Notification in the context of excess of loss insurance

Introduction

Excess of loss insurance (EOL) provides insurance cover where the primary (or primary layer) insurance is ‘maxed out’. This will either be because an individual claim exceeds the per-claim limit of indemnity under the primary layer, or because the aggregate limit of indemnity for all claims has been reached.

EOL is an important product, and increasingly so. The world is becoming more expensive, and the level of cover provided under primary layer policies will often not be enough. This is especially so for businesses requiring employers and public liability insurance, because the 2017 reduction to the Ogden discount rate meant a dramatic increase to the size of injury claims.

This article, based on a seminar given at the Gatehouse Insurance Seminar earlier this year, discusses the topic of notification: in what circumstances do insureds need to notify EOL insurers of claims or potential claims?

Notification clauses

Insurance policies will typically require the insured to give prompt notification of claims to the insurer. There are several reasons for this, but in general it is in insurers’ interest to know about their (potential) liability sooner rather than later.

Sometimes, the policy will provide that prompt notification is a condition precedent of cover. This means that, if the insured fails to notify promptly, then the insurer will be released from its obligation to provide cover for the claim in question.

If the duty is not framed as a condition precedent, then it will either be a warranty or an innominate term. If it is a warranty, then the insurer would need to demonstrate that it suffered loss that is compensable in damages, which could then be set off against the insured’s claim. In practice, a set-off of this nature is very rare. The only reported example is Milton Keynes BC v Nulty [2011] EWHC 2847 (TCC). If the term is an innominate term, then there are two possible remedies for the insurer depending on the seriousness of the insured’s breach. In ‘serious’ cases, the insurer will be given the right to terminate the policy as a whole (though almost certainly not the right to decline just the claim in question: see Mance LJ and Sir William Aldous in Friends Provident Life & Pensions Ltd v Sirius International Insurance Corp [2005] EWCA Civ 601, considered further below). In less serious cases, the remedy will be damages, as is the case with warranties.

Notification issues most frequently arise in liability policies. This is partly because of the importance insurers place on being given early notice of third-party claims, but also because liability policies are typically made on a claims-made basis, meaning that the cover is triggered not by the insured’s liability to the third party being ascertained (by either judgment, arbitral award or settlement), but rather by the prior occurrence of the third party making a claim against the insured. Additionally, claims-made policies typically oblige (and entitle) the insured to notify the insurer of “circumstances” – i.e. events, occurrences or states of affairs which may, or are likely to, give rise to a claim in the future.

It is often difficult to say whether a notifiable “circumstance” exists, or, if it has been notified, whether or not a subsequent claim “arises out” of that circumstance.

Notification to EOL insurers

As set out above, EOL insurance provides cover for claims whose magnitude exceeds the level of cover provided by the primary layer insurance. The majority of claims will be covered in full by the primary layer, and one may think that EOL insurers will only be interested in those (comparatively few) claims whose size reaches the layer in question.

One should not assume, however, that it is only large claims that need to be notified to the EOL insurer. Care must be taken by insureds – and their brokers – to review the notification provision and the notification threshold of the EOL policy. Some EOL policies will require notification of all claims and circumstances – even ones that are highly unlikely to exceed (or result in a claim exceeding) the primary layer. Other policies will only require notification of claims that are likely to reach the excess layer in question. A typical example (taken from an AXA policy online) might be: “You must give us notice as soon as practical of any claim which could reasonably be anticipated to exceed 75% of the underlying limit.”

The best-known decision that considered the issue of notification to an EOL insurer is the Friends Provident v Sirius case referred to above. The insured was the successor to a pensions advisory business formerly carried on by the London and Manchester Assurance company (LMA). In around 1993, LMA was being investigated by the pensions regulator for alleged mis-selling. In due course LMA was required to pay sums totalling £9m to various clients. The issue was whether LMA’s liability was covered by its EOL insurers for the 1993-94 policy year, even though the liability to pay compensation was not imposed until a date that fell within a later policy period.

The insured’s case was that the liability attached to the 1993-94 policy by virtue of its disclosure during the renewal of its 1993-94 policy of the regulatory investigation. This, it argued, had the effect of engaging a term of the EOL policy which deemed claims arising from circumstances notified in accordance with the policy to have been made during the policy period.

It was common ground that the relevant disclosure was only made to the primary layer insurers, not to the EOL insurers. What was in dispute was whether this was enough to engage the deeming provision of the EOL policy.

The relevant term required notification to be given to “the Underwriters”. However, that term was not incorporated into the EOL policy directly; rather, it was incorporated by virtue of the fact that the EOL policy was stated to be subject to the same conditions as the primary layer policy. What was not made clear, however, was whether, after being transposed to the EOL policy, the words “the Underwriters” meant the underwriters of the primary policy, or whether they became contextualised so as to mean the underwriters of the EOL policy.

The Court of Appeal, in agreement with the judge below (Moore-Bick J), decided in favour of the insured. The lead judgment was given by Mance LJ, who placed particular weight on the fact that the EOL policy had its own notification clause, which required notification of claims or circumstances “likely” to give rise to a claim “if it appears likely that such claim(s)… may exceed the indemnity” under the primary policy. In Mance LJ’s view, the fact that there was a distinct notification requirement in the EOL policy, with its own threshold (“likely to give to a claim” rather than “may give rise to a claim”), militated against the EOL insurers’ argument that they also required to be to notified under the separate notification clause that was incorporated by reference from the primary layer policy. Put shortly, it would make no sense for the EOL policy (in effect) to have two notification clauses containing different notification thresholds.

What this meant in practice was as follows. Suppose that an insured has a primary policy with a £1m limit, and a £5m excess policy. If a circumstance arises that may, but cannot be said to be likely to, give rise a claim, then, in accordance with the notification clause in the primary policy, the insured only has to notify the primary layer insurer in order for claims to attach to both the primary and excess layer policies. However, as soon as it both (a) becomes “likely” that a claim will arise out of the circumstance and (b) likely that such a claim may be for more than £1m, then, pursuant to the notification clause in the excess policy, the insured must additionally notify the EOL insurer.

What Friends Provident v Sirius demonstrates is that the question of whether and when EOL insurers need to be notified of claims and circumstances is not necessarily straightforward. Care should therefore be taken by insureds and their brokers of what is required. In particular, it should not be assumed that it is enough to notify the primary layer insurer.

Article by Tom Bell.