HLB Kidsons v Lloyd's Underwriters
Kidsons, a firm of chartered accountants, claimed under its professional indemnity policy in respect of claims made by clients relating to Solutions at Fiscal Innovation Limited (S@FI), a company owned and managed by the firm. S@FI marketed tax avoidance schemes which proved to be fundamentally flawed in their design and conception.
Kidsons' insurance policy ran from 1st May 2001 to 30th April 2002. The issue was whether Kidsons had validly notified insurers about "circumstances" of which it became aware during that period that might give rise to claims against the firm.
During the summer of 2001, one of the insured's tax managers raised concerns about a particular S@FI product, but also queried S@FI's methodology and suggested other S@FI schemes should be reviewed.
On 29th August 2001, Kidsons' board decided to review the product and notify insurers. The general view, however, was that the manager's wider concerns were unjustified. The subsequent investigation was confined to the particular product.
On 31st August, Kidsons wrote to its brokers stating that "a tax manager… has expressed the view that the Inland Revenue, if minded, could be critical of some procedures followed in certain cases" and that the board intended to investigate. The letter continued: "this might be regarded as material information for insurers". The brokers presented the letter to insurers on 27th September.
In March 2002, a further letter reported on the outcome of the investigation, stating that the "technical efficiency" of the product was accepted, "but in some instances there might be procedural difficulties involving the trustees for each scheme". This was presented to insurers in April 2002. The full extent of S@FI's problems,however, did not become apparent until September 2003.
This was a "claims made" policy, in that it responded to claims first made against the insured during the policy period. General condition 3 stated it was a condition precedent to the insured's right to an indemnity that Kidsons give insurers notice "as soon as practicable" of any claim made against the firm.
General condition 4, however, was a standard "circumstances" clause, requiring the insured to give insurers notice "as soon as practicable of any circumstances of which they shall become aware during [the policy period] … 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 policy period] … shall be deemed for the purpose of this insurance to have been made during the subsistence hereof."
Had the insured made a valid notification of a circumstance during the policy period? Kidsons said it had. In any event, the circumstances clause was not a condition precedent to its right to an indemnity (unlike general condition 3), so even if it had not notified as soon as practicable, it was still entitled to be paid.
The judge disagreed. The clause extended cover for claims made after the policy period, but this was contingent on notice of the circumstance having been given as soon as practicable.
Although not expressed as a condition precedent, it was clearly a condition precedent to the extension that the required notice had been given.
Most PI policies specify that such notice must be given during the policy period. This one did not, but the judge was satisfied that, given the "claims made" nature of the cover, this was clearly the intention, otherwise new claims or circumstances could be notified long after the policy expired.
A circumstance which "may give rise to a claim" against the insured is one which creates a reasonable and appreciable possibility of such a claim.
Whether notice has been given depends, not on the subjective intention of the insured, but on whether a reasonable recipient would understand that the insured was purporting to give notice of a circumstance for the purposes of triggering coverage under the policy.
On the evidence, the judge was satisfied that, in August 2001, the firm was sufficiently aware of wider concerns about the whole S@FI operation to notify insurers of a circumstance, whether or not the board thought the concerns were justified.
But she found the letter of 31st August "coy in the extreme". It failed to identify any error, act or omission by the insured or any potential claimant who might suffer loss as a result. It did not even state that the insured was notifying a circumstance which might give rise to a claim. A reasonable recipient would have had no idea what circumstance, if any, was being notified.
The judge held that no notification took place until April 2002 and that only covered the particular product that had been the subject of the review, not the wider problems. Any claims relating to S@FI's other activities had not been notified until after the policy expired and so were not covered by the insurance.
Whether or not to notify a circumstance - and in what terms - can be a tricky decision for an insured. This case highlights the perils of getting it wrong.
Whatever its views on the merits, an insured should take care that any notification of a circumstance is made promptly and in as clear and detailed a manner as possible.
Each case will depend on its own facts, but the notice should make it plain that the insured intends to trigger the cover, identify as far as possible the act or omission on which it is based and any potential claimants who might suffer loss as a result.