Court of Appeal judgment on the need for a “causal link” between notification and later claim

Euro Pools Plc (in administration) v Royal & Sun Alliance Insurance Plc [13.05.19]

This case review is co-authored by Jennifer Chapman, Solicitor Apprentice, Manchester.

On 13 May 2019 the Court of Appeal handed down judgment in the above case. The outcome of the case, in which Kennedys was instructed on behalf of the successful defendant insurers, will be welcomed by the insurance industry as it will help to provide certainty in respect of the construction and effect of notifications to professional indemnity policies.

The case is the first in the Court of Appeal since HLB Kidsons [2008] to consider issues of notification of circumstances to professional indemnity policies.

Background

The claimant (Euro Pools) (a company that specialised in installing and fitting out of swimming pools) sought an indemnity in respect of costs incurred in remedying various faults that had occurred in swimming pools it had installed for third parties.

In particular, Euro Pools sought an indemnity in respect of expenses incurred in installing a hydraulic system to power moveable ‘booms’ at several pools, to mitigate potential claims by third parties. The key issue that arose on appeal was whether the claim attached to the first or second of two successive professional indemnity policies.

The defendant (RSA) contended that the expenses arose from circumstances notified by Euro Pools under the first (2006-07) policy of insurance. This meant that that the indemnity payable by RSA would be subject to the policy’s limit of indemnity of £5 million.

Euro Pools contended that the potential claims in respect of which the expenses were incurred arose from circumstances notified under the second policy of insurance (2007-08), meaning that the indemnity payable would be subject to the separate limit under that policy.

RSA further asserted that communications about remedial works during the period of the second policy were not fresh notifications of circumstances but rather communications about an existing claim attached to the first policy.

Judgment

The Court of Appeal allowed RSA’s appeal, holding that the remedial works carried out by Euro Pools attached to the first policy year when the original notification of a circumstance was made, meaning that the claim was subject to the first policy year limit of indemnity.

Points of note from the judgment include:

  • A provision in a professional indemnity policy which refers to circumstances that ‘may’ give rise to claims sets a “deliberately undemanding test”.
  • 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.
  • An insured can notify a problem in general terms without fully appreciating its cause or its potential consequences (e.g. because the insured is not a technical specialist). If it does so, then the insurance will cover claims which have some causal connection to the problem notified.
  • If there has been a proper notification of circumstances, any claim arising from those notified circumstances, will be considered to have been made within the requisite period of insurance. Any claim which arose consequently from the notified circumstances would also be deemed to arise from those circumstances but there must be some causal, as opposed to merely some coincidental, link between the notified circumstances and the later claim.
  • As Akenhead J said in Kajima [2008], a notification of circumstances will be taken to cover the defects causing and the symptoms and consequences of the circumstances notified.

Comment

The decision is significant in that it is the first occasion on which the Court of Appeal has addressed notification of circumstances in the professional indemnity context since HLB Kidsons.

It confirms that an insured can notify circumstances that are reasonably expected to produce a claim, without fully appreciating the cause of the problem and potential consequences. As long as there is some ‘causal link’ between the notified circumstances and the later claim, the claim will fall within the requisite period of insurance, consistent with the approach adopted by Akenhead J in Kajima.

It may seem counterintuitive for an insurer to argue that the scope of a notification is broader than as submitted by an insured, but the stance adopted by RSA in this case was a fair one and clear from the outset, which has now been endorsed by the Court of Appeal.

Contacts: Jeremy Riley, Ollie Dent, Lee Cooper, Tom Handley and Jennifer Chapman.
Counsel were Jonathan Hough QC and George Spalton of 4 New Square.

This case review is co-authored by Jennifer Chapman, Solicitor Apprentice, Manchester.

Read other items in Professions and Financial Lines Brief - June 2019