26 September 2019

A recent decision from the Court of Appeal (Euro Pools plc v Royal & Sun Alliance Insurance plc [2019] EWCA Civ 808) has provided welcome pan-UK clarification on what is required to constitute notification of circumstances in professional indemnity claims.

The Defenders provided the Pursuers with professional indemnity insurance covering the policy period from 30 June 2006 to 29 June 2007 (“the first policy”) and from 30 June 2007 to 29 June 2008 (“the second policy”).  Each policy year was subject to a £5 million limit of indemnity.  The policy required the Pursuers to give prompt notification after they became aware of “circumstances…which might reasonably be expected to produce a Claim”.

In 2007, the Pursuers became aware and notified the Defenders of a problem relating to moveable booms in swimming pools they had installed for third parties.  Moveable booms are vertical walls designed to rise and sink in order that a swimming pool can be used in different configurations.  The difficulties in operating the booms were down to failures within steel tanks.  The Pursuers believed the installation of inflatable bags would resolve the problem, however, it did not and, in 2008, notified the Defenders of this further problem.  They considered that the only way to resolve the problem was to replace the air driven system which operated the booms with a hydraulic system. 

The Pursuers anticipated a number of third party claims and that the cost of the works to replace the air driven system with a hydraulic system was likely to exceed the limit of indemnity available under the first policy. Consequently, they sought further indemnity under the second policy.  This was on the basis that they considered the original notification in 2007 was limited to defects in the steel tanks of the moveable booms and that the second notification in 2008 related to problems with the air driven system requiring it to be replaced by a hydraulic system: in other words, the Pursuer considered themselves to be making two separate notifications of two separate issues.  

The Defenders rejected the claim made on the second policy on the basis that it was not a separate notification, but simply further communication about an existing claim falling under the first policy. 

Proceedings were raised and the Court, at first instance, held in the Pursuers’ favour.  The Defenders went on to appeal the decision and the Court of Appeal rejected the earlier decision, ruling in the Defenders’ favour.

At appeal, it was held that there had only been one notification.  The Pursuers knew in 2007 that there was a problem with the booms not rising and falling properly, but they did not know how that problem could be properly resolved.  By notifying the Defenders of the problem with the booms, the Pursuers had notified them of “circumstances…which might reasonably be expected to produce a Claim”.  There was no need for the Pursuers to know what the solution to the problem would be. So long as there was a causal connection between the circumstances which were notified and the claim which later arose, then policy cover would be provided.  There was a causal connection here between the circumstance notified in 2007 under the first policy and the work ultimately carried out to install the hydraulic system. 

Additionally, it is possible to give notification of a problem, indicating that something is not working for an as yet unknown reason: this is commonly known as giving a “can of worms” or “hornet’s nest” notification.  There is no reason why such notifications should not be made if it is expected a claim (or claims) will follow under the policy, again so long as there is a causal connection. 

In this case, intimation of circumstances ahead of the solution being identified worked to the Defenders’ advantage since the total losses exceeded the limit of indemnity of £5million for both policy years, but indemnity was, of course, restricted to the first policy year when notification had been made. 

Generally, it is to a policyholders’ advantage that there is a relatively low threshold for a notification to be effective: a fairly vague and unspecific notification is usually taken to be enough to trigger indemnity cover.  Policyholders cannot, however, have it both ways by trying to argue, as in this case, that notification requires to be more precise and specific; and by using that argument to try to rein in the ambit of an earlier notification, and thereby gain access to a second policy with a second limit of indemnity.

 Contact: Gillian Harman, Associate gah@bto.co.uk T. 0141 221 8012