Claims notifications vs crystal ball gazing – the Court of Appeal’s recent Euro Pools decision
The Court of Appeal has overturned a first instance decision in the case of Euro Pools PLC (in administration) v Royal & Sun Alliance PLC. This case deals with the notification of circumstances under a claims made policy where insured and insurer are asserting it fell within different policy years and what degree of awareness an insured must have in relation to the circumstances of which it is notifying insurers.
The Court of Appeal held that, consistent with previous authority, an insured must be aware of a circumstance in order to notify the insurer of that circumstance but there is no requirement that he/she be aware of the full causal origins and implications of the circumstance notified. The insured may give a “can of worms” or “hornet’s nest” notification. Accordingly the Court of Appeal found in favour of RSA, that the costs of works to mitigate the risk of potential third party claims objectively arose from the circumstances notified in 2007 and as such RSA had already paid the limit of indemnity for that year and no further sums were due to the insured.
The background to the Appeal
Euro Pools, now in administration, was a company that specialised in the installation and fitting out of swimming pools. Euro Pools agreed with RSA two materially identical professional indemnity policies, one covering 2006/2007 (the “First Policy”) and one covering 2007/2008 (the “Second Policy”), each with a limit of indemnity of £5m. The policies covered Euro Pools for liabilities to third parties and for the costs of remedial works intended to mitigate the risks of claims by third parties.
In a meeting in February 2007, during the period of the First Policy, Euro Pools notified RSA that they were encountering problems with the steel tanks installed at two sites but considered that the installation of inflatable bags might be a solution. Euro Pools also notified RSA of problems with their system of moveable booms (in-pool vertical dividing walls, designed to rise and sink so that a pool can be used in different configurations) which was not expected to exceed the retention. Several months later in its proposal form for the Second Policy renewal in response to the question regarding any claims circumstances, Euro Pools referred to the “tanks on booms” issue which they were fixing with inflatable bags. Aon (Euro Pools’ broker) confirmed to RSA that the total cost of remedial works would likely fall within the applicable excess. However, in May 2008, Euro Pools reported that the inflatable bag system was failing and they were considering the installation of a new hydraulic system. Having exhausted a number of other potential solutions, Euro Pools began to install hydraulic systems for booms from late 2008. RSA made regular interim payments in respect of these works.
A dispute arose however, regarding to which policy the claim for mitigation works on the system of booms attaches. Euro Pools contended that the cost of installing the hydraulic systems for booms should fall under the Second Policy, given that the 2007 notification related only to the failures of some of the steel tanks, whilst the discovery of a fundamental flaw in the air drive system which caused problems with the bags and subsequently the need to have a hydraulic system fitted, was not known until 2008. RSA contended that the claim attached to the First Policy, in respect of which RSA had already paid out the limit of £5m. At first instance, the judge found in favour of Euro Pools and held that the 2007 notification was limited to a problem affecting some but not all of the steel tanks installed in Euro Pools’ booms; there was no adequate causal connection between the circumstances notified in the First Policy period and the relevant loss.
The Court of Appeal’s decision
RSA successfully appealed the first instance decision. The issues which eventually required the installation of hydraulics had the requisite causal link to the circumstances notified in 2007 and therefore attached to the First Policy. The wording of the notifications made under the First Policy made clear that Euro Pools knew there was a problem with rising and falling of the booms and that claims might arise from these failures. The fact that Euro Pools made a precautionary notification demonstrated that they knew there was a chance that using inflatable bags might not fix the problem. In the view of the Court of Appeal, as summarised by Males LJ:
“an insured must be aware of a circumstance in order to notify the insurer of that circumstance; but there is no requirement that he be aware of the full causal origins and implications of the circumstance notified.”
The Court of Appeal referred to the sequence of measures by Euro Pools to try and make the booms rise and fall properly (first notified in 2007): it used air bags in place of tanks in booms; eventually it was decided that the booms could not be made to work with tanks or airbags and it was necessary to install hydraulic cylinders as an alternative design solution for the raising and lowering of the booms – there was an unbroken causal chain running through this sequence of design changes. There was therefore no new notification made under the Second Policy in 2008.
The Court of Appeal emphasised that for Euro Pools to be entitled to recover the costs of the remedial work undertaken to mitigate a potential third party claim, the potential claim must arise from the circumstances notified during the year of the policy under which indemnity is claimed. It was not correct to assess whether the mitigatory work arose from the circumstances notified.
In this case the court’s ruling means that Euro Pools’ insurance claim is limited to the cap in the First Policy. It is worth noting that a decision that favours a generous application of a claims notification can often benefit the insured who has made a broad statement in order to cover any and all potential future claims. The obligation on Euro Pools under the policy is to give written notice to RSA as soon as possible after becoming aware of circumstances which might reasonably be expected to produce a claim. There need only be a possibility of claims in the future – the notification need not be limited to particular events.
This decision raises the risk that notifications under claims-made policies can attract a wide scope of cover if the full extent of the facts is not yet known or understood. The link between the circumstances in the notification and the circumstances that give rise to the claims (or potential claims) must be causal rather than coincidental but the test for causation is, as Males LJ states, not particularly demanding. It seems likely that insurers will see an increase in broad/catch-all notifications from insureds, but to be valid, there will still need to be notification of a “problem” which may give rise to a claim.
This article was co-authored by Clare Birchenhough, second year trainee solicitor
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