Court ruling increases burden on professional liability insurers, expert warns

Under the terms of its professional indemnity insurance,  law firm McManus Seddon Runhams (MSR) was required to notify its insurer European Risk Insurance about any circumstances "during or after the period of the insurance" that could give rise to a claim. In 2011, the firm received a claim from a former client of one of the firms it had since merged with, relating to work carried out in 2007. It later discovered that there was a "consistent pattern" of failures across over 5,000 files. The law firm therefore provided its insurer with a 'laundry list notification' of all 5, 000 prospective cases relating to all the files of the acquired law firm.

The insurer had rejected this notification, informing MSR that it had not "identified the specific incident, occurrence, fact, matter, act or omission which would give rise to a claim on each individual file". In the High Court, the judge found that the insurer's stance was "clearly wrong" and "at odds with the case law", although whether each individual case fell within the notification would have to be decided "as and when it arises in the context of an actual claim".

MSR had appealed on this final point, and had applied for a declaration from the court that the notification would apply to each case. The Court of Appeal rejected this argument. In the leading judgment, Lord Justice Davis said that he could see "no basis for interfering with the exercise of [the High Court judge's] discretion" in refusing to order a declaration about whether circumstances were validly notified before a claim was made, as she gave "detailed and rational explanations" for doing so.

Insurance litigation expert Ravi Nayer of Pinsent Masons, the law firm behind Out-Law.com, said that the decision had practical implications for insurers in the administration of claims made policies.

"There are clear implications for all professional liability insurance such as directors and officers' coverage; medical and legal malpractice insurance; and errors and omissions policies which are 'claims made' policies," he said.

"Insurers may be encouraged to reserve most of their arguments about validity of circumstances until a claim is made, or to up the stakes by alleging bad faith of an insured, which increases expense and complexity for all concerned. The present approach will continue to lead to data dumping by policyholders and create substantial work for insurers; inevitably increasing their costs in a way that may be passed on to customers. Some customers may even find that there are insurers unwilling to take the risk of underwriting these types of policies or will do so only with more onerous terms," he said.

"On the upside, insurers will welcome the High Court's decision not to order a declaration about whether circumstances were validly notified before a claim has arisen", Nayer said. "The Court of Appeal has, further, taken the opportunity to confirm that determinations of questions about whether circumstances are correctly notified are held back until after a claim is made (which will frequently be after a policy has expired)."

"The Court of Appeal was not specifically asked, and therefore an opportunity was missed, to revisit the circumstances in which a blanket notification will be unacceptable, especially in a case where there were alleged systemic failures which could not to be said to apply to all cases and the insured could not even say how many cases it was notifying. Both the High Court and the Court of Appeal ignored the commercial interest insurers have in not accepting loosely defined circumstances which increase their exposure to claims," he said.

He said that those insurers who wanted to establish greater contractual certainty at the outset could "expressly define what circumstances should be notified to them, in particular focusing on the relevance or otherwise of the subjective awareness of insureds" when selling the policy in the first place.

"This can be achieved in those products sold by insurers which are not the subject of Minimum Terms of Insurance," he said.

"Better defining what is a notifiable circumstance will help to ensure that in the final analysis, when a claim is made, questions of the quality of knowledge required for a valid circumstance will not get mixed up with the causative importance of the circumstance to the ultimate claim. The Court of Appeal has confirmed that both enquiries should take place at the same time,"he said.