Facts
Kidsons, a firm of chartered accountants, claimed under their
professional indemnity policy in respect of claims made by clients
relating to Solutions at Fiscal Innovation Limited (S@FI), a
company owned and managed by the firm which marketed tax avoidance
schemes.
During the summer of 2001, one of the insured's tax managers
suggested that a particular product (a discounted option scheme, or
DOS) and S@FI's tax avoidance schemes generally were fundamentally
flawed and that the administrative procedures needed to implement
them were likely to fall foul of the Inland Revenue.
On 29th August 2001, Kidsons' board decided to review the DOS
product and notify insurers. The general view, however, was that
the manager's wider concerns were unjustified. The subsequent
investigation was confined to the DOS product.
On 31st August, Kidsons wrote to its placing broker stating that
"a tax manager… has expressed the view that the Inland Revenue, if
minded, could be critical of some procedures followed in certain
cases" and that the board intended to investigate. The letter
continued: "this might be regarded as material information for
insurers".
The letter was shown to the placing underwriter for the lead
syndicate on 27th September. In October 2001, a further copy was
presented to the two leading Lloyd's syndicates, together with a
claims file and a bordereau, which noted "Nature of claim: possible
tax errors in fiscal engineering work".
A subsequent letter written in March 2002 reported on the
outcome of the investigation, suggesting that the "technical
efficiency" of the DOS product was accepted, "but in some instances
there might be procedural difficulties involving the trustees for
each scheme".
This letter was presented by the brokers to some of the insurers
in April 2002 and to the remainder in July. The full extent of
S@FI's problems did not become apparent until September 2003.
The policy terms
Kidsons' insurance policy ran from 1st May 2001 to 30th April
2002. As a "claims made" policy, it responded to claims first
made against the insured during the policy period.
General condition 3 stated it was a condition precedent to the
insured's right to an indemnity that the insured give insurers
notice "as soon as practicable" of any claim made against
them.
General condition 4, however, was a standard "circumstances"
clause, requiring the insured to give insurers notice: "as
soon as practicable of any circumstances of which they shall become
aware during [the policy period] … which may give rise to a loss or
claim against them. Such notice having been given, any loss or
claim to which that circumstance has given rise which is
subsequently made after the expiration of [the policy period] …
shall be deemed for the purpose of this insurance to have been made
during the subsistence hereof."
The issue was whether the firm had validly notified insurers
about "circumstances" of which they became aware during the
policy period that might give rise to claims against the
firm.
The High Court
The judge held that the extension of cover provided by General
condition 4 was contingent on notice of the circumstance having
been given as soon as practicable.
She found that, in August 2001, the firm was sufficiently aware
of wider concerns about the whole S@FI operation to notify insurers
of a circumstance. The letter of 31st August was, however, "coy in
the extreme". No valid notification took place in September or
October 2001 because a reasonable recipient would have had no idea
what circumstance, if any, was being notified.
In the judge's view, no notification took place until April 2002
and that only covered the DOS product, not the wider problems. Any
claims relating to S@FI's other activities had not been notified
until after the policy expired and so were not covered by the
insurance.
Kidsons appealed, claiming that the presentation to insurers in
October 2001 was an effective notification of all the issues raised
by the tax manager.
They also challenged the judge's decision that the notification
made in April 2002 was limited in its scope and that the
presentation in July 2002 was ineffective because it was not made
"as soon as practicable".
Insurers were ready to concede that a notification was made in
October 2001, but said it was limited to circumstances relating to
the implementation of the DOS product. By that time, the firm was
satisfied there was nothing in the tax manager's wider concerns and
so had ceased to be "aware" of any wider circumstances.
Court of Appeal judgment
The Court of Appeal held that a notification was made in October
2001 that covered the tax schemes as a whole, but that it went no
further than their implementation. It did not cover the validity of
the products themselves or any mis‑selling.
Generally, a party's subjective intention in giving a notice is
not relevant to the interpretation of the notice itself.
Objectively considered, the letter of 31st August, accompanied by
the comment on the bordereau and a claims file, was clearly
intended to be a notification of circumstances.
Insurers' argument that the insured's awareness of the manager's
wider concerns had somehow ceased by October 2001 was dismissed.
The firm was plainly aware of those concerns, whether or not it
agreed with them.
The Appeal Court acknowledged that the letter of 31st August was
not very satisfactory, but there was no allegation of bad faith.
The question was what the letter said to a reasonable recipient,
not what it did not say.
What the letter actually said was that the Inland Revenue "could
be critical of some procedures followed in certain cases". The
majority of the Court of Appeal held that this gave effective
notification that the implementation of some of S@FI's products
might be criticised and that this might give rise to possible
claims.
The presentation to insurers in March 2002 merely updated the
October one and reiterated the same concerns about
implementation.
The Court of Appeal unanimously agreed with the judge that the
presentation in July 2002 was made out of time. The requirement to
give notice as soon as practicable was a condition of the extension
of cover to subsequent claims that arose out of the circumstance.
This was a "paradigm example" of a condition precedent.
Otherwise, however late a notice of a circumstance was given, a
claims made policy would extend to cover any claim arising from
that circumstance. The policy would become entirely open-ended.
Kidsons' appeal was therefore dismissed, save to the extent that
the October 2001 presentation effectively notified the two leading
Lloyd's syndicates of circumstances concerning the implementation
of S@FI products generally, not just DOS. The presentation in
April 2002 was similarly effective in relation to those insurers to
whom it was made.
Commentary
For insureds, deciding when a potential problem has become a
notifiable circumstance can be very difficult, particularly when,
as in this case, there has been no complaint from a third party and
the concern is wholly internal.
Lord Justice Rix thought it was doubtful that, in a normal case,
the insured's own concern that it might have made a mistake,
without more, would be a notifiable circumstance, "otherwise, every
insured could extend his policy indefinitely simply by a
notification based on his own lack of confidence".
He also disagreed with the judge's approach that a notification
had to be sufficiently clear and unambiguous to leave a reasonable
recipient in no reasonable doubt as to what it was intended to
notify. He thought few notifications would survive if there were
such a stringent test. Instead, his decision concentrates on what
the notification, viewed objectively, actually says.
