Giving notice to policy concerns

The recent Court of Appeal decision in the Kidsons litigation serves as a warning to insureds concerning the dangers of being 'coy' in notification, as David McCarthy explains

The case of HLB Kidsons v Lloyd's Underwriters and Others (2007) concerns efforts made by chartered accountants - former partners of Kidsons - to inform underwriters about tax avoidance schemes marketed by Kidsons' subsidiary, Solutions at Fiscal Innovation. These efforts occurred in the run-up to expiry of Kidsons' liability insurance, around the time of its merger with Baker Tilly in 2002.

The dispute was a contest about notification, based on a claims-made policy that was described as "unsatisfactory" and as having "a patchwork of provisions that do not all fit well together". The policy had an extension of coverage for circumstances first notified during the policy period. General condition four said: "The assured shall give to the underwriters notice as soon as practicable of any circumstance of which they shall become aware during the period specified in the schedule, 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 period specified in the schedule, shall be deemed for the purpose of this insurance to have been made during the subsistence hereof."

Kidsons now faces substantial mis-selling claims relating to the schemes. The essential issue for the appeal was, therefore, whether Kidsons gave effective notification of a circumstance, of a sufficient width, for the policy to now respond to these claims.

Voicing concerns

The difficulty about identifying whether a circumstance had been notified stemmed from the fact that no claim was ever intimated against Kidsons during the policy period. Rather, the potential notification occurred due to the voicing of internal concerns by a tax manager, Mr Torrance. Kidsons set up an independent review body to investigate, starting with a product known as the discounted option scheme.

A letter about Mr Torrance's concerns of 31 August 2001 was sent by Kidsons to its placing broker. The trial judge described the terms of this letter as "coy in the extreme". By late September 2001, a draft report from the independent review body had been presented; Kidsons appeared satisfied that implementation of the discounted option scheme was the only concern.

A further letter of 28 March 2002 was sent by Kidsons, which advised of a general view that this scheme was technically efficient, but in some instances there might have been procedural difficulties with its implementation. Based on Kidsons' two letters, there were four presentations (see box).

The trial judge held that the third presentation was the only effective notification, but it was limited to procedural problems in relation to Solutions at Fiscal Innovation's discount option schemes, and only to the two lead syndicates and the company market. In the case of the first and second presentations, she took the view that the 31 August letter was not effective because it was "too vague and nebulous" and was deliberately written in "coy and restrictive terms". The judge concluded the fourth presentation was too late.

Court of Appeal

Lord Justice Rix in the Court of Appeal noted that general condition four said nothing about how a notification was to be made, other than that it must be in writing and be given "as soon as practicable" after awareness. This he characterised as a "fairly loose and undemanding test". In his judgment, it was entirely irrelevant that Kidsons, from late September 2001, may have lacked "a genuine belief" - based on the draft IRB report - that claims might ensue.

Lord Justice Rix also commented that if there was a valid point about the ineffectiveness of Mr Torrance's concerns, by themselves, as "circumstances", this point had not been taken by the underwriters. On that basis, the majority of the Court of Appeal held the letter of 31 August 2001 was, in the absence of any allegation of breach of good faith, an effective notification.

Kidsons argued that the second presentation was a notification that extended to the whole gamut of Mr Torrance's concerns. The Court of Appeal rejected this argument and held that a reasonable reader of the 31 August letter would only believe underwriters were being notified of Mr Torrance's view that the 'procedures' relating to the schemes could be criticised, rather than the actual 'products'. They concluded the second presentation notified the two lead syndicates that implementation of the schemes might be criticised, not just the DOS one.

The Court of Appeal regarded the 28 March 2002 letter as merely updating the second presentation with respect to the concern about the implementation of DOS.

The Court of Appeal agreed with the trial judge that the fourth presentation to the Lloyd's following market was not made as soon as practicable. It also construed the second sentence of general condition four as a condition precedent extending to the timing of the notice required. It is clear that this conclusion was driven, in large part, by the concern that to find otherwise would have turned a claims-made policy on its head.

Points to consider

The strong message to insureds is that in notifying circumstances, they must ensure the terms of any notification is a fair summary of what they know. Attempts to water down the terms of any notification run the risk it will not, when construed objectively, be effective to trigger coverage. Attempts to 'test the waters' by notifying underwriters on the placing side, rather than through their claims department, could also detract from the objective appearance of a circumstance being notified.

Substantial delays occurring between notifying lead underwriters and the following market of circumstances must be avoided. Brokers, therefore, need to ensure that notifications are timely to all underwriters in the market.

In this era of contract certainty, this case also serves as a timely reminder that having a full policy wording in place is not the answer to all evils. Care needs to be exercised to ensure that all of the provisions in the policy sit comfortably together. This will minimise the risk that extensive - and expensive - arguments about how the policy is to be construed are needed after the event.

The four presentations

1. On 27 September 2001, the placing broker showed the letter dated 31 August to the underwriter for the lead syndicate.

2. During October 2001, material, including the 31 August 2001 letter, was presented to claims staff of the two lead syndicates.

3. During April 2002, material, including the 28 March letter, was presented to the lead syndicate and the company market.

4. In July 2002, material, including the 28 March letter, was presented to Xchanging Claims Services, Lloyd's market processing company, on behalf of the following Lloyd's market.

- David McCarthy is an associate director in the insurance and reinsurance group of Berwin Leighton Paisner.

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