The question as to what constitutes a valid notification of circumstances which may give rise to a claim under liability policies is often controversial. A recent Court of Appeal judgment in a case brought by a company which specialized in the installation and fitting of swimming pools is the latest in a long line of authorities on the issue and contains a valuable restatement of the relevant principles. The case also raises the question: what is the applicable limitation period for bringing claims against insurers under liability policies?
Why is notification such a difficult question?
Before considering the facts of the case it is worth remembering why notification is such a difficult issue. Firstly, while some legal principles can be derived from the relevant authorities, each case will always turn on the particular language of the policy with respect to the nature of the notification requirements. These vary quite considerably. Some policies use the formula “circumstances which may (or may reasonably) give rise to a claim,” and others refer to “circumstances which are likely to give rise to a claim.” Yet others specify in some detail the information required to accompany “valid notifications” whereas some are silent on that issue.
Secondly, the question is always fact sensitive and can often only be fully assessed later, with the benefit of hindsight and by reference to the future claims when made. Thirdly, given the annually renewable nature of liability policies, the result often involves high stakes for both parties. If the notification is deemed invalid there may be either no cover at all for the policyholder or conceivably cover by the insurers under multiple policy years with multiple limits. This was the situation in the Europools case where the Court of Appeal reversed the decision of the High Court, under which the insurer had been ordered to pay out in two policy years.
The facts of the case
The claimant had notified various problems connected to the installation and fitting of swimming pools both under its 2006/2007 policy with the defendant insurer and then later in the 2007/2008 policy written by the same insurer. The threshold questions were: what was the scope of the original notification under the 2006/2007 policy, and was there a separate valid notification under the 2007/2008 policy? The relevant provision in both policies provided that the policyholder:
“…shall as a condition precedent to their right to be indemnified under the insurance give written notice to … as soon as possible after becoming aware of circumstances… which might reasonably be expected to produce a Claim… for which there may be liability under this Insurance. Any Claim arising from such circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given…”
The circumstances in June 2007 were that, in the face of continuing failures associated with booms for its swimming pools, the company had developed a potential solution involving the use of inflatable bags which it wished to pursue by way of mitigation, but that it nevertheless wished to make a notification in case of “any future problems” giving rise to possible third party claims. By 2008, the claimants’ understanding of the extent of the boom problems had developed such that its proposed solutions had also become more extensive as notified to the 2008 policy.
The applicable principles
The Court of Appeal reviewed the relevant authorities. It emphasized that the notification language used in the policy does matter. The threshold test for what “may (or may reasonably) give rise to a claim” is materially lower than that for “circumstances which are likely to give rise to a claim.”
Lady Justice Elizabeth Gloster delivering the main judgment of the Court repeated that a policyholder can only give notice of circumstances of which they are aware and that there must be some causal link between what eventually occurs and that which is notified. But she added that:
“…At the end of day, it is in my view largely a question of interpretation and analysis of the document setting out the notification, in the context of the facts known to the assured, as to what precise circumstance or set of circumstances has in fact been notified to insurers. I am not therefore convinced that semantic cavilling over the precise formulation of the test assists the ultimate resolution of the problem.”
She later said, “…a notification need not be limited to particular events. It may extend to something as general as a regulatory warning about a class of business or a concern about work done by a former employee or prior entity. The insured may give a ‘can of worms’ or ‘hornet’s nest’ notification; i.e. a notification of a problem, the exact scale and consequences of which are not known.”
Applying these principles to the facts of this case, the Court of Appeal decided that even though the claimant was not able in 2007 to identify all the problems or associated remedial works to do with the boom defects, the original 2007 notification was apt to capture all such defects and works.
Summarizing the position, Lord Justice Males in his judgment said this:
“…In order to give a valid notice, the insured must be aware of the circumstances in question. You cannot notify something of which you are not aware. It is awareness of the circumstances which triggers the duty and the right to notify. But you can notify a problem even if you are not aware of the solution. It may later transpire that the problem is something which is not covered under the policy, such as a failure of workmanship rather than a design fault. That does not prevent a notification from being given. It is sufficient that there is a reasonable expectation that the circumstances in question may produce a Claim for which there may be liability under the policy. The question whether there is liability under the policy arises at a later stage when a Claim is eventually made against the insured.”
Summary and Conclusion
The following points are worth re-stating:
- Care should be taken to ensure that the parties to liability insurance contracts understand the effect of notification requirements, which vary from policy to policy.
- Policyholders can only validly notify circumstances known to them at the date of notification.
- There must be some causal connection between that which is notified and that which later results in a claim (albeit that this may be a low threshold depending on the notification requirement of the policy).
- Whilst care should be taken when drafting the notification of circumstances to describe and capture the likely pool of future claims, the courts will seek where possible to avoid “semantic cavilling” as to the precise formulas used.
The case is generally good news for policyholders, although it should be noted that applying these principles, in this case, it was the insurers who prevailed here.
One final cautionary note is worth making. Although it didn’t feature in the appeal, a question which surfaced at first instance was as to the applicable limitation period for bringing claims against insurers. For liability policies, the limitation period runs from the time at which the liability to the third party is established. What is the position though where, as here, the insurers’ liability consisted of its obligation to indemnify the claimant for mitigation/remedial costs as opposed to legal liability? The judge decided that these costs were in effect first-party costs in respect of which the limitation period runs from the date on which the relevant expense is incurred. That date could be very much earlier than the date on which any third party liability is ultimately established. Policyholders should beware of the potential limitation clock ticking.