Claims Notification: Don't Give Insurers an Excuse Not to Pay
By: Sarah Turpin, Jane Harte-Lovelace
The credit crunch has already given rise to numerous third party claims against financial institutions in the US, primarily by disgruntled investors and shareholders. While the "tsunami" of litigation predicted by many lawyers has not yet arrived in the UK, the collapse of Lehman Brothers and the scandal involving Bernard Madoff's $50 billion Ponzi scheme raises the prospect of similar claims (and related investigations) emerging. In these circumstances, companies are well advised to consider the state of their insurance coverage, particularly under Professional Indemnity/Errors & Omissions and Directors & Officers' Liability policies. In particular, companies should pay close attention to the importance of well-drafted claims notification provisions in their insurance policies. Companies should also be alert to the need for prompt notification to their insurers in the event of a claim or circumstances that may give rise to a claim.
Below is a checklist of some practical points to consider in connection with insurance placed in the London market and governed by English law, although many of the points have equal application in other jurisdictions, particularly the US.
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Check the policy provisions relating to claims notification and consider whether there is any scope for improvement. The English Court of Appeal recently criticised the claims notification provisions in a Professional Indemnity policy as "a patchwork of provisions, which have no doubt been largely drawn from other policies but do not all fit well together".
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Make sure that any notice of claims and of circumstances is given in a timely manner. The notice provision will normally stipulate the period within which notice has to be given and this can vary from a specified time period to "immediately" or "as soon as practicable". Failure to comply could prove fatal if the clause is a condition precedent to the insurer's liability under the policy.
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Don't assume that the absence of the words "condition precedent" means that the notice provision will not be construed as such. Harsh as it may seem, the English (and US) courts may hold that the requirement to give valid notice is a condition precedent even though not described as such in the policy. English courts may allow insurers to deny liability for breach of a condition precedent, even if they have not suffered any prejudice as a result. The position is similar in the US where, in contrast to comprehensive general liability policies, some US courts have not required an insurer to demonstrate any prejudice resulting from untimely notice under a claims-made policy.
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Set up and maintain proper internal lines of communication to ensure early identification of any errors or problems which may require notification. This is especially relevant to businesses with global operations, particularly those based in jurisdictions where less importance is placed on the need for early notification. In these circumstances, it may prove particularly beneficial to limit the requirement to notify to those claims or circumstances which are known to the group risk manager or general counsel.
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Make sure the notice of any circumstance is sufficiently detailed. Some policies require detailed particulars to be given, including the identity of any potential claimants and the types of claim anticipated. The insurer may seek to deny cover if it considers that inadequate details have been given.
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Make sure the notice of any circumstance is sufficiently broad to cover all potential claims regarded as real risks. The policy will usually contain a “deeming” provision to the effect that any claim arising from a circumstance notified to insurers will be deemed to have been made within the policy period. However, if the notice is not sufficiently broad and additional claims materialise which have no causal connection with the circumstance originally notified, then the deeming provision may not apply and the policy will not respond.
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Don't be economical with the truth! A preliminary notice couched in vague terms — perhaps to avoid the prospect of higher premiums at renewal — may be held inadequate for claims notification purposes. There is, however, a balance to be drawn between being too vague and too specific: a notification which is too specific may enable insurers to limit their liability if the claim expands into something much wider than suggested in the original notification.
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If the matter is subject to further investigation and/or dependent upon future developments, make this clear and update the notification as further information comes to light.
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Review and update the notification prior to renewal.
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Make sure notification is given to all insurers (including Lloyd's Underwriters and Co-Insurers). The policy will normally provide an address where notices must be sent. Some policies provide for notice to be sent to a broker or solicitor but, unless they are authorised by the insurers to act as their agents for claims notification purposes, they merely act as a conduit, and it is vital to ensure that the notice is actually received by the relevant insurers. Notice to the broker or solicitor may not in itself be sufficient.
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Make sure notification is also given to any excess layer insurers, where there is any possibility that the claim will impact on those layers. The excess layer policies may not necessarily have the same notice provisions as the primary layer, and notice to the primary layer insurers alone is unlikely to be sufficient. This could prove catastrophic for high-value claims where the excess layer insurance may prove essential.
Whatever the jurisdiction, but certainly in England and the US, it is vital that policyholders take a proactive approach to claims notification. Early advice both prior to and at the time of notification could prove invaluable.
Please contact Jane Harte-Lovelace (020 7360 8280 or jane.harte-lovelace@klgates.com) or Sarah Turpin (020 7360 8285 or sarah.turpin@klgates.com ) if you would like further information.
