Notification obligations under insurance policies - a review

In order to prevent arguments as to cover under insurance policies, it is vital that insured companies make sure their staff are aware of their notification responsibilities. What must be notified and when?

What must be notified?

Policy wording requiring the insurers to be notified within a particular period, or in a particular manner, of a loss or a claim, or of circumstances likely to give rise to a loss or a claim, are found, with variations in wording, in all modern policies of insurance. There is usually not much difficulty in determining whether an accident, loss or damage has occurred, however, the same cannot be said of the terms "claim", "occurrence" or "circumstance".

The word "claim" may mean a claim made by a third party against the insured as with liability insurance, or a claim by the insured under the policy, as with first party liability policies such as life or motor insurance. The word "claim" as generally understood in insurance law is a demand for payment. Thus, in the case of a first party policy the insured makes a claim by demanding payment from the insurers. It may be that the amount of the claim cannot be quantified at the outset, but this does not prevent a claim from coming into existence at the early stage when an initial demand is made.

In the context of liability insurance such as professional indemnity policies, a claim has be defined as meaning "a demand for something as due, an assertion of a right to something." (Thorman v New Hampshire [1988] 1 LR 7 per Stocker J at p 15). A claim is not the same concept as a cause of action by which the claim may be supported (see WestWake Price v Ching (1957) 1WLR 45) and is not made until it is communicated to the insured. Thus a writ that is issued but not served on the insured does not constitute a "claim" for the purposes of a notification clause in a liability policy (Robert Irving & Burns v Stone [1998] Lloyd's Rep IR 258).

In determining whether there has been one claim or a number of claims, a useful starting point is to consider the nature of the demand made by the claimant; but this is only a starting point and will not be decisive in itself. The underlying facts will be determinative. In Thorman v New Hampshire Sir John Donaldson MR emphasised the significance of facts stating:

"then take the present example of a single contract for professional services in relation to a number of houses on a single development. A single complaint that they suffered from a wide range of unrelated defects and the 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 single 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 the execution of his contract. It would, I think, very much depend upon the facts".

Where the obligation is to notify circumstances, or an occurrence, likely to, or which may, give rise to a loss or a claim, it may be difficult to determine whether the obligation to notify has arisen. In the case of a "claims made" policy, notification determines the policy year to which any eventual claim will attach, and policies commonly exclude liability not only in respect of claims arising from circumstance or occurrences notified to any earlier policy, but also in respect of claims which arise from occurrences which the insured knew might give rise to claims, whether or not notified to an earlier policy year.

A notice provision which requires the insured to notify insurers of "any occurrence of which they may become aware which may subsequently give rise to a claim" requires that the insured inform the insurers of events that happen as the policy term proceeds, and not of any previous event of which they are already aware at the execution of the policy. An occurrence "likely to give rise to a claim" has been held by the Court of Appeal to mean at least a 50% chance of a claim (Layher v Lowe [2000] Lloyd's Rep IR 510.) This is an objective test. The likelihood of a claim being made falls to be assessed at the time of the relevant "occurrence", which means that the fact that a claim is subsequently made has no bearing on the question of whether a claim was "likely" at the time of the occurrence (Layher v Lowe). The test "which may give rise to a claim" is weaker than "which is likely to give rise to a claim," however, in either case, it can be seen from the above that an insured must be vigilant to avoid late notification.

When to notify

When does the duty arise and what is the punishment for not doing so? Is it a condition precedent that notification has to be made within a certain time?

So, how does the above impact on notification of the claim or circumstance? What are the time restrictions on giving this notification? What measures should insured parties take in order to make sure that they are covered for any negligence claims?

Most insurance policies often contain a condition stating that the insured must notify insurers of any circumstance that may (or is likely to) give rise to a claim. It is often the case that this condition is referred to as a "condition precedent". In this case, failure to notify insurers of a potential claim would constitute a breach of a condition precedent. Insurers will then be in a strong position should they decide to refuse cover for the claim, the effects of which could be fatal to many firms.

If, however, insurers are persuaded that the condition regarding notification is a mere "condition", rather than a condition precedent, then insurers would have more difficulty in refusing to cover the claim. Instead, an insurer would only be likely to be entitled to claim damages suffered as a result of the extent to which the insurer's position has been prejudiced by the late notification.

Before considering the current state of the law relating to the implications of conditions and conditions precedent, it is perhaps pertinent to first ask the question "what is 'immediate notification'?", as it follows that if insurers are notified within the correct time period, then there is no need to worry about whether insurers have the option of refusing to cover the claim.

It is key that insured professionals are aware of the requirements of the notification clause within the policy. If the clause states that notification must be made "immediately", then insurers must be made aware of the potential claim or circumstance that has arisen as a matter of urgency. If it becomes apparent that companies have not informed their insurers as soon as they found out about the potential claim or circumstance, then they are running a serious risk of, at the very least, an argument over cover, which will cost time and money, and, at worst, loss of cover. If notification to insurers does not take place immediately, then there is a risk that something could occur to prejudice insurer's position.

If the policy wording is more relaxed (i.e. "within a reasonable period") then insurers will have more difficulty in raising an argument on the timing of the notification. However, to ensure cover, it is still prudent for the insured companies to inform insurers, providing all details of which they are aware, as soon as they possibly can. The consequences of not doing so could be catastrophic. In this regard, companies should do their best to make sure that all staff within the company receive guidance on the severity of a failure to notify the full details of any potential claim or circumstance within the correct timeframe. Insurers will argue (with some justification) that the "notification clock" starts ticking as soon as any member of the company receives knowledge of the potential claim or circumstance.

If insurers do take issue with the timing of the notification, then the issue of whether or not notifications constitute mere conditions or conditions precedent becomes pertinent. It is, unfortunately, an unclear area of law, which makes it even more important that the risk management procedures discussed in the paragraph above are in place.

There is no definitive answer as to whether a condition requiring prompt notification of a circumstance should constitute a condition precedent. The Court of Appeal, in 2001, stated that it is "unlikely" that such a condition will be held to be a condition precedent to policy coverage. However, in the case of Alfred McAlpine v BAI (Run-Off) Limited [2000], it was stated that there was no reason why a clause (stated as being a condition), should not be construed as an innominate term whereby the consequences of a breach might be so serious that it would entitle the insurer to reject the claim, albeit that the breach was not so serious as to amount to a repudiation of the entire contract." The courts will clearly consider the impact that the failure to correctly notify has caused to insurers in making its decision as to what insurers have the right to do. However, a condition requiring prompt notification of a claim is far more likely to be construed as a condition precedent to coverage.

The current position would appear to be as follows: a condition whereby a claim (rather than a circumstance) should be immediately notified is likely to be construed as a condition precedent, which is likely to enable insurers to refuse cover for the claim. However, a condition requiring notification of a circumstance is less likely to be a condition precedent (although the problem with this general analysis is exemplified by the fact that such a condition was actually found to be a condition precedent in the case of J Rothschild Assurance plc v Collyear and others [1998]).

In addition, simply because a clause states that it is a condition precedent, it does not necessarily follow that it is one. However, the courts have stated that where clauses are clearly labelled conditions precedent, and other similar clauses are not, then it is more likely that the former will be construed as such.

The difficulties and vagaries of the law mean that the best advice to insured parties is to ensure that they are aware of the specific notification provisions within their particular policies, and that they have taken all possible steps to cover themselves.

In order to prevent arguments as to cover, it is sensible for insured companies to try to ensure the following:

• ensure effective risk management procedures are in place within the company – make sure that staff are aware of the company's notification responsibilities
• try to ensure that the wording of the insurance policy does not make it a "condition precedent that insurers are informed of a claim immediately". The less stringent these obligations, the less chance there is of cover being waived
• try to avoid making the notification clause a "condition precedent" to cover
• check the wording of the policy carefully – does the notification clause relate to a circumstance or a claim?
• whatever the wording of the notification clause, inform insurers immediately upon receiving notice of a possible claim or circumstance; and
• ensure that the notification to insurers contains full details of the claim/circumstance being alleged.

For further information contact Sakina Rizvi on +44(0)20 7367 3431 or at [email protected] or Ben Goodier on +44(0)20 7367 2263 or at [email protected]