January 22, 2014 Articles

Claims Notification in the London Market

A number of features of the London market make the process of seeking recovery from insurers more complicated, particularly where the policy is governed by English law

by Sarah Turpin [1]

Mediation in coverage disputes tends to arise in one of the following three contexts: a court orders mediation early in the case; the parties mediate pursuant to some prior agreement to mediate disputes before litigation; or the parties agree to mediate at some time after a dispute arises, and often after litigation is initiated. Generally, it is preferable for the parties to control the mediation process and to decide whether and when to mediate, and how to structure the mediation. When the parties are invested in the process, they are more likely to reach a negotiated settlement. The opportunity for a favorable settlement is enhanced if both the parties and the mediator are sufficiently prepared, if the mediator has the right expertise, and if the parties have the documents and discovery needed to value the case. Like any other weapon in the litigator’s arsenal, mediation can be an effective tool for obtaining the best possible result for a client if used properly and at the right time. Thus, counsel should consider when and whether to mediate throughout a dispute.

Certain trends in litigation and mediation are likely to affect the decisions that counsel make as to whether, when, and how to proceed with mediation. This article lays out some of these trends alongside certain principles to consider in approaching mediation. Ultimately, the advantage of mediation, so long as counsel considers the client’s best interests, is to resolve disputes efficiently and effectively—to minimize the cost of resolving a dispute and to do so in a way that allows the parties to set their own terms.

The notification of any loss or claim is the first stage in the process of seeking recovery from insurers. However, there are a number of features of the London market that make the process more complicated, particularly where the policy is governed by English law. There may be potential traps for unwary insureds unfamiliar with the process.

This article provides a brief overview of some of the potential issues, but insureds are best advised to take English legal advice on the procedures that should be followed.

The Notification Process

The insurer. Most London market policies specify the address to whom notice of any claim or loss should be sent. Some specify the precise person, which is typically be someone in the claims department.

Notification to a placing underwriter may be sufficient depending on the circumstances. In the case of HLB Kidsons v. Lloyd’s Underwriters,[2] the first notification was made to a placing underwriter in a placing context, and this was held (at first instance) to be ineffective as means of giving notice of a circumstance—“the placing context was wholly inconsistent with the notion that Kidsons were attempting to notify circumstances which might give rise to a claim.” However, while the point was not raised on appeal, the Court of Appeal seemed to think that notification to a placing underwriter might be effective in certain circumstances.

Certainly, in an earlier case where the insured wrote to their prospective insurer (who was in fact the same as the previous year), the Court of Appeal accepted that, while the letter was directed at prospective insurers for the purpose of renewal, it was also capable of constituting notice to existing insurers.[3]

Multiple insurers. The question of to whom notice should be given can prove more complicated in London market policies as a result of the subscription market and the fact that a number of insurers (including Lloyd’s Underwriters and Company Insurers) may subscribe to the same policy.

In practice, notice should be given to all insurers subscribing to the policy and not just the lead insurer as, unless the lead has authority to accept notice on behalf of the entire market, notice to the lead may not be accepted as notice to the market as a whole. Notice should be given to the following market at the same time as giving notice to the lead insurer. In the Kidsons case, it was held that the following market was entitled to deny cover on the grounds of late notification, even though notice had been given to the lead insurer on a timely basis.[4]

The notification to excess layer insurers also requires careful consideration, particularly if there is a risk that the loss or claim will affect the excess layer cover. A notification provision in a primary layer policy, compliance with which is stated to be a condition precedent to the insurer’s liability, may be incorporated into an excess layer policy where the excess layer policy (as is often the case in the London market) is stated to be subject to the same terms and conditions as the primary layer policy. However, if the excess layer policy itself provides that notice is only required where the claim is likely to exceed the cover under the primary layer policy, then compliance with the condition precedent may be achieved by giving notice of a claim or circumstance to the primary layer, which would be covered by the excess layer once it had burned through the primary and been notified to the excess layer accordingly.[5]

In practice, the broker that placed the relevant policy will typically assume responsibility for giving notice of any claim or loss to London market insurers, particularly where the policy is underwritten in the Lloyd’s market. Historically, Lloyd’s and the London market as a whole operated on the basis of paper claims files that the broker would physically transport through the market, delivering the claims papers to each participating insurer.

The development of technology has led to the introduction into the London market of electronic claims handling processes, in particular Electronic Claims Files (ECF), which are designed to speed up the delivery of claims information and to facilitate electronic access to information about particular claims.This may also serve to eliminate some of the historical problems arising from failure to notify the entire market on a particular program. Where claims are to be settled using ECF, the notification will be the first stage in the electronic procedure, and the broker, acting on behalf of the insured, has responsibility for ensuring that proper notification is made.

The broker. Some London market policies provide for notice to be delivered to the broker, but, unless they are authorized by insurers to act as their agents for claims notification purposes, brokersay simply act as a conduit, and it is vital to ensure that the notice is actually received by the relevant insurers. Notice to the broker may not be sufficient.

In Friends Provident v. Sirius,[6] it was held at first instance that the broker had authority to receive notice on behalf of primary layer insurers but not on behalf of the excess layer insurers. The excess layer insurers required their own direct notification.

Triggers for Notification

Losses occurring. Most first-party policies issued by the London market provide cover on a “losses occurring” basis. The trigger for notification is usually the occurrence of any loss, which often, in the case of accident, fire, or flood, etc., coincides with the insured event. However, notification clauses do vary, and some provide for the notification of the event itself, which, to the extent that the event precedes the loss, may result in notice being required at an earlier stage.

Claims made. Most third-party liability policies are now written on a “claims made” basis. The key aspect of claims-made cover is that it is the policy in force when the claim is made against the insured that responds even if the conduct giving rise to the claim occurred several years earlier. The notification of a claim under a claims-made policy is important as it is the making of the claim against the insured that triggers the insurance cover, regardless of when the incident giving rise to the claim occurred.

Some policies are expressly written on a “claims made and reported” basis, which means that it is not only the making of a claim against the insured but also the notification of such claim to insurers that triggers the insurance cover. Such policies, which had previously been relatively rare, are now becoming increasingly common in the London market.

The question of what constitutes a “claim” for the purpose of notification under a claims-made policy is clearly important. There is English authority that “claim” means “a demand for something due; an assertion of a right to something.”[7]

In practice the meaning of “claim” is often defined by the policy and typically includes any legal proceeding as well as any written demand seeking damages or other relief. There is authority under English law that “claim” is not the same thing as a “cause of action.”[8] This is important because, if the third party expands its claim after the policy has expired to include a new cause of action (but for the same form of compensation originally claimed), it should not constitute a new claim for the purpose of the claims-made cover but should be encompassed within the original claim.[9]

Most claims-made policies provide for notification not only of claims but also of circumstances that the insured becomes aware of during the policy period and that may or are likely to give rise to a claim. While such provisions are common, they are generally considered as extensions of cover because they can result in cover being extended to claims made outside of the policy period.[10] This is because the policy normally includes a deeming clause that provides that, if notice of a circumstance is provided during the policy period, any claim that later materializes will be deemed to have been made and notified to the insurer during the effective policy year, even if the claim does not materialize until after the policy has expired.

This has real benefits for the insured because, in the absence of such provisions, the insured could end up with a gap in coverage. This is because, under English law, an insurance contract is a contract of the utmost good faith and the insured is required to disclose to the insurer at the time of renewal any material circumstance known or that ought in the ordinary course of business to be known to the insured.[11] If, therefore, the insured becomes aware of a potential claim during the policy period, that information must be disclosed to the insurer at the time of renewal. Any such claim may then be excluded from the subsequent year’s policy, either by means of an express exclusion or a general exclusion that applies to any claim or circumstance that should have been notified under the prior policy year.[12]

The notification of circumstances is therefore an important element of claims-made cover. However, while it is relatively easy to identify what constitutes a “claim” for the purpose of notification to insurers, the identification of “circumstances” and the type of claim they may or are likely to give rise to can prove rather more difficult.

It has been suggested that a “circumstance” can encompass any “fact, event, happening or state of affairs.”[13] In practice, the most obvious example would be an oral complaint or intimation of a claim or some form of adverse publicity regarding the conduct of the insured. However, there does have to be some prospect of a claim arising from the circumstance in question.

The term “likely to give rise to a claim” suggests a greater degree of probability of a claim arising than “may give rise to a claim.” The Court of Appeal has held that for a claim to be considered “likely” at least a 50 percent chance of a claim is required.[14] In contrast, a circumstance which “may” give rise to a claim creates a much lower threshold for notification. The phrase has been interpreted to mean that it is “at least possible that a claim would result.”[15]

The question of whether the insured is aware of circumstances that may give rise to a claim has been held by the Court of Appeal to involve a subjective test. However, the question of whether those circumstances may or are likely to give rise to a claim has to be determined objectively.[16] The Court of Appeal has acknowledged that this inevitably involves “a degree of crystal ball gazing, an estimation of the likelihood of a claim.” However, there has to be a real risk of a claim arising as opposed to something remote or fanciful.

Some policies are not prescriptive as to the contents of the notice nor the level of detail required. However, it is not uncommon for London market policies to require precise details of any “circumstance” to be given, including the situation, dates, potential claimants, and the nature of the claims anticipated. It is not always easy to provide all this information, particularly if the matter is still under investigation. However, if such details are not provided, insurers may not accept that a circumstance has been properly notified in accordance with the policy terms. Careful consideration should therefore be given to the specific policy requirements before submitting any notice of circumstance.

Time Period for Giving Notice

Most London market policies stipulate the period within which notice of any loss or claim must be given to insurers. This period can vary from a specified time period; to “immediately”; or “as soon as practicable” or “as soon as reasonably practicable.”

If notice of any claim or loss is required within a specified time period, this should be adhered to because such time limits may be strictly enforced by the English courts.

There is limited English authority regarding the meaning of “immediately” in the insurance context, but clearly a requirement for immediate notice allows minimal scope for delay. It has been held to mean with “all reasonable speed considering the circumstances of the case.”[17] The question of whether the insured has given immediate notice therefore depends on the facts and circumstances in which notice was given.

A requirement to give notice “as soon as practicable” or “as soon as reasonably practicable” is less stringent, but the question of whether the insured has complied will again depend on the particular facts and circumstances. In theKidsons[18] case, it was held at first instance that notification to the following market four months after the insured first learned about the relevant circumstance was not “as soon as practicable.” This was confirmed in the Court of Appeal. However, the decision was clearly influenced by the fact that the lead insurer had been notified much earlier and by the fact that notification was given three months after the expiry of the claims-made policy. The Court of Appeal found that the notification was ineffective because it was notified outside of the policy period.

Some policies have a form of “hybrid” notice requirement. In AIG v. Faraday,[19] notice had to be given “as soon as reasonably practicable and in any event within 30 days.” Faraday argued that there were two separate obligations: (1) to notify as soon as reasonably practicable; and (2) to notify within 30 days. On this basis, Faraday argued that notice within 28 days could be rejected because it failed to fulfill the first requirement. The court rejected this argument on the basis that as long as notice was given within 30 days it would be effective.

In the absence of any express time period, notice should be given within a reasonable time.[20]

Potential Consequences of Failure to Give Adequate Notice

Scope of coverage.The notification to insurers is often what triggers the liability of the insurer. It follows that if the notification is too vague, or indeed too specific, this may afford the insurer a basis on which to deny cover if the claim expands into something much wider than anticipated at the time of notification. This means that great care is required when drafting the notification to ensure that the wording is broad enough to encompass the “multitude of sins” that could develop.

This is particularly important in relation to the notification of circumstances. This is because, as discussed above, there will usually be a deeming provision that provides that any claim that develops at a later stage (even after the policy has expired) will be deemed to have been made and notified during that particular policy year. If the notification of circumstance is drafted in narrow terms, the insurer may argue that the claim that eventually materializes cannot be said to arise from the matters notified.

A classic example of this is the case of Kajima UK Engineering Limited v. Underwriter Insurance Company Limited.[21] There, the insured notified insurers that a timber-framed building it had designed was settling and moving excessively. It was later discovered that the building had more extensive problems and was at risk of collapse. The court held that the notification was effective only in relation to the specific circumstances that had been notified—namely, the settlement and excessive movement—and did not cover the additional problems discovered later on. However, the judge seemed to accept that it should be possible to notify a “hornet’s nest” or “can of worms” type of circumstance, which might be broad enough to encompass problems discovered at a later stage. In that particular case, however, the notification had not been expressed in those terms.

The practice adopted by some insureds has been to give very wide notifications, often referred to as “blanket notifications, ”particularly where there is potential for a series of similar or multiple claims to arise from the same set of circumstances. The aim of this is to ensure that all claims fall within the same policy year and to avoid the risk of claims falling within the coverage “gap” between two successive policies. These types of notifications have not always been welcomed by London market insurers but have been accepted by the English courts. In J Rothschild v. Collyear,[22] the insured gave notice of “circumstances which may give rise to a claim” following a letter from its regulator, Lautro, regarding potential problems relating to the selling of pensions in certain classes of case known as transfers and opt-outs. The insured had been involved in hundreds of transfers and opt-outs, although there was no specific criticism aimed at them at the time of notification. The court held that the letter was a valid notification although the judge was clearly influenced by the fact that the insured’s concerns had been shown to be justified by the subsequent course of events. Nevertheless, the judgment should make it more difficult for London market insurers to reject these type of blanket or block notifications, as they have done in the past.

Denial of cover—conditions precedent. It is not uncommon for London market policies to stipulate that compliance with claims notification provisions shall operate as a condition precedent to the insurer’s obligation to provide indemnity under the policy. Under English law, a condition precedent requires strict compliance—failure to comply with a condition precedent enables the insurer to deny cover for the claim in question, even if the insurer has not suffered any prejudice as a consequence. The position taken by the English courts is reflected in the comments of Mr. Justice Bingham:

I find no support . . . for the requirement of prejudice and, as a matter of general principle, it appears to me that this cannot be required of an insurer before he relies on a condition precedent in the policy.[23]

In contrast, if the notice requirement has the status of a bare condition (as opposed to a condition precedent), the insurer would not be entitled to deny cover, only to claim damages for any prejudice suffered as a consequence of the breach.

The fact that a policy term is labeled as a “condition precedent” does not necessarily mean that it will be construed as such. No express words are required to create a condition precedent, and the absence of the words “conditions precedent” may be equally inconclusive. The overarching principle applied by the English courts when construing insurance contracts is to give the words used by the parties their natural and ordinary meaning. The result is that, if the policy wording provides that there is no coverage if a particular requirement is not met, that may be treated as a condition precedent even though not expressly referred to as such. However, the English courts do not look at an individual clause in isolation but in the context of the policy as a whole.

In terms of claims notification, the English courts seem particularly willing to treat compliance with the notice requirements as conditions precedent to insurer’s liability. This appears to be driven by the “claims made” nature of the policy and the fact that insurers have a commercial interest in knowing about the existence of any claim at the earliest opportunity. Moreover, in the context of notification of circumstances, because the effect of notification is to extend cover for claims made beyond the policy period, the Court of Appeal has taken the view that compliance with the notice requirements should be treated as a condition precedent to the insurer’s liability even if not expressly designated as such. Thus, the failure to give notice of such circumstance “as soon as practicable” would enable the insurer to deny liability for any claim that arose outside of the policy period.[24] Similarly, a blanket provision stipulating that the liability of insurers is conditional upon the observance by the insured of all terms and conditions in a policy could result in the requirement to give “immediate notice” of any occurrence that could give rise to indemnity as a condition precedent to insurers’ liability.[25]

In practice, given the risk that compliance with the claims notification provisions will be treated as conditions precedent, and the fact that any breach may enable insurers to deny coverage even if they have not suffered any prejudice as a result, compliance with such provisions should be regarded by the insured as essential.[26]

Duty to cooperate. Most London market policies include an express provision imposing a duty on the insured to cooperate with the insurer in the defense of any third-party claim. These provisions often state that the insured must cooperate and assist the insurer in the defense of the claim and not agree to any settlement or make any admissions of liability without the insurer’s prior written consent. Many policies also stipulate that the insured shall not incur any defense costs without the insurer’s prior written consent.

These types of provisions are often expressed to be conditions precedent to the insurer’s liability. This is another reason why the prompt notification of claims is important. If defense costs are incurred without the insurer’s prior written approval, the insurer may seek to deny liability for those costs purely on the basis that consent was not given. This may seem harsh, but it is a practice adopted by some London market insurers and one that can prove detrimental to unwary insureds.

Keywords: litigation, insurance, coverage, London market, claims made policies, occurrence-based policies, notification

Sarah Turpin is with K&L Gates in London, United Kingdom.

[1] The author is a partner resident in the London office of K&L Gates. The views expressed herein are the author’s own and do not necessarily reflect the views of K&L Gates or its clients.
[2] [2008] Lloyd’s Rep. I.R. 237.
[3] Friends Provident Ltd. v. Sirius Int’l Ins. Ltd., [2006] Lloyd’s Rep. I.R. 45.
[4] HLB Kidsons v. Lloyd’s Underwriters, [2008] Lloyd’s Rep. I.R. 237.
[5] Friends Provident Ltd. v. Sirius Int’l Ins. Ltd., [2006] Lloyd’s Rep. I.R. 45.
[6] Friends Provident Ltd. v. Sirius Int’l Ins. Ltd., [2006] Lloyd’s Rep. I.R. 45.
[7] West Wake Price & Co. v. Ching, [1957] 1 W.L.R. 45.
[8] West Wake Price & Co. v. Ching, [1957] 1 W.L.R. 45.
[9] Thorman v. New Hampshire Ins. Co., [1988] 1 Lloyd’s Rep.
[10] HLB Kidsons v. Lloyd’s Underwriters, [2009] Lloyd’s Rep. I.R. 178.
[11] Section 18 of the Marine Insurance Act 1906, which, despite its name, is not confined to marine insurance and many of its provisions have been held to apply to insurance in general. 
[12] In the United States, insureds do not operate under the same duty of utmost good faith. Absent a showing of fraud, an insured in the United States generally has no affirmative duty to disclose information that is not specifically requested by an insurer. Ins. Co. of N. Am., Inc. v. U.S. Gypsum Co.870 F.2d 148 (4th Cir. 1989). 
[13] Per Gloster J in HLB Kidsons v. Lloyd’s Underwriters,[2009] Lloyd’s Rep. I.R. 178.
[14] Layher Ltd. v. Lowe (1996) 50 Con. L.R.
[15] J Rothschild v. Collyear,[1999] Lloyd’s Rep. I.R. 6.
[16] HLB Kidsons v. Lloyd’s Underwriters,[2009] Lloyd’s Rep. I.R. 178.
[17] Aspen v. Pectel, [2009] Lloyd’s Rep. I.R. 440.
[18] Aspen v. Pectel, [2009] Lloyd’s Rep. I.R. 440.
[19] [2007] Lloyd’s Rep. I.R. 267.
[20] Hadenfayre Ltd. v. British Nat’l Ins. Soc’y Ltd., [1984] 2 Lloyd’s Rep. 393; Merrill Lynch Int’l Bank Ltd. v. Winterthur Swiss Ins. Co., [2007] Lloyd’s Rep. I.R. 532.
[21] [2008] Lloyd’s Rep. I.R. 391.
[22] [1999] Lloyd’s Rep. I.R. 6.
[23] Pioneer Concrete (UK) Ltd. v. Nat’l Emp’rs’ Mut. Gen. Ins. Ass’n, [1985] 2 All E.R. 395.
[24] HLB Kidsons v. Lloyd’s Underwriters, [2009] Lloyd’s Rep. I.R. 178.
[25] Aspen Ins. UK Ltd. v. Pectel Ltd., [2009] Lloyd’s Rep. I.R. 440.
[26] In the United States, courts often require a showing that an insurer was prejudiced by late notice before they will find a forfeiture of coverage. See FDIC v. Oldenburg34 F.3d 1529  (10th Cir. 1994). Some states have even enacted statutory provisions to that effect. The rationale for requiring the insurer to prove that it was prejudiced by untimely notice acknowledges that an insurer pressing the defense is seeking a forfeiture, which would “deny the insured the very thing paid for.” Brakeman v. Potomac Ins. Co.371 A.2d 193 (Pa. 1977). Under certain circumstances, where notice is late by a significant period of time, some U.S. courts will recognize a presumption that the insurer has been prejudiced. SeeFireman’s Fund Ins. Co. v. ACC Chem. Co.538 N.W.2d 259 (Iowa 1995). It should be noted that much of the U.S. authority requiring a showing of prejudice arises in the context of occurrence-based policies. For claims-made policies, given the key role of notice in such policies, some U.S. jurisdictions have developed more stringent approaches to notice issues. Helfand v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.13 Cal. Rptr. 2d 295 (Cal. Ct. App. 1992).

Copyright © 2014, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).