Which policy pays? It all depends on the circumstances

Abu Dhabi take off
The Commercial Court has handed down judgment in The Cultural Foundation and Abu Dhabi National Exhibition Company v Beazley Furlonge Limited & Ors, a dispute between insureds, primary and excess insurers concerning professional indemnity policies providing cover to a now insolvent architects’ firm. The case, although fact specific, raises a number of interesting points of insurance law. In this blog post I will take a look at the notification issue. In forthcoming posts we’ll consider the issues arising from the operation of the Third Parties (Rights Against Insurers) legislation and the recoverability of interest under the policies’ insuring clauses.

The primary issue was which set of circumstances was notified to the primary and excess insurers since this would determine the policy year or years into which the claims fell. There were two relevant policy years, 2008/09 and 2009/10. The primary policies each included a limit of indemnity of US$10 million (plus defence costs) with an excess of US$250,000 for any one claim. The excess policies insured limits in excess of US$10 million (plus defence costs) for the 2008/9 year (it was accepted that the excess policy for the 2009/2010 year would not be impacted in any event).

The notification provision in the primary policies was typical in that it required the insured to notify its insurers of any “circumstance” which might give rise to a claim. “Circumstance” was defined as “information or circumstances of which the insured is aware which suggests that a claim is likely to be made against the insured which the insured may become legally liable to pay”. It also contained a deeming provision meaning that the effect of making a valid notification was that all future claims arising out of the relevant circumstances would be deemed to have been made during the policy period in which the circumstances were notified.

Each of the two claimants had obtained an arbitration award against the insured and, following the insured’s insolvency, were statutory assignees of the insured’s rights under the policies by virtue of the Third Parties (Rights against Insurers) Act 1930. Their claims individually fell within the limit provided by the primary policies but together exceeded it. The significance of this was that, If both claims fell into the same policy year, the primary cover would (subject to any defences) be exhausted and the bulk of one of the claims would fall to be paid by the excess insurers. If, however, the claims fell into different years the primary insurer would have to pay both, one under the 2008/9 year and the other under the 2009/10 year.

In deciding which policy year should respond to the claims the Court had to decide whether both claims arose out of circumstances notified to the primary insurer in March 2009 (in which case the claims would attach to the 2008/9 policy) or whether one of the claims arose out of circumstances notified in September 2009 (in which case it would attach to the 2009/10 policy). It was held that, to the extent the claims arose from structural defects, they did not arise from circumstances notified during the 2008/9 policy period (but those notified during 2009/10). To the extent, however, that the claims arose from an acoustic design problem, they arose from circumstances notified during the 2008/9 policy period and, therefore, attached to the 2008/9 policy and potentially put the excess insurers on the hook.

Of particular interest are the judge’s findings in relation to:

  • Notification of a “hornets’ nest” or “can of worms” which may give rise to numerous types of claims of unknown quantum and character at the date of the notification. The judge held that the requirement that the notified circumstances be such as to suggest that a claim is likely to arise may limit the extent to which it is possible validly to make this type of notification. Given that likelihood of a claim is an objective test, he said, it would seem to follow that a notification is valid only to the extent that the circumstances identified – however broad or narrow they may be – are such that a reasonable person would think them likely to give rise to a claim.
  • The proper construction of the phrase “give rise to a claim”. The judge held that this required there to be a causal as opposed to a merely coincidental link between the circumstances notified and the ultimate claim.
  • Whether the insured could choose under which policy to claim. The judge expressed the view, obiter, that where an insured has made valid notifications in respect of the same claim, or circumstances giving rise to a claim, to two consecutive claims-made policies, the insured may choose the policy under which it brings a claim provided that the later policy does not contain an exclusion for claims deemed first made under the earlier policy.

Notification clauses are often stated to be conditions precedent to coverage under the policy and if the insured fails to comply with the notification requirements, the insurer may have a complete defence to the claim. Whether an insured has given valid notice of a claim or circumstances likely to give rise to a claim will depend on the particular facts and on the terms of the policy. This is by no means always straightforward to determine, as evidenced by the regularity with which notification disputes come under the judicial spotlight (see, for example, here and here). While the decision in this case turns on its own facts, the points highlighted above are of general interest and relevant to professionals and their professional indemnity insurance providers alike.

Simon Cooper