UK: Are You Taking A Risk With Your Insurance?

Last Updated: 14 January 2009
Article by David Robinson

Whether you are the Finance Director of a major company or in business in a modest way or simply a private individual you should take extra care to ensure that you do not take a risk that may prejudice you when you suffer a claim. The English Courts have recently clarified the position on the obligations of an insured when reporting to its insurers where that insured has duties to report either circumstances or claims. Unless care is taken, first to understand the obligation the insured is under in terms of timing, and second on the scope or breadth of the notice (what it contains by way of detail about what has happened) there is a real risk that the insurer who may wish to, may take advantage of the insured's either lateness or lack of clarity and lawfully avoid making any payment to the insured.

This means that potentially tens or hundreds of millions of pounds of claims may go unpaid which would otherwise be paid.

Reduced capital bases following recent steep falls in World-Wide markets, coupled with sharp reductions in available credit may incline insurers to take advantage of the position the recent decision of the English Court of Appeal has set in the case of HLB Kidsons v Lloyd's Underwriters and others.

Briefly, the facts in the Kidsons case are that this firm of Accountants which had been selling tax schemes which were intended to assist taxpayers to mitigate (reduce) the amount of tax they might otherwise have to pay in certain situations became concerned that some of those schemes which they had sold and were selling might have either been mis-sold, incorrectly implemented, or incorrectly designed (or a combination of these) and that in consequence they might face claims. An employee in one of their offices pointed to deficiencies that he thought existed in these schemes and first the partnership management board of the firm and then the board of the wholly owned subsidiary company of the firm through which the products were sold met to consider what ought to be done in light of concerns the individual was expressing. On 30 August 2001, the subsidiary company board resolved to instruct the firm's partnership secretary to notify their professional indemnity insurers that there may be circumstances which may give riser to claims.

The following day, the firm's partnership secretary wrote to the firms brokers as instructed by the company's board, i.e. with the intention of notifying the firm's underwriters that circumstances existed which may give rise to claims across the range of products that the firm had, and was selling. The letter was sent to the firm's insurance Brokers. It was shown to the lead underwriter on the policy, one who was on the placing, not claims side of the syndicate, and returned "Noted". A while later a further copy of the letter was, packaged in a claims file wrapper, produced to the lead underwriter again, this time to someone who dealt with claims. The English court held that the first presentation did not have the intended effect of making a notification of circumstances but instead (and contrary to the insured's interest) amounted to a nothing. The second presentation did, the court held amount to an effective notification, but the notification was said not to be as wide as the insured intended it to be (and indeed needed it to be to cover the spectrum of losses foreseen by the board of the company as reported by the employee. So, only a proportion and not all of the claims which have subsequently emerged and been made have been held to be covered by insurance. The unfortunate partners have been left shouldering the cost of all the claims while the policy contest has been fought out, and of the litigation too.

But the unlucky partners' problems do not end there because, in common with many insurances of this type, and many professional practices have similar cover against the cost of civil liability claims, they gain protection against the cost of claims in the future if they notify circumstances before the expiry of their policy and this policy contained the clause that such notification must be made by them, as soon as practicable. The firm's policy was underwritten by a number of insurers on what is termed a "line slip". Each individual insurer on this slip was entitled to be shown notice of claims. A proportion of the insurers were not shown the notification until well after the policy period which the courts held was not as soon as practicable. The consequence of that was that the proportion of the cover under the policy, attributable to those insurers was lost to the partners.

Anyone who was not a lawyer who sat through the case in court would have been astounded to see the range of issues which the underwriters dragged into the case. From what was in the mind of the author of the letter as to what he intended to achieve by writing it (the underwriters contention was that he did not intend to notify anything but was merely 'testing the water') to the business background of the firm at the time (considering as it had been a merger with another firm of accountants and so there was not intention to make a notification which would in turn become reportable during the due diligence process the two firms would go through in the process of merging.

Whether they intended to or not, in the eyes of the English courts, Kidsons took a risk with their insurance and have paid a high price. What the partners wanted was certainty, and that is certainty that if any claims from any of these products arose then they would be paid by their insurers. Are you taking risks with your insurance?

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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