Claims against professional advisors, such as accountants, auditors and tax consultants often take months and even years to develop and reach fruition and, in many cases, claims will disappear altogether after an initial grumble by a seemingly disgruntled client. Knowing when to notify a circumstance under a "claims made" professional indemnity policy, what that notification should comprise, and whether a later claim attaches to the initial notification, can be difficult to determine, and as a result, notification issues can be a fertile ground for disputes between professional insureds and their insurers.
The recent Court of Appeal decision in Euro Pools Plc (In Administration) v Royal Sun Alliance Plc provided clarification on the scope and effect of an insured's notification of circumstances. This is the most important decision on notification issues since the Court of Appeal's highly-reported judgment in Kidsons concerning whether accountants had effectively notified circumstances concerning the efficacy of tax planning activities provided by its subsidiary.
Euro Pools (EP) specialised in the installation of swimming pools. It discovered an issue with moveable booms (which would rise and fall to divide a pool into different walled zones), and notified its 2006/7 professional indemnity insurers, RSA, on the basis these were "circumstances which might reasonably be expected to produce a Claim". EP told RSA there were air leaks in the steel tanks within the booms and it was fixing these with inflatable bags. The inflatable bags then failed and a hydraulic system solution was introduced.
EP made claims for mitigation costs under both policy years arguing the 2006/7 policy covered the inflatable bags and the 2007/8 policy (also insured by RSA) covered the hydraulic system. RSA argued that all mitigation costs attached to the 2006/7 policy and were subject to a single £5m limit of indemnity (most of which had been exhausted already).
At first instance, the judge held the costs of the hydraulic system fell to the 2007/8 policy on the basis there was no causal link between the notified circumstances relating to the air leaks in the tanks and the later problems with the bags. RSA appealed.
Court of Appeal Decision
The Court of Appeal allowed RSA's appeal and made the following key points:
- Although, when notifying insurers, an insured has to know of circumstances which might reasonably be expected to produce a claim, the insured does not have to know the cause of the problem, the consequences that may flow from it, or how to solve it.
- A "can of worms" or " hornet's nest" notification can be made where the exact scale and consequences of the problem are not known.
- If there has been a validly made notification of circumstances, any claim arising from those circumstances will be considered to have been made within that period of insurance provided there is a causal (not merely coincidental) link between the notified circumstances and the later claim.
- The requirement for a causal link between the circumstances notified and the later claim "is not a particularly demanding test of causation".
The Court of Appeal held that the circumstance which had been notified in 2006/7 was that the booms were not rising and falling properly rather than a problem specific to the steel tanks. At the time, EP did not know the fundamental cause of the problem (whether a flaw in the structural design of the system, defects in the tanks, or in the air bags) but this did not matter. The notification of circumstances would cover the defects causing, and the symptoms and consequences of, the circumstances notified; it was not necessary to "over-analyse the problem by dissecting every potential cause of the problem as a different 'notifiable' circumstance". The later claim for the cost of mitigation works thus arose from the circumstances notified in the first policy year and there was no additional indemnity under the second policy year.
The Court of Appeal noted this approach was consistent with the analysis in Kidsons. In that case, there was no suggestion that the notification was ineffective because it failed to identify particular clients to whom the tax avoidance products had been sold or to examine whether a particular client may have a claim. Provided circumstances exist which may give rise to a claim, and provided those circumstances are notified, then any future claim arising out of those circumstances must fall to the insurer on risk at the time of notification.
This decision is important because it helps clarify the scope of a "hornet's nest" or "can of worm" notification in a situation where a professional insured is facing a problem which is still developing. The case confirms that an insured can notify awareness of a problem which might reasonably produce a claim (a relatively undemanding test that does not require full knowledge of the cause of the problem or the potential consequences) and all later claims that have a non-coincidental connection to the cause, or to the consequences of the cause, will attach to that initial notification of circumstances.
The Euro Pools decision is fact specific and therefore its outcome will cut both ways – it may favour the insured or the insurer depending on how the problem unravels, the policy excess and limits in the relevant policies, and whether there are different insurers on cover in subsequent policy years. On these facts, the Court came down in favour of RSA and held the claims could not be split over the two policies to give EP the benefit of two limits of indemnity. Equally, in another case, where claims may follow over many years and there are different insurers covering subsequent policy years, the arguments would probably be run very differently.
So what does this all mean for professional insureds such as accountants and auditors? Given the potential breath of a hornet's nest notification of circumstances, they should take care in the language they use to notify wide scale problems, particularly where investigations are ongoing and the cause of the problem and solutions to it are not yet known. In many cases, it will be in their interest to keep the language broad and non-specific to ensure that later claims fall within its scope, but as was illustrated by Euro Pools, this may not always be the case.
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.