On 31 October 2008, the Court of Appeal handed down Judgment in HLB Kidsons v Lloyd’s Underwriters [2008] EWCA Civ 1206, an important decision concerning the construction and application of notification provisions in a claims made policy. Craig Orr QC (Fountain Court Chambers) together with Gavin Kealey QC (7 King’s Bench Walk) acted for underwriters, instructed by Fishburns.
The action arose out of professional negligence claims made against HLB Kidsons in relation to the activities of its tax planning subsidiary, Solutions @ Fiscal Innovation Limited (“S@FI”). The claims were all made after expiry of the relevant policy period, but Kidsons contended that they were entitled to an indemnity under the policy by reason of prior notification of circumstances. The meaning and effect of the letters and other documents relied upon by Kidsons as constituting valid and effective notice of circumstances to underwriters was the issue at the heart of the case.
At first instance, Gloster J found that valid and effective notification was only made (and then only to the two lead Lloyd’s syndicates and companies market, but not the Lloyd’s following market) in respect of procedural difficulties affecting implementation of one particular product marketed by S@FI, known as the discounted option scheme[1]. Gloster J rejected the contention of Kidsons (supported by their former brokers, Millers Insurance Services Limited, and former solicitors, CMS Cameron McKenna) that notification had been made of concerns relating to the whole gamut of S@FI’s activities, whether by a letter dated 31 August 2001 (which Gloster J regarded as too vague, nebulous and coy to constitute effective notification) or a report provided to underwriters in October 2003, over 15 months after expiry of the policy. According to Gloster J, this report was provided far too late to qualify as valid notice under the policy, which required notification to be given to underwriters “as soon as practicable” of any circumstances of which the assured became aware during the policy period.
A joint appeal by Kidsons, Millers and Camerons was dismissed by the Court of Appeal, except to the extent that a majority (Rix and Toulson LJJ) found that the 31 August letter constituted effective notification to the two lead Lloyd’s syndicates and companies market (but not the Lloyd’s following market) of circumstances relating to implementation of S@FI products generally (and not only discounted option schemes). This notification did not extend to the whole gamut of S@FI’s activities: it covered only “claims stemming from the manner of implementation, as distinct from the essential nature, of ‘fiscal engineering products’ which had been marketed by S@FI”. This interpretation of the 31 August letter was consistent with a concession made by underwriters at trial but rejected by Gloster J. The majority found the concession to have been rightly made. Buxton LJ, dissenting on this point, agreed with the Judge that the 31 August letter was so uninformative as to be incapable of constituting an effective notification. The decision highlights the importance of an assured giving a full and fair presentation of what he knows when notifying circumstances to insurers. As Rix LJ confirmed, and the result of the case shows, a non-comprehensive notice “carries its own penalty in that it is unable to give notice of that which is omitted”.
All three members of the Court of Appeal concurred with the construction of the policy terms adopted by Gloster J. A notice which was not given ‘as soon as practicable’ did not qualify as valid and effective notification so as to enable an assured to attach to the policy claims made after expiry of the policy period. Even though the clause requiring notice was not expressed to be a condition precedent, it was interpreted as having this effect. Any other conclusion would have turned a claims made policy “on its head”.
The Court of Appeal agreed that Institute conditions, relied upon by the appellants, did not reduce or extinguish the condition precedent effect of the notification clause. A failure to give timely notice did not merely give insurers a remedy in damages for prejudice suffered by reason of the delay. Rix LJ referred to guidance issued by the Institute of Chartered Accountants warning that a failure to give timely notice of claims or circumstances ‘could seriously prejudice the firm’s rights and entitlement to indemnity under the policy’. In his view, this went “very much further” than a warning that a full indemnity might be reduced by underwriters’ assessment of the cost of any prejudice. He observed that if the Institute terms were nevertheless intended to operate as the appellants suggested they were, then they need to be revisited.
In the result, the following Lloyd’s market, who were only provided with a copy of the 31 August letter the following July (i.e. 11 months later), were not on risk for any claims arising out of S@FI. It was, according to Rix LJ, “impossible to suggest” that the notification to them was given ‘as soon as practicable’. The importance of assureds, and their brokers, giving timely notice is clear.
