UK & Europe
Insurance & Reinsurance
Court of Appeal allows insurer's appeal regarding notification of circumstances
The claimant insured is a company specialising in the installation of swimming pools. It notified a problem with moveable "booms" (walls which divide a pool vertically into different swimming zones) under its 2006/7 policy (the policy required notification after the insured became aware of "circumstances which might reasonably be expected to produce a Claim"). At the time of notification, it thought the problem was caused by steel tanks within the booms. The tanks were then replaced by inflatable bags but that solution then failed and a problem with the bags was notified under the insured's 2007/8 policy with the same insurers.
The insurers sought to argue that all losses fell within the 2006/7 year, but that argument was rejected by Moulder J, on the basis that an insured can only notify a problem of which it is aware and because there was no causal link between the notified circumstances and the later problem with the bags. The insurer appealed that decision and the Court of Appeal has now allowed that appeal. It held that:
(1) Although an insured must know of circumstances which might produce a claim "that does not predicate that the insured needs to know or appreciate the cause, or all the causes, of the problems which have arisen, or the consequences, or the details of the consequences, which may flow from them". An insured can notify a problem in general terms, without fully appreciating its cause or potential consequences. The circumstances which were notified here under the 2006/7 policy were simply that there was a problem with the booms. It made no difference that the exact cause had not been properly identified at that time. Put another way, "you can notify a problem even if you are not aware of the solution". The Court of Appeal advised that "it would not be appropriate…to over-analyse the problem by dissecting every potential problem as different "notifiable" circumstances".
The insured sought cover for works carried out to mitigate the risks of a potential third party claim based on the failed booms. The third party claimant would not have cared what the technical reason was for the non-functioning of the booms. What matters is that the third party claim, and not the mitigatory works, arise from the notified circumstances.
(2) Furthermore, the potential third party claims were causally linked to the circumstances notified under the 2006/7 policy. If it had not been for the repeated failures of booms incorporating tanks, there would have been no need to install bags. Furthermore, it was held that the requirement for a causal link "is not a particularly demanding test of causation".
As a result, all the losses fell within the 2006/7 policy year: this worked to the insurer's benefit as the total losses exceeded the policy limit of £5 million for both years.
COMMENT: Notification arguments cut both ways: sometimes insurers will seek to argue that an insured has breached a notification condition precedent by notifying too late, sometimes they will seek to argue that a notification has been made too early. Although insurers dislike "blanket notifications" which are too wide, and made too early, to enable them to set an appropriate reserve, this case again confirms that notification of a "can of worms"-type situation is valid, provided that the insured is aware of a problem which might reasonably be expected to produce a third party claim (even if the insured does not yet know what the cause of the problem, or its consequences, might be). Unusually, though, in this case, a "can of worms" notification worked to the benefit of the insurer rather than the insured (although, crucially, the insured was not left without any cover at all).