UK: English Court Of Appeal Underlines Importance Of Notice Of Circumstances

HLB Kidsons v Lloyd's Underwriters et al
31 October 2008 - [2008] EWCA Civ 1206

Claims-made policies have been with us for a long time and insurers might be forgiven for thinking that the requirements for the timing of notifications under such policies were no longer an issue. But, as with so many issues, policy wording is everything.

The recent decision of the Court of Appeal will be of interest to insurers, insureds and brokers alike, as it illustrates the perils of both disjointed policy wordings and the scope of notifications of circumstances.

The Facts

Accountancy firm Kidsons owned and managed Solutions @ Fiscal Innovation Limited (S@FI), a company which marketed tax avoidance schemes, or "fiscal engineering". A tax manager in Kidsons' Edinburgh office had serious concerns about both the nature and implementation of these schemes and brought these concerns to the attention of the S@FI board and of Kidsons' national executive committee, notably in memoranda dated 23 and 24 August 2001. Both the board and the committee agreed to set up an independent review body to investigate the situation and, in the meantime, to give notice of circumstances to Kidsons' professional indemnity insurers. A letter was accordingly sent to Kidsons' placing broker on 31 August 2001; the letter referred to "S@FI Limited", describing its fiscal engineering work and the fact that "a tax manager in Edinburgh ... has expressed the view that the Inland Revenue, if minded, could be critical of some procedures followed in certain cases". The letter closed with the statement 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."

The 31 August letter was not submitted to Underwriters until 27 September 2001, and then by the placing broker only to the placing underwriter for the leading Lloyd's syndicate (the first presentation). The letter, along with a claims bordereau, was subsequently submitted to the two lead Lloyd's syndicates on 17 and 18 October 2001 (the second presentation). These materials were later presented, along with further documentation, on 18 and 19 April 2002 to the lead underwriter and the company market (the third presentation). Finally, the materials from the second presentation were presented to the following market in July 2002 (the fourth presentation).

Claims were subsequently made against Kidsons by their clients in respect of S@FI. The claims covered a variety of S@FI tax schemes and alleged that Kidsons (1) had been negligent in advising the schemes; (2) had made false representations about the schemes; and (3) had failed to give their clients adequate warning of the risks, if not the likelihood, of the schemes being challenged and rejected by the Inland Revenue because of their inherent defects.

The Policy

Kidsons were insured under a Lloyd's claims-made policy wording. The policy period was 1 May 2001 to 31 April 2002. Cover was provided by Lloyd's syndicates and various insurance companies in London. By General Condition 3, it was a condition precedent to the insured's right to indemnity that notice in writing of any claims, loss, etc. be given as soon as practicable. In addition, General Condition 4 provided:

"The Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the period specified in the Schedule shall be deemed for the purpose of this Insurance to have been made during the subsistence hereof."

General Condition 6 stated:

"Any claim first notified to the Assured prior to the expiry date of this policy will be deemed to fall to be dealt with under this policy provided it is properly notified to Underwriters within 15 calendar days of the expiry day."

The policy also contained certain "General Institute Conditions", one of which stated as follows:

"b) Where the Assured's breach of or non-compliance with any conditions of this Insurance has resulted in prejudice to the handling or settlement of any loss or claim the indemnity afforded by this Insurance in respect of such loss or claim (including costs and expenses) shall be reduced to such sums as in the Underwriters' opinion would have been payable by them in the absence of such prejudice."

In addition, General Condition 11 provided that, in the event of a dispute over the policy terms, the terms of the wording approved by the Institute of Chartered Accountants would take precedence. These generally mirrored the policy wording, but were not identical to it.

The Dispute

Kidsons asserted that the claims were covered by virtue of General Condition 4, notice of circumstance having been provided to all its insurers by virtue of the four presentations outlined above. With respect to the following market, to which a presentation was made only two months after the end of the policy period, Kidsons argued that the effect of General Condition 6 and General Institute Condition (b) was that even a notification soon after the policy period was effective, subject to a reduction in the indemnity commensurate with any prejudice caused by the delay.

The following underwriters denied liability on the basis that notification of a circumstance had not been made as soon as practicable. The other insurers accepted that the Second Presentation constituted effective notice, but argued that the notice provided related only to potential claims in respect of the implementation of S@FI's tax schemes, and was not broad enough to cover claims concerning the underlying nature of the schemes themselves.

The Litigation

The case was lengthy, involving not only the insurers, but also the broker and Kidsons' claims advisors, each party presenting sometimes intricate arguments as to the construction of the disparate elements of the policy wording. At first instance, Mrs Justice Gloster held that the first presentation was not effective as a notice of circumstance and that the second presentation was likewise not effective, as the 31 August letter was coy and disingenuous, written in non-committal terms, "to avoid notifying a circumstance until and unless it was established that it was necessary...". Furthermore, the claims bordereau provided with the second presentation, in the court's view, was not sufficient to constitute notification of a circumstance. In so holding, Gloster J applied an objective test previously approved by the House of Lords, that notices to be valid must be "sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate" (Delta Vale Properties Ltd v. Mills [1990] 1 WLR 445 at 454, approved in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 767).

The court further held that the third presentation constituted effective notice of a circumstance, but was limited as to its scope and to the insurers so notified. As to the fourth presentation, Gloster J held that it was not an effective notice to the following market, as it was not made as soon as practicable.

The Appeal

The Court of Appeal was unanimous in denying Kidsons' appeal. However, in the leading judgment, Rix LJ noted that, since the Delta Vale test had been developed in a context considering the law of estoppel, he "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."

Both Rix and Toulson LLJ considered that the second presentation constituted effective notice of a circumstance (Buxton LJ instead agreed with the court at first instance that the 31 August letter "was coy in the extreme if it was indeed intended to be a notification of circumstances giving rise to a claim"). In addition, although the Court of Appeal agreed that the fourth presentation was not timely notification, it further considered the various arguments as to the effect of that finding, given the potential ambiguity introduced by General Condition 6 and General Institute Condition (b). The Court concluded that it was a condition precedent to insurers' liability under the policy that notice of a circumstance be provided as soon as practicable. Accordingly, the following market was under no liability to Kidsons, and the liability of the remaining insurers was limited to those claims (if any) which fell within the scope of the notice provided.

Conclusion

In this long-awaited decision, the Court of Appeal has confirmed the importance of providing insurers with prompt notification of claims and/or circumstances. When the latter is appropriate, insureds will wish to pay particular attention to the drafting of such notices and/or any follow-up correspondence which may affect the scope of claims covered by the notification.

In the course of the litigation, it was noted that the policy wording was a "patchwork of provisions" that did not fit well together. It is likely that the litigation would have been more limited, if not avoided altogether, had more attention been paid to the wording as a coherent whole. Insurers would do well to take note.

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