| INSURANCE — Contract — Condition — Policy containing condition requiring assured to notify insurers of circumstances potentially giving rise to claim — Whether requirement for notification “as soon as practicable” binding — Whether circumstances notifiable when only raising possibility of claim
HLB Kidsons (a firm) v Lloyd’s Underwriters subscribing to Policy 621/ PKID00101 and others [2008] EWCA Civ 1206; [2008] WLR (D) 344
CA: Rix and Toulson LJJ and Sir Richard Buxton: 5 November 2008
Where a professional indemnity insurance policy required the insured to notify to the insurers of any potential claims against the insured “as soon as practicable” the insured could satisfy the policy requirement if he made an attempted notification of circumstances which might give rise to a claim for professional negligence, which was understood by the underwriters to be such and which was made within the insured period. However, a notification served after the policy had expired relating to new potential claims was not an effective notification.
The Court of Appeal so observed when allowing in part the appeal of the claimants, HLB Kidsons, a firm of chartered accountants, from the judgment of Gloster J [2007] EWHC 1951 (Comm); [2007] Bus LR D28 on 9 August 2007, dismissing their claim for a declaration that the defendant underwriters, including certain Lloyd’s syndicates, Underwriter Insurance Co Ltd, Royal and Sun Alliance Insurance plc, International Insurance Co of Hannover Ltd and Great Lakes Reinsurance (UK) plc, were bound to indemnify Kidsons in respect of claims made against them by clients under three policies of professional indemnity insurance.
The claims made against Kidsons had been made, after the expiry of the policy period, by clients in relation to the activities of Solutions @ Fiscal Innovation Ltd ("S@FI"), a company formerly owned and managed by Kidsons, which marketed tax avoidance schemes. The clients alleged that they had negligently been advised to enter into flawed schemes. The underwriters disputed that Kidsons had given notice in writing “as soon as reasonably practicable of any circumstances of which they shall become aware ... which may give rise to a loss or claim” as required by general condition 4 (“GC4") of the policy. The judge held that in one material respect Kidsons had failed to comply with the notice condition. Kidsons’ insurance brokers, Millers Professional Risks Ltd, and their solicitors, CMS Cameron McKenna, both of whom had been joined as defendants to the action, were also appellants on this appeal, which the court dismissed on several other grounds.
RIX LJ said the essential issue was whether Kidsons gave to the underwriters effective notification of circumstances for the purposes of GC4 such as might cover such subsequent claims or some of them. Kidsons submitted that they did, and that such notification embraced the full extent of concerns relating to the whole of S@FI's fiscal engineering work, both as regards the tax schemes marketed and as regards the implementation of such schemes, which had been voiced by a tax manager employed in Kidsons' Edinburgh office by the name of Mr Iain Torrance. In response to Mr Torrance’s concerns, Kidsons, having taken further advice, sent a letter to their brokers, Millers, on 31 August 2001. That letter was not at that time submitted to the underwriters. Another letter identifying possible problems was sent to Kidsons’ solicitors, Camerons, on 28 March 2002. Subsequently, four presentations were made by the brokers to some of the underwriters in which the contents of one or both of the letters were disclosed. The judge held that the first (made in September 2001) and second (made in October 2001) were ineffective as notifications of circumstances; that the third (made in April 2002) was effective only in relation to one particular product (known as the Discounted Option Scheme (or "DOS"), about which Mr Torrance had a particular concern, especially relating to its implementation); and that the fourth (made in July 2002) was not made "as soon as practicable" within the meaning of GC4. His Lordship disagreed with the judge’s conclusions in part, in relation to the second and third presentations. The 31 August 2001 letter might not have been a very satisfactory letter, but it was on all objective criteria intended to be a notification of circumstances. GC4 said nothing about how a notification was to be made, other than that it must be in writing and given as soon as practicable after awareness of circumstances which might give rise to a claim. That was, on the face of it, a fairly loose and undemanding test. The 31 August letter was a fair and honest, if cautious, representation of the problem viewed by Kidsons at that time. In his Lordship’s judgment the second presentation was effective notification, while the third presentation updated that notification and widened the range of recipients. But since his Lordship agreed with the judge that the fourth presentation was not made as soon as practicable it was necessary to consider the policy terms for the purpose of evaluating the parties' conflicting submissions as to whether such delay was destructive of the complete efficacy of that presentation. The first critical question was whether the expression in GC4 "as soon as practicable" was a condition precedent at all. The policy was a “claims made” policy, that was to say it primarily insured only claims made against the assured within the policy year, but “such notice having been given” it extended to cover claims made outside the policy year (“after the expiration of the period specified in the Schedule”) where such claims arose out of the circumstances of which notice had been given. The extension was achieved by deeming such post-expiry claims to have been made during the policy year. However, it was commonly and accurately referred to as an extension of the cover, because it changed the essential basis of the policy, which was limited to claims made within the policy year, into something different. The deeming provision, however, emphasised even as a matter of drafting technique that the basis of cover remained the same. But the price, or condition, of this extension, or of this deeming provision, was the giving of a proper notice. Therefore the timing expression “as soon as practicable” was part of the condition precedent contained in the second sentence of GC4. The next critical question was whether that was unmade by general institute condition (b) (“GIC(b)”) which provided: “Where the assured's breach of or non-compliance with any conditions of this Insurance has resulted in prejudice to the handling or settlement of any loss or claim the indemnity afforded ... shall be reduced to such sum as in the underwriters' opinion would have been payable by them in the absence of such prejudice.” In his Lordship’s judgment it did not. Although GIC(b) referred to "any conditions of this Insurance", which was of some assistance to the submission, it did not in terms refer to conditions precedent. The whole premise and assumption of GIC(b) were that any breach of a condition precedent had been waived, so that the breach or non-compliance being spoken of by the clause could only be remedied by damages and the breach concerned had been transformed into the breach of a merely innominate term. In other words, it was not so much that "conditions" did not in itself extend to "conditions precedent", as that the situation being discussed was one in which any failure of a condition precedent was being treated as a mere breach of an innominate term. Moreover, the clause as a whole was not written in terms which were designed to undo the effect of conditions precedent and to create cover where none existed. It followed that the judge had been right to say that the fourth presentation having been out of time was thus ineffective.
TOULSON LJ gave a concurring judgment.
SIR RICHARD BUXTON concurred with Rix LJ save to Rix LJ’s conclusion that an earlier letter of the insured given on 31 August 2001 was an effective notification to the insurers.
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