UK: One Size Fits All?

Last Updated: 26 January 2005
Article by Patricia Orr and Simon Konsta

The decision in Friends Provident Life and Pensions Limited v Sirius International Insurance Corporation and Others (2 July 2004, unreported) focuses on a number of important preliminary issues concerning the construction and effect of notification clauses contained in primary and excess layer "claims made" policies. Although the claims under the policy arose from pension mis-selling losses, the policy wordings under examination by the court are common in professional indemnity policies across the market.

BACKGROUND

The claimant ("FPLP"), was the successor in title to London & Manchester Assurance Co Ltd ("LMA") whose business included giving financial advice on personal pensions. LMA had professional indemnity insurance cover for the period 1 February 1993 to 31 January 1994, which took the form of a primary layer covering losses up to £1 million, and an excess layer of £4 million in excess of £1 million. Both layers were placed by brokers Bowrings, and were written on a "claims made" basis, providing an indemnity for losses arising from claims made against LMA during the policy period.

Clause 2 of the primary layer policy ("Clause 2"), underwritten by a Lloyd’s Syndicate, required LMA, as a condition precedent to liability, to give to "the Underwriters notice as soon as possible during the period of this policy... of any circumstance of which [LMA] shall become aware which may give rise to a claim against them or any of them". The clause also provided that, once notice had been given, LMA was obliged to give underwriters full details in writing, and that if this was done, "any claim or loss to which the circumstance has given rise which is subsequently made after the expiration of the [policy] shall be deemed to have been made during the subsistence hereof ".

The excess layer was written partly by a group of Lloyd’s Syndicates (this policy was referred to as the "co-insurance policy"), and included, by clause 5 ("Clause 5"), a provision that "any claim[s]... or loss(es)... or any circumstances... which are likely to give rise to such a claim or loss, shall, if it appears likely that such claim(s) or loss(es) may exceed the indemnity available under the Policy/ies of the primary and Underlying excess layers, be notified immediately by [LMA] in writing to the Underwriters hereon". The remainder of the excess layer was written by the defendants, members of the London companies’ market. The defendants’ policies purported to incorporate the terms of the co-insurance policy, which in turn purported to include the terms of the primary layer policy.

Three days before the end of the period of cover, as part of negotiations for renewal, LMA wrote to the Lloyd’s underwriters at the brokers’ address, stating that it was not aware of any circumstances likely to give rise to a claim under the policy except for pensions mis-selling ("the Renewal Letter"). Losses for pension mis-selling ultimately reached £9 million, and claims were made under the 1993-1994 policy. The primary layer and insurers under the co-insurance policy accepted the claim, but the defendants denied liability.

THE PRELIMINARY ISSUES

A number of preliminary issues arose for determination by Mr Justice Moore-Bick, the most important of which were decided as follows:

  • Clause 2 was incorporated into the excess layer policies with the effect that cover under those policies extended to claims arising out of circumstances notified during the policy period. In reaching this conclusion, the judge confirmed that when construing commercial documents, regard should be had to the background knowledge reasonably available to the parties. Here, this involved taking into account the general practice in the insurance market of including a term in "claims made" policies extending cover to losses established during later years, but arising from circumstances notified to underwriters within the policy period, as well as the assumption (absent evidence to the contrary), that the scope of cover under the excess layers is intended to be the same as provided under the primary layer (here there was no evidence of an intention to exclude Clause 2 from the general incorporation provisions in the excess layer policies). The judge also took into account the fact that incorporation would only require minor manipulation of the wording.
  • Notice to the primary layer underwriters was sufficient to bring the claim within the excess layer policies. The term "underwriters" in Clause 2 was to be construed as referring only to the primary layer insurers even when read into the context of the excess layer policies, with the effect that notice to them amounted to notice to all insurers on risk. This conclusion was supported by the market view that excess layers would not normally expect to be notified of claims, or circumstances giving rise to claims, unless and until there was reason to suspect that the loss may exhaust the primary layer, as reflected in Clause 5, coupled with the strong presumption that the parties intended the scope of the cover to be the same as for the primary layer.
  • Although it was unnecessary to decide the point, the judge stated that notice to the brokers amounted to notice to the primary layer underwriters who had been appointed for this purpose under a term of the primary layer policy, but would not have amounted to notice to the excess layers as this term of the policy was peripheral to the risk and accordingly was not incorporated into the excess layer policies.
  • The Renewal Letter was sufficient to amount to notice to both the primary layer and the underwriters on the co-insurance policy (both Lloyd’s syndicates). Although it was intended to be a declaration for the purposes of renewal, there was no reason why the Renewal Letter could not amount to a notification under Clause 2 as it was in a form that made it clear that underwriters were being notified of circumstances that LMA thought might give rise to a claim. As the Renewal Letter was not directed to the defendants, it did not constitute notice to them, but only to Lloyd’s.
  • There was no basis for concluding that Clause 5 amounted to a condition precedent to LMA’s right to recover under the excess layer policy. Following Alfred McAlpine v BAI (Run Off) Ltd (2000), it was instead to be construed as a term, a serious breach of which would entitle the defendants to reject liability for the relevant claim without having to formally "accept" the breach, regardless of when the claim was made or the loss occurred. A practical example of this is where the insured commits a breach of the policy which demonstrates an intention not to continue to make a claim.

IMPLICATIONS

  • The decision serves as an important reminder that the court will construe policy documents against the backdrop of underwriting practice in the market.
  • To avoid being caught out, excess layer insurers should give consideration to whether they wish to receive notice of claims against the primary layer which could (as opposed to being likely to) exceed the primary layer. If so, they should expressly state this in the policy. This is likely to be particularly pertinent to policies which contain "drop down" provisions (where the primary layer is exhausted, the excess layer policy "drops down" to become the primary layer).
  • Breach of a term which is not a condition precedent to liability may still, if serious enough, entitle insurers to repudiate the relevant claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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