Notification under Professional Indemnity Policies: How much knowledge is enough? Notification under Professional Indemnity Policies The High Court s decision in Euro Pools plc (in administration) v Royal and Sun Alliance Insurance plc [2018] EWHC 46 (Comm), contains an interesting analysis of notifications of circumstances under professional indemnity policies. Background The Claimant was a company specialising in the installation and outfitting of swimming pools. It was insured under design and construct professional indemnity policies provided by the Defendant. Of relevance to the proceedings were the policies covering the periods 30 June 2006-29 June 2007 (the First Policy ) and 30 June 2007-29 June 2008 (the Second Policy ). Both Policies were on materially the same terms, and contained a condition requiring the Claimant to give notice to the Defendant: As soon as possible after becoming aware of circumstances which might reasonably be expected to produce a Claim Any Claim arising from such circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given. Both policies also contained a mitigation works clause establishing that: The [Defendant] will indemnify the [Claimant] against costs and expenses necessarily incurred in respect of any action taken to mitigate a loss or potential loss that otherwise would be the subject of a claim under this Insurance. The onus of proving a loss or potential loss under this Insurance shall be upon the [Claimant] who
will be obliged to give prior written notice to the [Defendant] during the Period of Insurance of the intention to take action that will incur such costs and expenses. The Claimant identified issues with elements of certain pools it had installed, which it subsequently mentioned to the Defendant. It then sought to claim costs and expenses it incurred under the mitigation works clause. As a result, there was an issue as to whether there were valid notifications of circumstances for the purposes of the Policies. There were also separate issues before the Court as to (a) whether the Defendant was to indemnify the Claimant in respect of costs incurred (including adverse costs awards) in litigation against a third party; and (b) when time starts running for limitation purposes in respect of claims for indemnity arising from costs or expenses incurred by an Insured (in this case, the Claimant). Notification of Circumstances under the Policies In order for the Claimant to seek an indemnity in respect of mitigation works (subject to limitation, discussed further below), there first needed to be a valid notification under either the First Policy or the Second Policy. As a consequence, this was the first matter the Court needed to consider. (a) The Booms System It is only circumstances of which an Insured is actually aware which can be the subject matter of a notification. The booms system comprised vertical walls which divide a pool into different swimming zones, designed to rise and fall so that a pool can be used in different configurations. The Claimant discovered an issue with the stainless-steel tanks which, when filled with air, raised the booms system at certain pools it had installed. It discussed this with the Defendant at a meeting in February 2007, following which the Claimant implemented a remedial solution involving the use of inflatable bags. In May 2008, some 15 months later, the Claimant encountered problems with the inflatable bags, and informed the Defendant that it intended to change the booms system to incorporate a hydraulic system. The Claimant argued that it had made a valid notification of circumstances in May 2008 (ie. under the Second Policy), arguing that the relevant loss was the failure of the inflatable bags, not the failure of the tank in February 2007.
The Claimant argued that any third-party claim made in relation to the booms could not be causally linked to the original issue with the steel tank. By contrast, the Defendant took the view that the notification had been made under the First Policy, in February 2007. The total loss in this matter exceeded each Policy s limit of 5 million. The Defendant therefore sought to assert that all the losses fell within the First Policy, to limit the amount the Claimant could recover. In relation to the booms system, the Defendant argued that the original issue with the steel tank and the later failure of the inflatable bags were both causally connected as a broader flaw in the design of the booms system. The judge referred to the principles established in Kajima UK Engineering Ltd v The Underwriter Insurance Co Ltd [2008] EWHC 83 (TCC), particularly emphasising the following two points: (a) It is only circumstances of which an Insured is actually aware which can be the subject matter of a notification; and (b) There must be some causal, as opposed to coincidental, link between the notified circumstances and the later claim. On this issue, the Court found in favour of the Claimant: there was no causal link between the failures in the tanks and the decision to abandon an air drive system and move to hydraulics. The Court further found that, even if both failures were causally connected, the Claimant was not aware of this when they made the earlier notification in February 2007, and as such could not notify the circumstances which led to a claim for the expenses of the move to a hydraulic system. As a consequence, the Claimant made a valid notification under the Second Policy only and its subsequent claim for mitigation works fell under that policy period. (b) Leeds Diving Pool Floor The Claimant was the subcontractor for the installation of a diving pool in Leeds. On 25 October 2007, the moveable floor system jammed. The Claimant gave formal notification to the Defendant on 26 November 2007 of circumstances which may give rise to a claim against it. The Claimant subsequently incurred cost and expense in relation to remedial works to that pool, then sought an indemnity from the Defendant under the mitigation works clause.
The Claimant s case was that there was a valid notification in relation to the diving pool floor under the Second Policy as the costs and expenses incurred were in relation to remedying the floor, and the Claimant could not give notice of this until after the floor actually failed in October 2007. The Defendant s case was that the claim in relation to the diving pool floor all arose out of circumstances notified in February 2007 (as discussed above). It considered that the February 2007 notification was of a broad scope and related to a wide range of failures at different sites which were causing pool floors not to rise properly. The Court again found in favour of the Claimant, for similar reasons as those in relation to the booms system claim: ie. (a) the Claimant was not aware in February 2007 of the defect in the design of the diving pool floor; and (b) there was no causal link between the design failure which occurred at the diving pool floor and the problems which were notified in February 2007. Costs Incurred in Third Party Litigation A dispute also arose as to whether costs incurred by the Claimant in litigation against a third-party consultant were covered under the Policies. It was a condition of each Policy that: The [Defendant] shall be entitled to take over and conduct in the name of the [Claimant] the Defence or settlement of any Claim or to prosecute in the name of the [Claimant] for its own benefit any Claim and shall have full discretion in the conduct of any proceedings and in the settlement of any Claim. It was the Claimant s case that there was an implied term that, if the Defendant decided to bring proceedings against third parties in the name of the Claimant, then the Defendant would indemnify the Claimant for any costs and expenses the Claimant incurred, including any adverse costs orders made against the Claimant. There must be some causal, as opposed to coincidental, link between the notified circumstances and the later claim. The proceedings against the third party consultant were initially prosecuted by the Defendant in the Claimant s name. However, these were not fully for the Defendant s benefit as the Policy condition required. Furthermore, the Claimant subsequently excluded the Defendant (i.e. its insurer) from the proceedings. As a result, once the Defendant was so excluded, it was no longer prosecuting the claim against the third party consultant it therefore had no liability for adverse costs awards after that date.
Limitation on Claims for Indemnity for Costs and Expenses Incurred Finally, having determined that there were valid notifications (and therefore subsequent claims) for indemnity in respect of mitigation works, the Court had to determine whether costs and expenses incurred by the Claimant before 28 January 2010 were time-barred by the Limitation Act 1980, and could not be recovered. The Claimant argued that limitation runs from date of breach, and the Defendant could not have been in breach of its contractual obligation to indemnify unless and until it had knowledge of the actual amount being claimed. The Court rejected this argument, preferring that advanced by the Defendant: a mitigation works clause is a first-party financial loss which is suffered when the relevant cost or expense is incurred. It followed that the Claimant s right to an indemnity (and therefore its cause of action for breach) arose when the Claimant incurred cost or expense to mitigate a loss or potential loss. The Claimant therefore had six years from that date to make its claim accordingly, costs or expenses incurred before 28 January 2010 were timebarred. Summary The most significant aspect of the decision in Euro Pools is that an Insured must actually be aware of circumstances before they can be the subject matter of a notification. In addition, there must be a causal link between those circumstances and any later claim for all the loss to fall within the same policy year. It would seem the Court took a restrictive approach to the principles set out in Kajima: using the booms system as an example, while the exact cause was not known, the Insured was nonetheless aware of issues with the booms system as far back as February 2007. Indeed, it mentioned this to the Defendant. Despite this knowledge, the Claimant prevailed in its argument that the earlier mention was not a notification under the First Policy, and that the later claim fell under the Second Policy. This approach has the potential to encourage frequent, yet vague, notifications of circumstances to protect against the possibility that a later claim is caused by different means. It seems that the more precise the notification, the greater the risk that a later claim may not fall within its scope. Nonetheless, the decision emphasises the fact-specific nature of notifications, and care should be taken. March 2018 For further information please contact: Ian Masser Partner T: +44 (0) 20 7469 0439 E: i.masser@beale-law.com Michael O Brien Solicitor (NZ Qualified) T: +44 (0) 20 7469 0461 E: m.obrien@beale-law.com