DLA Piper's Practical Guide for Claims Managers in 2022 - Part 1: Notification of Claims
In this first guide in our monthly series, we focus on the key issues that arise when considering the notification of a claim or circumstance and set out the guiding principles. Of course, how any particular notification clause will be construed will always depend on its precise wording and its context in the wording of the policy as a whole.
"Claims made" policies vs "losses occurring" policies
"Claims made" policies provide cover for claims which are first made against the insured in the policy year - no matter when the underlying loss or wrongful act occurred (subject to any other relevant terms in the policy).
Many policies contain a double trigger for policy coverage, ie claims must be both first made and notified to an insurer during the policy period. Claims made policies include, for example, most Professional Indemnity policies and Directors' and Officers' liability policies.
"Losses occurring" policies, on the other hand, cover the insured for any losses first occurring within the policy period (subject to any other relevant terms in the policy), eg Property policies.
In this note we discuss "claims made" policies.
Notifying a "claim" or a relevant "circumstance" in a claims made policy
It is common in third party liability policies that the insured will have cover not only for claims first made during the policy term, but that the insured will also be able to notify ‘claims laden’ facts and circumstances which, for example, may, or are likely to, give rise to a claim later in time.
The policy should then further provide that any subsequent claim that is sufficiently connected to those circumstances will 'attach back' to the prior notified policy (otherwise there could be a gap in policy coverage, as an insurer in a subsequent policy year is likely to exclude circumstances known to the insured or which could have been notified to a prior policy year).
Almost all policies will contain notification provisions that the insured will be required to comply with, and which may be expressed or interpreted as a 'mere' condition or a condition precedent - more on that later.
Key questions we are often asked include:
1. What is a claim or circumstance?
- What comprises a claim will usually depend on the wording of the policy. The wording will usually include a definition of claim, eg litigation, regulatory proceedings, or receipt of a written demand or assertion of a right against the insured.
- Absent a definition, the ordinary meaning of a claim is a demand for something as due; an assertion of a right to something.
- A claim is not made until it has been communicated to the insured.
- Of note, some policies will also require express notification of receipt of formal commencement of legal or regulatory proceedings, such as a claim form, even if the substance of the proceedings has already been notified.
- The obligation to notify will often be expressed as arising when the insured becomes aware of facts, circumstances or an occurrence which, for example, "may" give rise to claim, or which are "likely" to give rise to a claim.
- Unlike a claim, a circumstance is often left undefined in a policy.
- Examples of what might constitute circumstances are: (1) a complaint from a client; (2) a realisation by a professional that a mistake has been made in relation to a particular matter; or (3) the outcome of a review or audit that identifies a systemic error.
Identifying what exactly constitutes a circumstance that should be notified might not be straightforward. The obligation to notify a circumstance should be construed objectively, but taking into account the actual knowledge of the insured.
As policy wordings will often set out that any circumstance that "may" or is "likely" to give rise to a claim must be notified, that obviously raises the question as to what those terms mean in practice.
- "May" give rise to a claim – this means that it is at least possible that a claim will result or, in other words, there is a real, as opposed to a fanciful, risk of a claim being presented to the insured.
- Might reasonably be expected to give rise to a claim – this is generally regarded as a higher threshold than "may", but lower than "likely".
- "Likely" to give rise to a claim – this means at least a 50% chance of a claim being made.
There is no need for the insured to think the claim has merit - it is the potential for a claim to be made that needs to be assessed, not the potential for it to succeed.
2. When must the notification be made to the policy?
Once again, the policy wording is key on the issue of timing. Sometimes the policy will set out the precise period for notification, such as specifying that the insured must give notice of a claim or circumstance within a set number of days of becoming aware of them. However, on other occasions, the policy will be less specific.
We comment on some common examples below.
- If the notification must be "immediate", the insured is generally expected to act with all reasonable speed in the circumstances; but some time typically will still be allowed between receipt by the insured of the information and the subsequent notification. Each case will turn on its facts, but four weeks has previously been determined as acceptable (albeit at the upper end of the limit).
- A provision that requires a notification to be made "as soon as possible" or "as soon as practicable" is clearly a less onerous obligation than "immediately". However, it is nevertheless incumbent on an insured to make a reasonably prompt notification. For example, in one case, notification to the following market three months after the policy expired, was not made "as soon as practicable"; and eleven months is without doubt "not as soon as reasonably practicable" as we note in our article here.
That leads to the following questions: what and whose knowledge sets the clock ticking?
- First, it is the insured who must have the requisite knowledge.
- Second, the policy wording may expressly indicate whose knowledge is relevant, eg the General Counsel or the Director within the insured’s organisation responsible for purchasing the insurance. If not, then this can be a difficult issue of attribution where a company or partnership is involved. If the Board of directors as the 'directing mind and will' of the company have knowledge, then the insured will have knowledge. It may be a more difficult question if the knowledge rests with a less senior individual. Care should be taken to consider the position from an objective standpoint.
3. What should a notification comprise of?
The express policy provisions must always be considered to assess what information the notification must contain and whether the information provided is compliant. There may be particular requirements as to the form and detail of the required notification.
Absent contrary policy terms, in general terms:
- A stringent test as to the form and contents of a notification will not be applied.
- Notice can be oral - although most policies require it to be in writing.
- There is no particular person to whom notice must be given - although most policies specify a claims address.
- Blanket, block or "hornets' nest" type notifications might be acceptable – although some policies contain strict notification requirements to avoid notification of industry wide issues. However, generally, a notification can be made on a wide basis and can include, for example, facts, matters or circumstances where the insured has not fully appreciated the extent of the issue or its potential consequences.
- It is necessary to make clear to an insurer that what is intended to be notified is a blanket, block or "hornets' nest" type of notification. For such a notification to be effective, it should include any details specified in the policy and details of the acts that form the basis of circumstances eg any systemic deficiencies.
- When construing the scope of the insured's notification and what their words mean, regard can only be had to the actual knowledge of the insured at the time of notification. The insured cannot be considered to have notified something of which it had no knowledge, regardless of the words used.
4. When does a subsequent claim 'attach back' to an earlier notified claim or circumstance?
In order to establish whether a claim can 'attach back' to an earlier policy year, by reason of an earlier validly notified claim or circumstance, the insurer must conduct a critical examination of the claim against the scope of that earlier notification and the required level of connection between the two. (Note, a circumstance cannot 'attach back' to an earlier policy year, only ever a claim.)
The policy will usually specify the degree or type of connection required between the circumstance(s) or claim that were notified previously and the later claim; but this is where there is a very wide range of approach by each insurer.
For example, the policy could specify that the later claim:
- must have some sort of close causal connection to the earlier notification, for example, "arise out of" or "result from" the subject matter of the earlier notification
- must have a somewhat looser connection to the earlier notification, for example, "be based upon", or concern "the same or similar facts or matters". Even with a looser basis for connection, there must a connection that is more than purely coincidental
- must be capable of being treated as a "single claim" with the earlier notification, applying the aggregation language of the prior policy
Ultimately, whether a claim is sufficiently connected to a prior valid notified claim or circumstance is a matter of fact and it will be important to consider how a notification has been framed and whether the degree and type of connection is satisfied.
The more specific and narrow the wording of the original notification, the less likely it is that later claims will fall within its scope. However, if the notification is focused on the symptom of an issue, rather than the underlying cause, it may be more likely that a later claim will attach to the policy against which the notification was made.
In summary, the: breadth of the wording of the original notification of a circumstance or claim; nature of the subsequent claim that is made against the insured; and degree of closeness of connection between the two that the policy says is required, must all be carefully considered.
The consequences of an insured's failure to comply with the notification provisions will depend on whether those obligations are a 'mere' condition or a condition precedent to an insurer's liability.
We set out below some points to keep in mind.
- The description of the notification obligation in the policy as either a condition or a condition precedent is not determinative of its legal effect. It is possible that a term described as a condition could in fact be held by the Courts to be a condition precedent, or vice versa.
- If the requirement to notify is a condition precedent, then the insurer is entitled to deny liability for the claim without the need to establish prejudice as a result of non-compliance. Indeed recent judicial guidance from the Courts provides a salutary reminder of this remedy. You can find our article on the relevant decision here.
- Where the notification requirement is not a condition precedent, an insurer's remedy for breach is damages for any prejudice that has been suffered. Prejudice may be difficult to prove unless, for example, the delay has led to a detrimental step being taken by a third party in relation to litigation against the insured, or perhaps because the insurer has lost the chance to carry out some investigations in respect of the claim or to take steps to mitigate its exposure.
- The policy may contain special conditions that limit the effect of an insurer's remedies for failure to notify. One common example is that, if a claim or circumstance should have been notified to a prior policy year for which the same insurer was on risk, then the current policy will provide that cover will be restricted to the level of cover available under that policy year. In professional indemnity policies some of the regulatory bodies' minimum terms also limit an insurer's remedies for breach of notification conditions.
Notification: Practical takeaways
Overall, when considering a notification, here are our top tips to keep in mind:
- Consider whether the notification complies with elements 1-4 highlighted above.
- If it looks like the insured may have known of the claim or circumstance for some time - and perhaps prior to the commencement of the policy – consider whether the insured has breached its duty of fair presentation when entering into the policy, ie by failing to disclose the claim or circumstance.
- Be clear about which policy year responds. For example, is the claim that has been presented under the current policy year in fact sufficiently connected to a claim or circumstance notified in a prior year to 'attach back' to that prior year, or is it truly a new claim?
- A circumstance discovered at the very end of the policy year, but reported (within the appropriate time-frame) after policy expiry, will typically still attach to the prior policy, subject to other policy terms.
- Any kind of blanket, block or "hornets' nest" notification, or a vague high-level notification, will need particularly close scrutiny. Depending on the individual facts, an insurer may consider it appropriate to adopt a "wait and see" approach and reserve their rights on the validity of the notification in the meantime.
- Even with a reservation of rights (ROR) in place, it is important that an insurer does not waive rights, or become estopped from relying on the policy terms (or the insurer's rights more generally) through either action or omission. (Practical guidance on RORs will follow later in this series.)
DLA PIPER UK LLP
Leon Taylor is a Partner and Head of DLA Piper’s Insurance and Reinsurance Disputes team in the UK, Jane Childs is a Partner, and Oliver Saunders is a Legal Director in the team. The UK Insurance and Reinsurance Disputes team forms part of DLA Piper's leading, multi-disciplinary, global insurance sector, consisting of over 400 lawyers who advise and represent major insurance and reinsurance companies internationally across all aspects of their business, including claims, disputes and investigations, transactional, regulatory and all forms of commercial advisory work.
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This publication is intended as a general overview and discussion of the subjects dealt with under English law at the time of original publication and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation.