By Jonathan Newby and Rachel White
In brief - Insurer found to be wrong in rejecting blanket notification for lack of specificity
The uncertainty of blanket notifications can create considerable difficulties for professional indemnity (PI) insurers. There is a balance to be struck between "flushing out the bad news" on the one hand and making sure there are appropriate limits placed on what is being notified on the other.
The English High Court decision last year of McManus & Ors v European Risk Insurance Company considered the validity of blanket notifications and concluded that the insurer's rejection of the blanket notification for lack of specificity was wrong. This decision was more recently affirmed by the Court of Appeal and assists with identifying some practical considerations for PI insurers when responding to a blanket notification.
Insured's obligation to notify of circumstances that may give rise to a claim
While there is a wide variety of notification clauses seen across PI policies in the market - the variation no doubt a factor of attempts to skirt the fine line between ensuring notification but not making that a condition of cover - the common thread between them is generally that they set out an insured's obligation to report to their insurer as soon as reasonably practicable any facts or circumstances of which the insured becomes aware during the policy period, that may give rise to a claim.
The effect of a valid notification is that if a claim is subsequently made in later years, the insurer on risk at the time of notification would be liable to pay out on that claim if the claim arose out of facts or circumstances notified.
Generally speaking, the form in which a notification is made is not a determining factor of its validity unless specified in the policy wording. Case law dictates that a notification is to be construed objectively and according to its content. (See HLB Kidsons v Lloyds Underwriters  EWHC 1951 (Comm); Hamptons Residential Ltd v Field & Ors  2 LR 248.)
Determining the validity and scope of a notification can be difficult in practice. This is particularly relevant when an insured seeks to notify of a broad category of concerns or blanket notifications. The decision in McManus sheds some further light on this vexed issue.
McManus & Ors v European Risk Insurance Company - first instance decision
In early 2012 McManus Seddon Runhams (MSR), the insured law firm, received 17 claims against a prior practice, Sekhon Firth - a small conveyancing firm, which had been acquired by the insured some three months earlier. These claims were notified to its PI insurer, European Risk Insurance Company, and accepted as valid.
As a result of the claims received, the insured arranged for an internal and external audit of a sample of the prior practice's files, which revealed a consistent pattern of failings in the work provided. Accordingly, MSR sent a letter to its PI insurers on 21 September 2012 headed "Blanket Notification of Circumstances which may give rise to claims", which essentially sought to notify every file conducted by the prior practice, estimated to be around 5,000 matters.
Insurer rejects blanket notification
In addition to the 17 prior notified files, the insurer accepted the 32 files set out in detail by the external auditor as a valid notification. However, it rejected the remainder of the notifications on the basis that they did not amount to valid circumstances, as the insured did not identify "the specific incident, occurrence, matter, act or omission which could give rise to a claim on each individual file".
After issues associated with obtaining insurance for the following year from a qualifying insurer, MSR commenced proceedings against European Risk Insurance Company, seeking a declaration that the blanket notification was valid, despite the absence of any further claims.
Insurer's response found to be impermissible
The court considered and applied the principles set out in the English decisions of J Rothschild Assurance Plc & Ors v Collyear & Ors  CLC 1697 and HLB Kidsons v Lloyd's Underwriters  EWCA Civ 1206, and held that the insurers were "clearly wrong" in rejecting the blanket notification and asserting that their liability was limited to the files identified by the external consultant.
The rationale largely focuses on what is an impermissible response by an insurer. This must necessarily be so because each "circumstance" will be its own unique set of facts.
Insured not required to identify transaction or possible claimant at time of notification
In the court's opinion, the key point which could be taken from the authorities was that notifications will be held to be valid in relation to later claims that arise from the circumstances notified, even if such notifications do not refer to the transaction from which the later claim arose or delve into the detail of how a particular client's affairs had been handled. This statement is an amalgam of the two leading cases cited, comprised as follows:
- in Rothschild it was stated that it is not a requirement that an insured has to wait until the point where it can identify a possible defect in a specific case if a general pattern of wrongdoing is observed
- in Kidsons, it was put in terms that it is not a requirement that an insured must be capable of identifying the particular transaction or possible claimant at the time of the notification
However, the court fell short of granting declaratory relief and instead, on the balance of justice, held that the precise scope of the circumstances validly notified in the notification is an issue to be determined on a case by case basis as and when it arises in the context of an actual claim.
Insured and insurer both appeal unsuccessfully
The insurer appealed over the trial judge's decision to award the insured 60% of its costs and the insured cross appealed on the issue of the refusal to grant declaratory relief.
Both appeals were rejected on the basis there were no grounds to interfere with the decision below. In regard to the insured's appeal, it was noted that the trial judge's discretion was accompanied with detailed and rational explanations.
It was further noted that the insured's evidence did not establish a consistent pattern of failure by the prior practice and it could not be said that the files examined by the consultant were representative samples.
Practical implications of McManus
This decision does not change the law, however it does signify a further Court of Appeal judgment which supports the validity of blanket notifications in some circumstances. Against the background of this decision, insurers will need to consider carefully their response to such notifications to ensure their position is adequately protected until such time as a coverage decision can be made.
However, it is important to note that even a valid blanket notification will not result in automatic cover for future claims. As emphasised in the McManus first instance decision, the precise scope of the blanket notification is to be determined on a case by case basis when an actual claim is made.
Desirable attributes of a notification
There is a reasonable body of law in Australia and comparable jurisdictions which provides assistance. Taken from those authorities, the notification should:
- identify the basis of a potential claim
- be specific and not general
- concern circumstances which, objectively evaluated, create a reasonable and appreciable possibility that it will give rise to a claim
- relate to circumstances of which the insured is actually aware (i.e. not be speculative)
Does a claim fall within a blanket notification?
When considering whether a claim arises from a fact or circumstance notified, insurers should consider whether the subsequent claim:
- involves the deficiency, concern or conduct identified in the notification
- is in relation to matters which the insured was aware of at the time of the notification
- is one which a reasonable person, knowing all the facts, would conclude that a claim of that type might be brought (the legal basis of such a claim is not required)
- is causally connected to the fact or circumstance notified
Of further relevance is that if a coverage dispute comes to court, judicial guidance has said that what comes to pass – whether the evil from which insurance protection is sought does in fact eventuate – will be illustrative in looking at the merits of a blanket notification.
This is a tricky area of law, particularly when it intersects with aggregation clauses. The guidance from the courts suggests that whilst insurers tend to be circumspect in reviewing blanket notifications, a pragmatic approach and "stripping back" to the prospective issues is called for. A notification is to be construed in accordance with its substance and not its form.
|Jonathan Newby||Rachel White|