentation within the meaning of section 28(1)(b) of the Insurance Contracts Act. [24]
The core issue was whether the insured’s failure to include reference to the threats of legal action which had been made against it back in 1987, in its disclosure for 1991 policy, constituted a misrepresentation or material non-disclosure, thus entitling the insurer to a reduction remedy under s 28(3) of the Act. A key consideration in determining this was whether, as at December 1990 when the insured was renewing its policy, it was reasonably entitled to consider that the prospect of a claim from Strategic Minerals, arising from the report which it had prepared for that company in 1986 and the allegations subsequently raised in respect of it, had ‘passed into history’. If so, it could no longer, therefore, be considered to be a matter which the insured knew, or which a reasonable person in their circumstances could be expected to know, was relevant to the decision of the insurer within the meaning of s 21(1) of the Insurance Contracts Act.
On this specific issue, the trial judge, Anderson J, had concluded that:
"I am satisfied that when the proposal for the 1991 policy was completed in December 1990, [Hendry Rae and Court were] not still aware of any claim or circumstance which may give rise to a claim against them by Strategic Minerals. The events of 1987 had passed into history. It must be remembered that there is no proof that Strategic Minerals in truth had grounds for a claim against [the insured] or that it was considering launching any such claim. It is not proved that the report was in fact negligent or that it had any quality or vice of which [insured] was aware or ought to have been aware and which made it of itself a circumstance that may give rise to a claim. I think that on a true analysis of what was known to the [insured], the only ‘circumstance’ of which they were aware that might give rise to a claim against them by Strategic Minerals required the election of [the certain individuals] to the Board of Strategic Minerals. Those people had failed in that bid nearly 4 years previously . . ." [25]
On appeal, the WA Full Court agreed entirely with the above comments of Anderson J and Malcolm CJ went on to say:
"What [the insurer] had to prove was awareness as of December 1990 of a circumstance which may give rise to the claim. Had there been evidence of the fact that Strategic Minerals had grounds for a claim, or that [the insured] knew of facts which might constitute negligence in relation to the report, those matters and the other matters mentioned by the learned trial judge would clearly have been relevant to the issue of [the insured’s] awareness . . .
. . . at its highest, there had been an allegation of negligence by persons who were not in a position to make a claim. No such allegation had been made by Strategic Minerals . . .
. . . as the learned judge concluded, by December 1990 so far as [the insured] were aware, the potential claim had ‘passed into history’. There were not currently circumstances which then existed which gave rise to a possible claim by Strategic Minerals." [26]
FAI General Insurance Co Ltd v Hendry Rae and Court was distinguished in the more recent case of Fishwives Pty Ltd v FAI General Insurance Co Ltd, [27] a case in which the ‘passing into history’ argument was raised unsuccessfully. In that case the insured was a firm of architects who had designed an office building, which was completed in 1989. In early 1990, several granite tiles fell from the exterior of the building. Rectification work was performed at the owner’s expense, with some contribution from the insured. Further delamination of the granite tiles occurred in 1992 and in 1993 the owner indicated its intention to sue the insured, who then notified their insurer. The insurer refused indemnity on the basis that the circumstances from which the claim arose should have been notified back when the first delamination occurred, in early 1990.
The insurer’s argument was that the claim that was threatened in 1993 would arise out of essentially the same problem with the building, of which the insured was aware and which constituted a notifiable circumstance in 1990, or 1992 at the latest. The court agreed with the insurer and held that:
"This was not a case where the threat of a claim had ‘passed into history . . . the question is ultimately one of fact and, in the present case . . . the recurrence of the ‘delamination’ problem in 1992, after it had been apparently rectified in 1990, must have brought home to the insured an actual awareness of circumstances which might give rise to claims against it." [28]
Conclusions regarding retrospective determinations
The upshot of these cases seems to be that if a subsequent claim can be seen to have arisen from matters referred to, either expressly or by necessary implication of the language, in a prior-year circumstance notification, then it will be referred back to the policy in force at the time of that notification notwithstanding that the actual facts supporting the cause of action giving rise to the claim were not explicitly detailed in the notification. It is possible to notify of the fact that a task or a project has been badly mismanaged, with numerous problems likely to arise from that fact, without providing chapter and verse of each particular shortcoming and how it may be expected to give rise to a claim against the insured.
On the other hand, the insured cannot notify facts, matters or circumstances of which they are themselves as yet unaware and unless a matter which they have notified can clearly be seen to be the tip of an iceberg, the fact that investigations into it may unearth a litany of further problems will not, of itself, suffice to bring those problems within the ambit of the original notification.
The cases discussed so far, with or without nondisclosure aspects, all deal essentially with the question of whether a claim, once it has been made upon the insured, can be related back to and encompassed by a prior-year, circumstance notification. The key question is whether the subsequent claim did, in fact, arise out of the facts, matters or circumstances embodied in the notification to the earlier policy. Since the insured must themselves be taken to know what they have notified, there is consistency between the level of knowledge necessary for effective notification and that which would engage the duty of disclosure to an incepting insurer. [29]
The purpose of a circumstance notification is not merely to engage the policy in respect of all possible future claims against the insured arising from matters in existence during the policy period, however remote and however arising. It must be sufficiently specific to put the insurer on notice at least of the actual basis of a claim. It must not be ‘too vague or remote to be reasonably capable of being regarded in itself as a matter which might give rise to a claim’ [30] and it will not suffice merely to say, for example, ‘I think it is possible that there may be some unknown and unidentified design deficiencies in a particular building’. [31] The insurer must be provided with sufficient information that it can at least appreciate the nature and basis of the future claim or claims which may be made, although it need not be in a position to evaluate their merit or likelihood. [32]
Prospective determinations
What then of the situation, which occurs more often in the era of widely-distributed financial products and large-scale wealth management facilities, in which the insured becomes aware of a potential issue which, if it materialises, may give rise to an indeterminate number of claims against it, from persons whose identities have not yet been established and the actual substance of those claims, let alone their merits, cannot yet be ascertained?
The case of J Rothschild Assurance Plc v John Robert Collyear [33] is interesting in that the insured’s notification arose from a report by accountants, KPMG, into the life insurance industry, which had been commissioned by the regulator. [34] This report did not identify any specific misfeasance on the part of the insured but revealed substantial levels of industry-wide non-compliance, in the area of pension rollovers and opt-outs from industry funds. Significant potential losses to investors were foreshadowed and the regulator encouraged participants in the industry to establish remedial mechanisms for future compliance and compensation, where appropriate.
The insured gave notice to its insurers in the following terms:
"Claims may arise against any of the assured in relation to any advice concerning an ‘opt-out’ from an existing or perspective occupational scheme. An exercise to identify ‘opt-out’ advice given is in hand."
The insurers peremptorily rejected this notification, asserting that notifiable circumstances had not yet arisen and that the policy’s deeming clause, which referred to ‘any circumstance of which the Assured shall become aware’, required that the insured at least know the identities of the actual persons who might be expected to bring claims against it.
The industry review process in which the insured participated did, in fact, uncover instances of inappropriate investment advice by the insured and compensation was duly made to the affected customers. The insured pursued indemnity under the policy to which notification had been given and the insurer joined issue, for relevant purposes on three main points:
1. Whether there had been an effective notification during the policy period of the circumstances from which the so-called ‘claims’ were said to have arisen;
2. Whether there had been material non-disclosure of the same matters before policy inception; and
3. Whether the liabilities settled in fact arose from claims made against the insured within the meaning of the policy, in light of the fact that they were only uncovered during a review process.
In the Queen's Bench Division, Mr Justice Rix found for the insured on all three of these questions. As regards the ambit of the notification, he summarised the insurers’ submission as follows:
"The main point taken by the Underwriters, however, was that the matters relied on in the TSW letter were not circumstances which may give rise to a claim within General Condition 2. In particular they objected that the TSW letter purported to make a blanket notification, that no cause for concern specific to any transfer or opt-out case had been mentioned, that no reference had been made to any criticism or complaints directed against JRA personally, and that the KPMG findings were no basis for fearing a claim against JRA or indeed any claim at all based upon poor advice as distinct from poor recording." [35]
Rix J found these submissions unpersuasive:
"While it is true that GC2 gives to an assured a significant extension of cover, a ‘claims made’ policy could hardly work on any other basis. Otherwise, by the time that a claim came to be made, it is quite likely that it would have become impossible to obtain cover for it, either at all or on any but prohibitive terms. Therefore as or more significant than the extension of cover itself are the factors first, at the test of materiality for notice is a weak one — ‘which may give rise to a claim’, not ‘which is likely to give rise to a claim’; and secondly, that the price of the extension of cover is notification of such circumstances, which is a condition precedent to a right to be indemnified. . . . I do not think, therefore, that there is any justification for demanding too much of the test that the notified circumstances ‘may’ give rise to a claim." [36]
In the learned Judge’s opinion, the fact that 91% of the industry files reviewed by KPMG had been found to contain some element of non-compliance, was reason enough for the insured to be apprehensive that their own conduct ultimately would not escape criticism. Consistently with the view that by the logic of the situation, a matter which does eventually give rise to a claim must, at the time of reporting, have been a matter which might do so, he also held that subsequent events could be taken into account in assessing, retrospectively, the ambit and effectiveness of the circumstance notification:
"In this case, the future showed that JRA were more than justified in saying that there were circumstances which might give rise to a claim against them in the identification of the problems which KPMG had reported on and which SIB had provisionally determined would have to lead to a review of past business and the provision of financial remedies. Where a prediction based not only on objective evidence which has itself been under scrutiny by independent professionals, but also on the concern of regulatory authorities, turns out to have been entirely justified by events, it seems to me to be unrealistic to say that that prediction was invalid and unjustified merely because there was much other evidence which was not yet to hand, even though that evidence was of particular relevance to an important aspect of the prediction." [37]
His Honour goes on to point out that the response of Underwriters on the renewal policy for the following year, in light of the coverage terms which they were prepared to offer, was itself evidence of the materiality of the circumstances disclosed and, accordingly, of the effectiveness of the notification.
On what was referred to as ‘the non-disclosure issue’, it turned on Exclusion 2 of the policy which deleted cover for any claim or loss: Arising out of any circumstances or occurrence which has been notified under any other policy or certificate attaching prior to the inception of this Policy or which were known to the assured prior to the inception of this policy. (emphasis added) The insurers had submitted that although the industry-wide non-compliance revelations in the KPMG report only came to light during the period of insurance, the insured had been aware of concerns on the part of the regulator, as expressed in an enforcement bulletin, issued before its inception. Mr Justice Rix dealt shortly with this submission:
"The position as at the time of EB16 was that the case of opt-outs was causing some concern, but the extent of the problem had not yet even been probed. It was like the situation in the case of transfers before the study conducted and reported on by KPMG. So it was that EB16 Lautro called for its members to conduct the limited monitoring exercise spoken of above. In JRA’s case, this exercise produced a nil return. JRA would have been entitled to take account of that nil return and also in that connection the introductory language of EB16 to the effect that members should not assume that Lautro’s views went beyond particular cases so as to be necessarily applicable to each member’s own circumstances. . . . In my judgment, I do not think that it can be said that the opt-out cases which JRA have finally been called upon to remedy arose from ‘any circumstances or occurrence which . . . were known to’ JRA prior to inception of the policies." [38]
On the ‘claims issue’, which Rix J considered to be ‘perhaps the most fundamental issue of all’, the fence at which the insurers balked was the fact that, in response to pressure from the regulator, the life insurance industry (including the insured) ‘went out to uncover non-compliance and to volunteer recompense, rather than the more normal situation where an Assured awaits claims to which he is then forced to respond’. [39] This is an issue which goes to the heart of the viability of traditional ‘claims made’ insurance, in an enhanced regulatory environment. [40] As Rix J put it:
"There had simply been no assertion of any rights against JRA and that to find or manufacture such an assertion would be fundamentally to alter the risk being insured under a ‘claims made’ policy. In such a case, JRA’s conduct of the review would cause Underwriters to be insuring the settlement of contingent liabilities before any claim was made. As for the suggestion that JRA could have asked their investors ‘Do you want to make a claim?’, that question, if it had been asked, would have given rise to questions as to whether under a ‘claims made’ policy the solicitation of claims would have been in good faith." [41]
Rix J conceded, as he accepted he was probably bound to, that the words ‘claim . . . made’ required not only the assertion of an entitlement to remedy but also the communication of that assertion to the insured. On that basis, while acknowledging the grounds for the insurers’ submissions and the difficulty of the case, he concluded that the responses of the investors to the questionnaires and accompanying correspondence, issued to them in the course of the review, amounted to claims for compensation within the meaning of the policy:
"Ultimately, it seems to me that I have to take an overall view of the review process and the documentation which it engendered and ask myself whether claims had been made against JRA. In my judgment the answer is to say that they had. I think that the investors made claim on JRA by participating in the review process and/or in accepting the redress offered in light of its terms." [42]
In the case of HLB Kidsons v Lloyds Underwriters Subscribing to Policy 621/PKID 001101,[43] the insured had a potential source of claims specific to their own business to notify. An employee of a subsidiary division of the accounting firm, which promoted ‘fiscal engineering’ products to clients for tax minimisation purposes, had expressed some concerns over the effectiveness, and indeed the legality, of one such product, the discounted option scheme. These concerns were enhanced when an eminent tax barrister endorsed the view that the product might, at least, lead to difficulties with the taxation authorities. During the period of insurance under their PI policy the insured provided notification of circumstances to their insurers, in the form of a letter to the placing broker followed by three presentations. A fourth presentation was made after expiry.
The policy period ran from 1 May 2001 to 30 April 2002. The initial notification letter, dated 31 August 2001, was in fairly low key terms. It was even described by the Trial Judge, Gloster J, as ‘coy’, and merely informed insurers that the product in question had been validated by earlier legal opinion but that an employee ‘has expressed the view that the Inland Revenue, if minded, could be critical of some procedures followed in certain cases’. The letter advised that the matter was being investigated and concluded that:
"The board has taken the view that this might be regarded as material information for insurers. There is no sign of a claim arising at the present time but the board feels that it is appropriate in the circumstances to advise what is happening and to take your instructions."
This letter was delivered on 27 September 2001 by the broker to a placing underwriter. It was followed up on 17 and 18 October 2001 by presentations to insurers which included other documents as well, including some example files and a bordereau entitled ‘Claim Circumstance Notification Bordereaux’. The next development was a meeting with external counsel which took place on 26 March 2002, after which there was a further set of presentations to insurers on 18 and 19 April 2002. These included all of the earlier information along with a further letter from the insured, adverting to the external legal advice, and a data sheet prepared by their solicitors. A further report was foreshadowed. Finally, in July 2002 presentations were made out of time to the following market, of the same material as had been included in the April presentations, but too late as the Trial Judge and the Court of Appeal both found.
The issues between insured and insurers at first instance and on appeal concerned, as in the J Rothschild Assurance Plc v Collyear case, the ambit of the information conveyed, by way of notification during the policy period, and its effectiveness to attach the coverage to claims which might subsequently be made against the insured should their concerns about the product prove well founded. At first instance, Gloster J found the letter of 31 August 2001 alone and its reiteration on 27 September to have been ineffective as notifications of circumstances. The follow up presentations in October 2001, likewise. [44] The April 2002 presentations were found to be effective notification of circumstances limited, however, to the product problems explicitly discussed and to the insurers in attendance. [45] The insured appealed and the case is chiefly interesting for what the two Lords Justices of Appeal, Rix LJ (building on what he had had to say in the Collyear case) and Toulson LJ, laid down concerning the principles to be applied in determining the scope and effectiveness of a circumstance notification with respect to future, unascertained claims.
In short, the Appeal was dismissed except as regards the October 2001 presentations, which the Court of Appeal (Rix and Toulson LJJ, Sir Richard Buxton dissenting) found to have been effective notification to the insurers present of the specific concerns of the employee of the insured, regarding the implementation of certain of the insured’s products, as referred to in the material then provided. The ambit of the notification did not go any further than that. [46] As regards the third presentation, in April 2002, the broker had appealed against the Trial Judge’s finding that the effectiveness of that presentation, as notification, was limited to claims arising from procedural problems relating to the discounted option scheme, as opposed to the insured’s other tax minimisation products. The Court of Appeal accepted that the insurers present had been given effective notification of potential problems arising from the implementation of such products generally, not merely the said scheme. [47]
The majority in the Court of Appeal [48] concluded, essentially, that the second and third presentations were effective to place the underwriters concerned in each of them on notice of the possibility of future claims against the insured arising not merely from the implementation of the discounted option scheme, which was really all that was adverted to in the 31 August 2001 letter and the first presentation in respect of it, but also from the implementation of the insured subsidiary’s ‘fiscal engineering’ products generally. This conclusion followed from the range and implications of the content of the material presented at the meetings with underwriters and the substance of the matters discussed. The real interest of the case, however, lies in what the Lords Justices of Appeal had to say concerning the principles governing effective circumstance notifications and the attachment of coverage. Thus Lord Justice Rix:
"In the ordinary way, I am doubtful that an insured’s own concern, without more, that he may have made a mistake is a relevant circumstance which can entitle him to give notice of circumstances, thus extending his claims made policy into future years: otherwise, every insured could extend his policy indefinitely simply by a notification based on his own lack of confidence." [49]
And further:
"As it is, however, both Kidsons and the underwriters were prepared to approach the question on the basis that the relevant circumstances were Mr Torrance’s concerns. Since Kidsons were plainly aware of these, it seems to me irrelevant that Kidsons may themselves, at some or other time, have lacked ‘a genuine belief’ that claims might ensue (para 101). In any event, Mr Kealey’s test for awareness of ‘a genuine belief’ is taken from Mance J’s test for knowledge, not awareness.We must surely be aware of allegations about many things in which we have no genuine belief.
In my judgment, therefore, the underwriters’ respondent’s notice, to the effect that Kidsons were not aware of the circumstances relied on by them, fails. . . ." [50]
So the effectiveness of a circumstance notification is not to be gauged by reference to the insured’s subjective level of belief in it as a potential source of claims against them. Nor is it invalidated by uncertainty surrounding its scope. As Rix LJ went on to say:
"I would be unhappy to accept any suggestion that a purported notification of circumstances to an insurer becomes ineffective whenever there might be a real point of argument as to its proper width. . . . (it may be otherwise if there is doubt about it whether a notice is a notice of circumstances at all, but as I have observed above, it clearly was subjectively intended to be such a notice, and Mr Kealey’s concession accepted that it was, and the real question was as to its width.)" [51]
Toulson LJ adopted a more nuanced approach to determination of both the ambit and effectiveness of a circumstance notification, purportedly given, and the obligation to provide it under a policy which contained such a requirement. His ‘spectrum’ of matters which may be the subject of purported notification is relevant, therefore, both to the referral back of future claims to the expiring policy, and to their exclusion from a subsequent one as having arisen from the subject matter of a notification under an earlier policy. This is so significant that it is worth reproducing those of his judgment, in full:
"At one end of the spectrum, there may be cases in which an insured seeks to notify a circumstance which is too vague or remote to be reasonably capable of being regarded in itself as a matter which might give rise to a claim. This is not as unlikely as it might sound, because an insured at the end of a policy period may have an incentive to give a notification in the widest possible terms for which there may be no real justification. The insurer would be entitled to refuse to accept such a purported notification.
In the middle of the spectrum, there may not uncommonly be cases in which different people, possessed of the same knowledge, might reasonably form different views about whether a claim was a real possibility as distinct from a remote risk. In such cases an insurer could not reject a notification of the circumstance, but nor could an insurer complain if the insured did not give such a notification. At the other end of the spectrum are cases which any reasonable person in the insured’s position would recognise a real risk of a claim. If so, the insured would be duty bound to give notice of it to a prospective insurer. He would also in my view be bound to give notice of it to the current insurer if the terms of the policy required him to give notice of any circumstance of which he became aware and which might give rise to a claim.
In short, in my judgment the right general approach to a policy clause which entitles an insured to give notification of a circumstance which may give rise to a claim, and thereby cause the risk to attach to that policy, is to treat the right as subject to an implicit requirement that the circumstance may reasonably be regarded in itself as a matter which may give rise to claim. The right general approach to a policy clause which goes further and imposes a duty on the insured to give such a notification is to treat it as implicitly limited, not only by the requirement that the circumstance may reasonably be regarded as a matter which may give rise to a claim, but to a circumstance which either the insured notifies or which any reasonable person in his position would recognise as a matter which may give rise to a claim and therefore requiring notification to the insurer." [52]
The last paragraph may be a bridge too far, if the inference is taken to be that the validity and effectiveness of a circumstance notification may be impugned by reference to the objective probability of a claim in fact arising from it. Insofar, however, as it purports to measure the intended scope of a notification, at the time it is given, by reference to the nature and perceived likelihood of the future claims in contemplation, from the standpoint of the insured, at the time of notification, then it would appear to be consistent with the views of Rix J (as he then was) in Collyear and with the Australian authorities discussed above. [53] Perhaps the most interesting aspect of Toulson LJ’s Judgment, from the perspective of efficacy of notifications, is his comment that:
"I would readily accept a proposition that where a policy contains a provision for the insured to notify a circumstance which may give rise to the claim and thereby attach the risk to the policy, it is impliedly incumbent on the insured to see that any such notification is a fair, if summary, presentation of what the insured knows . . . if the insured chooses to be deliberately misleading or economical with the truth, so that the insurer is not given a fair picture of what the insured knows, I can see a good arguable case for saying that the notification should be treated as invalid." [54]
That position is consistent with the prior authorities discussed above and with the previously expressed views of the present writer, that an efficacious circumstance notification must contain, at minimum, sufficient detail to distinguish it from the surrounding matrix of the insured’s affairs, as a specific source or cause of future claims against them. [55] It is the degree of specificity required that is at the heart of dispute in all these cases, both as regards the attachment of a claim to an earlier policy and its exclusion, whether by way of an express exclusionary provision or a non-disclosure defence, from the one in force at the time it was made.
The most recent case in this line, and one which illustrates most clearly the issues at stake for both insured and insurers, is McManus v European Risk Insurance Company hf. [56] This case concerned a law firm, McManus Seddon Runhams (MSR), which succeeded to the liabilities of another firm it had taken over, Runhams LLP. Runhams LLP, in turn, was successor practice to a third firm, Sekhon Firth.
As it transpired, there were some serious skeletons in the closet at Sekhon Firth which, due to an acknowledged failure of due diligence, MSR duly inherited. In addition to Solicitors Disciplinary Tribunal proceedings against three former members of Sekhon Firth, which eventually came to nothing, in November 2011 MSR first received a claim from a former client of its predecessor firm. By May 2012, 17 such claims had been received and the partners of MSR were beginning to be seriously concerned. They retained a compliance consultancy firm, the Corre Partnership, to audit a sample of Sekhon Firth files. Thirty-two files out of a sample of 385 were reviewed, including the 17 which had already given rise to actual claims. Representatives of MSR themselves also audited further files from the Sekhon Firth archive.
The upshot of these investigations was a notification letter sent to the firm’s insurer, European Risk, on 21 September 2012. This letter described the background and events leading up to the file audit, the problems revealed by it and summarised the situation as follows:
"The conclusion my partners and I come to, which is the inevitable conclusion one must come to is that every file conducted by Sekhon and Firth and Runhams LLP (in the period subsequent to the merger of those 2 practices), and in respect of which this firm is deemed by the Successor Practice Rules to be the successor practice contains or is more likely than not to contain examples of malpractice negligence and breach of contract and so each and every file of the predecessor firms Sekhon and Firth, Sekhon and Firth LLP and Runhams LLP should properly be notified to you as individually containing shortcomings on which claimants will rely for the purposes of bringing claims against this firm as successor practice."
The notification letter estimated the total number of files involved at approximately 5000 and enclosed a spreadsheet setting out the various categories. It was acknowledged that the insured had not been able to conduct individual reviews of all of the inherited files and the insurer’s instructions were requested. The insurer responded by accepting that all of the 32 matters expressly reviewed and described in the Corre Report were valid circumstance notifications, including the 17 actual claims which had already been reported to it. As regards the remainder, the insurer responded:
"The list of matters contained in the List and the Spreadsheet do not amount to valid Circumstances as you have not [identified] the specific incident, occurrence, fact, matter, act or omission which would give rise to a Claim on each individual file. Simply stating that Sekhon & Firth worked on the files in the list and spreadsheet does not constitute a valid notification, and as such, the notifications are firmly rejected in their entirety and without question."
The result of the rejection was to leave MSR in a situation where it could not procure renewal insurance, from European Risk or from any other authorised insurer, and was forced to join the Assigned Risks Pool [57] (albeit temporarily) in order to continue in practice. [58] MSR then brought proceedings against the insurer for declaratory relief. What the insured wanted, in essence, was a declaration of the validity of the ‘blanket’ circumstance notification. [59] Ms Vivien Rose, sitting in the Chancery Division as a Deputy Judge of the High Court, referred briefly to the Rothschilds and Kidsons cases and observed:
"In my judgment, the key point arising from these authorities is that in both cases the notifications were held to be valid in relation to later claims that arose from the circumstances notified, even though the notification had not even referred to the transaction from which the later claim arose, let alone identified a defect in relation to the handling of that particular client as likely to give rise to a claim by that client. . . . On the contrary, the Court, having found that there was a sufficient factual basis to amount to a ‘circumstance’, held that the notification covered not only transfers out of pensions but also opt out advice, despite the fact that JRA had not even been able to list the clients to whom opt out advice had been given. Similarly in Kidsons there was no suggestion either in the judgment of Gloster J or in the judgement of the Court of Appeal that the notification was ineffective because it failed to identify particular clients to whom the tax avoidance products had been sold or to examine whether that particular client might have a claim." [60]
On this basis, the learned Deputy Judge had no hesitation in concluding that ‘the stance taken by European risk in the Rejection Email was clearly wrong’. [61] She stated the point concisely as:
"Whether or not a future claim arising from other Sekhon Firth files will fall to be paid out by European Risk as a result of the Notification Letter depends on the nature of that future claim and whether it arises from circumstances that were validly notified. It will not be conditional on MSR having separately notified a problem on that particular file as being a separate circumstance under the policy." [62]
What then of the insured’s application for declaratory relief and a mandatory injunction? [63] The difficulty here was that while notification will be effective if it is sufficiently detailed and specific that a subsequent claim against the insured can clearly be seen to arise out of the matters notified, that cannot be proven or refuted unless and until the claim is made. Any declarations would have had to say, in effect, either that a whole class of future claims were within the scope of the notification, before they had even been made and without being able properly to define the class, or that a claim to which the circumstances notified subsequently gave rise would have arisen from the matters notified, which merely begs the question. As the learned Deputy Judge put it:
"There are problems with trying to pull out of the Notification Letter something that purports to be an exhaustive list of the misconduct notified. The case law is clear that a notification can only be valid insofar as it is based on circumstances which are known to the insured at the time the notification is made: there must be a ‘substratum of underlying external fact, over and above the [insured’s] mere concerns’... A declaration setting out the circumstances which have been ‘validly notified’ would appear to prevent European Risk from being able, once a claim is made, from arguing that the underlying matters to which MSR referred as circumstances in the Notification Letter were not in fact true and so could not validly be notified to European Risk. . . .
A declaration limited to the circumstances set out in those files would exclude a range of other circumstances which the Notification Letter describes which might well turn out, on further investigation, to have existed and to have been validly notified but which it is not possible to verify now. . . .
Conversely, to declare that MSR has validly notified circumstances wider than the defects apparent from the Corre Report and SDT judgment files would be to go further than the evidence currently before me justifies. . . .
To qualify any declaration by stating either that it is not an exhaustive list of the circumstances notified or that it is based on an assumption rather than a finding that the listed circumstances really existed at the time of the Notification Letter would denude the declaration of any real value to either party.
In my judgment, issues about the limits of the circumstances notified and the range of claims that might be said to arise from them are matters better left to be determined if and when a claim arises." [64]
The Court of Appeal agreed unanimously with the analysis of Deputy Judge Vivien Rose and refused to disturb any of her findings. [65] In particular, the refusal to grant the insured declaratory relief was held to be an entirely appropriate exercise of her discretion. The sticking point remained the sheer complexity of the declarations which would have been required and the perceived impossibility of preventing them from being either so wide as to go beyond what the present evidence would justify; or so narrow as to be of no practical utility. Importantly, there was no appeal by the insurer against the finding that its purported rejection of the ‘blanket’ notification was inappropriate. [66]
So where does that leave the status of the blanket notification? The situation between the insurer and insured was neatly summed up by Lord Justice Davis in the Court of Appeal:
"The litigation seems to have been marked by a mutual perception of tactical manoeuvring. The stance of MSR was that its entire future was being jeopardised by European Risk wrongfully failing to confirm the availability of the cover for potential claims properly notified under the insurance contract. The stance of European Risk was that MSR was seeing unjustifiably to foist onto European Risk overstated, unspecified and speculative ‘claims’ or ‘circumstances’ with a view to enhancing its ability to obtain insurance at relatively moderate rates from qualifying insurers in succeeding years." [67]f
Conclusions regarding prospective determinations
The circumstance notification has placed the insurer on notice of an indeterminate number of possible future claims against MSR, arising from the files of Sekhon Firth, and based upon the specific forms of misfeasance identified in the Corre Report, the Solicitors Disciplinary Tribunal judgment and the 17 actual claims, all of which were effectively notified to the insurer during the period of the policy. To the extent that any future claims involving Sekhon Firth clients also involve the same sorts of issues, similar misfeasance and, perhaps, the same individuals, they may be deemed to have arisen from the circumstances notified and that is why the insurer was wrong to adopt the position that the actual facts of each potentially claim-generative matter had to be notified in order to attach the cover.
If, on the other hand, a future claim were to arise involving a Sekhon Firth client, but based upon alleged misfeasance of an entirely different and unrelated order to the shortcomings identified in the materials which had been supplied to the insurer before expiry, then it would be an open question whether there was sufficient connection between the circumstances previously notified, to the extent that they could be said to imply the possibility of such a claim, and the claim as made. This, however, would be a question that could be answered only if and when such a claim was made. In other words, you cannot really determine the effective ambit of a circumstance notification until you have claims to compare against it and it is simply not feasible to try to set down, in advance, the defining characteristics of all of the future claims which might be said to have arisen from the matters notified.
It occurs to the writer that this leaves the circumstance notification in a situation similar, by analogy, to that of Schrödinger’s unfortunate cat, in his famous thought experiment illustrating the Copenhagen interpretation of quantum mechanics. The cat in the box is neither alive nor dead but exists in a so-called ‘quantum superposition’ of both states, until actually observed. The making of the observation (claim) collapses the probability wave function and only then is the cat either dead or alive. Likewise, only when the claim is actually made does the prior circumstance either encompass it, or not. When there is a known circumstance of uncertain ambit in the insured’s claims experience, incoming insurers can be expected to draw their exclusions in the widest possible terms. The question then arises, whether there is any feasible drafting by which deeming clauses could or should similarly be expanded, so as to cast the future claims net as widely as possible. The present situation would seem to be less than satisfactory from the standpoint of both insurers and insured. Insurers justifiably object to generic or ‘shopping list’ notifications, on the basis that there is no clear causal relationship between the facts disclosed and future claims that may be alleged to have arisen from them. On the other hand, insureds need to be able to notify the potential for an indeterminate number of future claims to arise from an identified source or fundamental cause of dereliction, as opposed to individual examples of misfeasance, if claims made insurance is to continue to serve its purpose of allowing insurer and insured both to rule off the accounts at the end of the period of insurance.
The situation is not dissimilar to the problem of aggregation in claims made insurance, for the purposes of determining the number of claims under the policy and the number of excesses which may apply. It might be possible to modify the usual form of ‘deeming clause’, so that instead of referring merely to future claims which arise from the ‘fact, matter or circumstance’ which has been notified, it attaches cover to any subsequent claims which arise out of or in connection with the same ‘source or originating cause’ as the factual matters notified. Of course, the notification would have to make clear also just what the insured considered that ‘source or originating cause’ to be, which might itself be the subject of contention, and it is questionable whether the insurance markets would entertain such a wording.
In any case, such an amendment would only be an option in respect of policies containing deeming clauses and these clauses are increasingly rare in Australia since the decision of the High Court in the Australian Hospital Care case. [68] Where the insured is reliant upon s 40(3) of the Insurance Contracts Act for notification of circumstances and attachment of coverage, what must be notified are ‘facts that might give rise to a claim against the insured’ and there is no scope for expansion of that wording. If a claim is subsequently made, the question is whether those facts did, or did not, ‘give rise’ to it and the basic question, regarding the nature and extent of the ‘facts’ which were included in the notification and their connection with the subsequent claim, remains for determination at that later date.
For assistance with the research for this article I am indebted to Ms Emma Mawson, Senior Associate and Mr Myles Farley and Ms Claire Wesson, solicitors of the firm. The mistakes, as usual, are all my own work.
This article was first published in (2014) 25 Insurance Law Journal.
[1] For a succinct discussion of the ‘claims made’ liability insurance principle and the way in which circumstance notification or so-called ‘deeming clauses’ operate, see G Pynt, Australian Insurance Law: a First Reference, 2nd ed, LexisNexis Butterworths Australia, 2011, 17.48–17.54 inclusive. The statutory provision in Australia which gives effect to the circumstance notification/claim attachment principle is s 40(3) of the Insurance Contracts Act 1984 (Cth), for a discussion of which see F Hawke, ‘Notification of Circumstances under Claims Made Policies: Some Observations upon the Scope and Operations of Section 40(3) of the Insurance Contracts Act 1984 (Cth)’ (1993-94) 6 ILJ 25 [back]
[2] The full wording of s 40 is as follows:
(1) This section applies in relation to a contract of liability insurance the effect of which
is that the insurer’s liability is excluded or limited by reason that notice of a claim
against the insured in respect of a loss suffered by some other person is not given to
the insurer before the expiration of the period of the insurance cover provided by the
contract.
(2) The insurer shall, before the contract is entered into:
(a) clearly inform the insured in writing of the effect of subsection (3); and
(b) if the contract does not provide insurance cover in relation to events that
occurred before the contract was entered into, clearly inform the insured in
writing that the contract does not provide such cover.
Penalty: 300 penalty units.
(3) Where the insured gave notice in writing to the insurer of facts that might give rise to
a claim against the insured as soon as was reasonably practicable after the insured
became aware of those facts but before the insurance cover provided by the contract
expired, the insurer is not relieved of liability under the contract in respect of the
claim, when made, by reason only that it was made after the expiration of the period
of the insurance cover provided by the contract. [back]
[3]J Rothschild Assurance Plc v Collyear [1999] Lloyd’s Rep IR 6; HLB Kidsons v Lloyds
Underwriters subscribing to Policy 621/PK1D001101 [2008] EWCA Civ 1206; [2009] 2 All
ER (Comm) 81; [2009] 1 Lloyd’s Rep 8; [2009] 1 Lloyd’s Rep 178. See also Hawke, above
n 1, at 270, n 59 and the authorities there cited.[back]
[4] Some claims made insurers attempt to address this issue by what are known as ‘Continuity of Coverage’ clauses. These effectively provide that where the insured has had cover continuously with the same insurer (or sometimes even with any insurer under the same class of policy) from the date when a notifiable circumstance first arose, to the date when a claim arising from it was made upon the insured, the insurer on risk at the time the claim is made will not apply the prior known circumstance exclusion strictly according to its terms but will meet the claim under the current policy, subject, however, to the terms, conditions and limits of the policy under which the original circumstance giving rise to it could and should have been notified. This approach is to be commended but is only a partial solution to the problem. It will only avail the insured where they have been able to maintain continuous cover, for the most part with the same insurer, and the claim generally must be covered in other respects, apart from the known circumstances exclusion, under both contracts. [back]
[5] FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR
641; 180 ALR 374; [2001] HCA 38; BC200103370. Section 54(1) reads as follows: Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act. ‘Act’ includes an omission by virtue of subs 54(6) and, relevantly, an omission to notify the insurer under a claims made policy, before that policy expired, of a fact, matter or circumstance which might give rise to a future claim against the insured. For a discussion of the protracted and extensive jurisprudence dealing with the application of s 54(1) to circumstance notification under claims made policies, see, eg, CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173; BC200809279 and FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 180 ALR 374; [2001] HCA 38; BC200103370. [back]
[6] See above n 5. [back]
[7] Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; (2003) 12 ANZ Ins Cas 61-566; [2003] NSWCA 34; BC200300808. See also CA and MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R 1; (2001) 188 ALR 439; [2001] QSC 388; BC200106381. Section 40(3) of the Insurance Contracts Act cannot avail the insured either, since its effect is not to imply a deeming clause into the policy but merely to provide the insured with a statutory mechanism to similar effect, Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61-527; [2002] NSWSC 511; BC200203182 per Bergin J. If the insured fails to notify a circumstance within time as required by s 40(3), it is the fact that the policy simply does not cover the subsequent claim and the insured’s failure to take advantage of a statutory facility which would have made it do so that allows the insurer to refuse indemnity, not the ‘effect of the Contract of Insurance’ as applied to the insured’s omission. The balance of authority is that s 54(1), despite the breadth of its terms, cannot be used to expand the ambit of a policy beyond its essential scope of coverage, the class of losses to which it applies. See Matthew Maxwell v Highway Hauliers Pty Ltd (2013) 45 WAR 297; 298 ALR 700; [2013] WASCA 115; BC201302311; Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Ins Cas 61-197; BC9301461. A counter argument of course is possible, along the lines that the ‘effect of a Contract of Insurance’ must be determined not just by reference to that contract’s express terms, but also to those terms as acted upon and modified in their effect by applicable legislation. If the effect of the Contract of Insurance is that it does not respond to the claim made against the insured, by reason of the insured’s omission to invoke the statutory mechanism which would have made it do so, and the insurer is thereby enabled to refuse indemnity, why should s 54(1) not provide relief? That, however, is a question for another day. [back]
[8] (2001) 205 CLR 149; 185 ALR 213; [2001] HCA 73; BC200107780. See also Pynt, above
n 1, at 20.30–20.31. [back]
[9] See above n 5. [back]
[10] [1988] 1 Lloyd’s Rep 7; (1987) 39 BLR 41. [back]
[11] [1988] 1 Lloyd’s Rep 7 at 12 per Sir John Donaldson MR; (1987) 39 BLR 41. [back]
[12] Ibid, at Lloyd’s Rep 12. [back]
[13] [2008] EWHC 83; [2008] All ER (D) 194 (Jan); [2008] Lloyd’s Rep IR 391; [2008] 1 All ER (Comm) 855. [back]
[14] [2008] EWHC 83 at 111; [2008] All ER (D) 194 (Jan); [2008] Lloyd’s Rep IR 391; [2008] 1 All ER (Comm) 855. [back]
[15] See introduction, p 2 and above n 4.[back]
[16] It is, in fact, possible for both policies to respond and for there to be double insurance in this situation, depending upon just how effective are the terms of exclusions in the policy in force when the claim is actually made on the insured. In FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 180 ALR 374; [2001] HCA 38; BC200103370, the insured in fact had cover under the policy which was in force at the time a claim was actually made upon it by the injured patient, as well as under the expired policy to which notification of his injury and a potential claim in respect of it had been given, because the former policy only excluded matters which the insured new or ought reasonably to have known might give rise to a claim against it or which ought to have been disclosed on the proposal. There was no express exclusion of claims arising from matters actually notified to an earlier insurer. Because the claimant’s then solicitors had completed their investigations into the circumstances of his injury and had disavowed any intention of bringing a claim against the insured in respect of it, before expiry of the policy under which their enquiries had been notified as a potential claim circumstance, it was held that the insured was justified in concluding that the matter would go no further and in not disclosing it on the renewal proposal. See FAI General Insurance Co Ltd v Australia Hospital Care Pty Ltd (1999) 10 ANZ Ins Cas 61-445; (1999) 153 FLR 448; BC9903787 per Derrington J. [back]
[17] (2008) 235 CLR 103; 248 ALR 240; [2008] HCA 30; BC200806837. [back]
[18] Ibid, at [63]. [back]
[19] (1999) 10 ANZ Ins Cas 61-443; BC9807710. [back]
[20] Ibid, at ANZ Ins Cas 75033–4 (emphasis added). [back]
[21] (1993) 10 WAR 322; (1993) 115 FLR 50; (1993) 7 ANZ Ins Cas 61-200. [back]
[22] The claim might still, of course, be caught by an exclusion which referred to claims arising
from matters which had been notified under an earlier policy, however, that was not the issue
in the case. If there were no such exclusion, the fact that the insurer on risk at the time the
claim was made could not exclude or reject it would not appear to preclude a determination
that the claim was in fact, one which arose out of the circumstance notified to the earlier
policy and was, therefore, covered under that policy also. It would merely result in double
insurance, see above n 16. [back]
[23] It is to be noted that s 21(2)(c) of the Insurance Contracts Act provides that the insured is not
obliged to disclose to the insurer, as part of the duty of disclosure, a matter of which the
insurer is already aware or ought, in the course of its business, to be aware. Accordingly,
assuming that the insured had no additional information as to the likelihood of a claim
beyond that which had already been the subject of the circumstance notification and follow
up correspondence, there would be no obligation to continue to refer to it. Interestingly, this
does not appear to have been discussed in the case. In Kotku Bread Pty Ltd v Vero Insurance
Ltd [2012] QSC 109; (2012) 17 ANZ Ins Cases 61-930, the court drew a distinction between
actual knowledge of an insurer, within the meaning of s 21(2)(c), and ‘the mere possession
of information’. Applegarth J held that in the circumstances of that case:
"The march of the computer does not require insurers to undertake costly searches
throughout their records, at a cost which is likely to be passed on to policy holders, to
locate information that was acquired years earlier . . .
One would expect that by the same reasoning, the insured ought not be required to search
back through years of records in order to locate and disclose all matters which might once
have been considered of sufficient significance to report to the insurer but were no longer
thought to be so." [back]
[24] Interestingly, the insurer tried to get around the absence, from the 1991 policy, of an
exclusion of claims arising from matters actually notified to an earlier policy, by clever
application of the remedy in subsection 28(3) of the Act. Had the misrepresentation not
occurred, the insurer argued, the matter would have been referred to in the proposal and the
claim would then have been caught by the standard exclusion of claims arising from such
matters.
Accordingly, had there been no misrepresentation the insurer would have issued in fact,
although not in terms, a different contract, which would have excluded entirely the subject
claim. It ought, therefore, to be entitled to reduce its liability for that claim to nil, in line with
previous authority. See Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673; (1989) 5 ANZ
Ins Cases 60-913; Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) FLR 284; (1989)
5 ANZ Ins Cases 60-933; Twenty-first Maylux v Mercantile Mutual Insurance (Aust) Ltd
(1990) 6 ANZ Ins Cases 60-954; (1990) VR 919; Zurich Australian Insurance Ltd v Contour
Mobel Pty Ltd (1991) 2 VR 146; (1990) 6 ANZ Ins Cases 60-984. TheWA Full Court agreed
with the insurer that the effect of the same policy terms producing a different result could
found the basis of a remedy under s 28(3), FAI Insurance Co Ltd v Hendry Rae and Court
(1993) 10 WAR 322; (1993) 115 FLR 50; (1993) 7 ANZ Ins Cas 61-200. [back]
[25] (1991) 5 WAR 376 at 385–6; (1991) 7 ANZ Ins Cas 61-101. [back]
[26] (1993) 10 WAR 322 at 340; (1993) 115 FLR 50; (1993) 7 ANZ Ins Cas 61-200. [back]
[27] [2001] NSWCA 193; (2002) 12 ANZ Ins Cases 61-515. [back]
[28] (2002) 12 ANZ Ins Cases 61-515 at 75,997; [2001] NSWCA 193. [back]
[29] The terms of s 21 of the Act make clear that constructive knowledge is not to be imputed to
the insured for the purposes of the duty of disclosure, see Macquarie Bank Ltd v National
Mutual Life Association of Australasia Ltd & Larcombe (1996) 40 NSWLR 543;
Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735; (2000)
11 ANZ Ins Cas 61-458; [1999] NSWCA 422; BC9907760; CIC Insurance Ltd v Midaz Pty Ltd [1999] 1 Qd R 279; (1998) 10 ANZ Ins Cas 61-394; BC9800770. Likewise, from the
reasoning in Kajima UK Engineering Ltd v The Underwriter Insurance Co Ltd [2008]
EWHC 83; [2008] All ER (D) 194 (Jan); [2008] Lloyd’s Rep IR 391; [2008] 1 All ER
(Comm) 855, it would seem that even though a reasonable person in the position of an
insured might have been expected to suspect the presence of further problems, beyond the
maters actually notified, unless the prospect of such problems is actually referred to or
implicit in the terms of the notification they will not be included within it. [back]
[30] HLB Kidsons v Lloyds Underwriters subscribing to Policy 621/PKID00101 [2008] EWCA
Civ 1206; [2009] 2 All ER (Comm) 81; [2009] 1 Lloyd’s Rep 8; [2009] 1 Lloyd’s Rep 178
at [138]. [back]
[31] Kajima UK Engineering Ltd v The Underwriter Insurance Co Ltd [2008] EWHC 83 at 99;
[2008] All ER (D) 194 (Jan); [2008] Lloyd’s Rep IR 391; [2008] 1 All ER (Comm) 855. [back]
[32] J Rothschild Assurance Plc v Collyear [1999] Lloyd’s Rep IR 6. [back]
[33] [1999] Lloyd’s Rep IR 6.[back]
[34] The UK Securities and Investments Board, more specifically its division the Life Assurance
and Unit Trust Regulatory Organisation (LAUTRO), later replaced by the Personal
Investment Authority. [back]
[35] [1999] Lloyd’s Rep IR 6 at 17. [back]
[36] [1999] Lloyd’s Rep IR 6 at 22 (emphasis added). This statement proved to be prophetic, in
light of the subsequent facts in McManus v European Risk Insurance Company hf [2013]
EWHC 18 (Ch), discussed below. [back]
[37] [1999] Lloyd’s Rep IR 6 at 23 (emphasis added). [back]
[38] [1999] Lloyd’s Rep IR 6 at 24. In an obiter dictum, Rix J went on to opine that even if the
matters the subject of the enforcement bulletin had been circumstances known to the insured
at inception, the exclusion ought not to apply because it had to be read down so as to be consistent with the claims made nature of the coverage and the special conditions allowing
notification of circumstances and coverage continuity. For the policy to give effect to those
terms, would be ‘simply inconsistent with a view of exclusion 2 that would simply deny
cover in all cases of knowledge prior to inception of circumstances which have given rise to
a claim’. In other words, the exclusion should be read down so that it applied only to matters
of which the insured was aware, prior to inception, as circumstances out of which claims
might arise. This would make the exclusion operate co-extensively with a defence of
non-disclosure, under either UK or Australian law, and seems a reasonable construction. [back]
[39] [1999] Lloyd’s Rep IR 6 at 25. [back]
[40] See, eg, Standard Life Assurance Company v Ace Insurance [2012] EWHC 104 (Comm);
also F Hawke and L Burke, ‘Pitfalls of claims made insurance in large scale financial
liability cases’ (2011) 22 ILJ 203. [back]
[41] [1999] Lloyd’s Rep IR 6 at 26–27. [back]
[42] [1999] Lloyd’s Rep IR 6 at 28. The solicitation of claim point was not addressed, however,
given that the insured had effectively no choice but to participate in the review and could
scarcely have refused to offer compensation to investors whose circumstances entitled them
to it, it seems unlikely that the insurers would seriously have pressed this point. It was not
disputed that compensation was only offered to those investors toward whom the insured
found itself to be under a legal liability and only in the amount of their loss. Cf Standard Life
Assurance Company v Ace Insurance [2012] EWHC 104 (Comm). [back]
[43] [2008] EWHC 2415 (Comm); [2009] 1 All ER (Comm) 760. [back]
[44] This was a somewhat strange finding, since the underwriters had conceded at the trial that
this presentation was at least partially effective. It was argued on appeal that Gloster J was
wrong to have disregarded this concession. [back]
[45] [2008] EWHC 2415 (Comm); [2009] 1 All ER (Comm) 760. [back]
[46] [2008] EWCA Civ 1206; [2009] 2 All ER (Comm) 81; [2009] 1 Lloyd’s Rep 8; [2009] 1
Lloyd’s Rep 178 at [92] per Rix LJ. [back]
[47] Ibid, at [95] and [129]. [back]
[48] Ibid, per Rix and Toulson LJJ. [back]
[49] [2008] EWCA Civ 1206; [2009] 2 All ER (Comm) 81; [2009] 1 Lloyd’s Rep 8; [2009] 1
Lloyd’s Rep 178 at [73]. [back]
[50] Ibid, at [78] and [79]. [back]
[51] Ibid, at [87]. [back]
[52] Ibid, at [139]–[142]. [back]
[53] FAI Insurance Co Ltd v McSweeney (1999) 10 ANZ Ins Cas 61-443; BC9807710; FAI
General Insurance Co Ltd v Hendry Rae and Court (1993) 10 WAR 322; (1993) 115 FLR
50; (1993) 7 ANZ Ins Cas 61-200. [back]
[54] [2008] EWCA Civ 1206; [2009] 2 All ER (Comm) 81; [2009] 1 Lloyd’s Rep 8; [2009] 1
Lloyd’s Rep 178 at [147]. [back]
[55] Hawke, above n 2. [back]
[56] [2013] EWHC 18 (Ch); upheld on appeal [2013] EWCA Civ 1545. [back]
[57] Effectively the insurer of last resort. [back]
[58] One insurer had informed the firm that if the blanket notification was accepted it would consider offering terms and MSR was able eventually to acquire replacement insurance and
exit the pool, although at nearly double the prior policy premium. [back]
[59] The actual terms and scope of the declarations sought changed substantially over the course
of the proceeding, along with the terms of a mandatory injunction requiring the insurer to
accept the notification which MSR had also sought. The difficulty of contriving an
appropriate form of declaratory relief was further demonstrated in the Court of Appeal,
where counsel for the insured submitted a yet further form of draft order. Davis LJ’s
response to this was succinct: ‘The complexity of the declaratory relief sought by this draft
order continues to be such as not to make it comprehensible without a close understanding
of the facts and circumstances recorded in the judgment under appeal: and even then, I
would venture to suggest, not readily comprehensible in all respects in any event.’ McManus
v European Risk Insurance Company hf [2013] EWCA Civ 1545 at [30]f. [back]
[60] [2013] EWHC 18 (Ch) at [43]. [back]
[61] Ibid, at [44]. [back]
[62] Ibid, at [45] (emphasis added). [back]
[63] The insured had also sought damages, however, that was agreed to be deferred to a later
hearing. It may be observed that if the insurer was wrong to reject the notification then it
may well have breached the contract in purporting to do so. However, if the ambit and
application of the notification is unaffected by the insurer’s response to it, any damages must
necessarily be limited to the incidental impact upon the insured of the insurer’s wrongful
rejection. On the assumption that an incoming insurer would automatically exclude any
claims in any way related to the matters notified, irrespective of whether or not the expiring
insurer was liable for them, any premium increase would have to be taken to relate to the
adverse claims experience as such, rather than to the risk of inadvertently covering any of the matters the subject of the notification. Causation issues in proof of damage could be
expected to feature prominently in the damages claim but are beyond the scope of this
article. [back]
[64] McManus v European Risk Insurance Company hf [2013] EWHC 18 (Ch) at [56]–[58], [60]
and [61]. [back]
[65] [2013] EWCA Civ 1545. [back]
[66] The insurer had appealed only against the judge’s exercise of her discretion to award the insured 60% of the trial costs. The insured cross appealed against the refusal to grant
declarations. Both appeal and cross-appeal were dismissed.[back]
[67] [2013] EWCA Civ 1545 at [16]. [back]
[68] FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 180
ALR 374; [2001] HCA 38; BC200103370. [back]