Getting Out of the Deep End
Court Decision on Assessing the Scope of Notification under a Professional Indemnity Insurance Policy
Euro Pools PLC v RSA and Sun Alliance Insurance Plc  EWHC 46 (Comm)
In a claims-made policy, the insurer's obligation to indemnify is triggered not by the occurrence of a loss, but by a third party making a claim against an insured. The insured is also normally obliged to notify the insurer of 'circumstances' which may give rise to a claim in the future. So, if the insured notifies the insurer of the relevant 'circumstances' in year 1, the resulting claim will be deemed to have been made in year 1. Consequently, the year 2 policy will exclude claims that arise from those 'circumstances' (which were notified in year 1).
In this recent English decision, the court had to decide which of two policy years a claim fell under.
The Claimant, Euro Pools, is a company which specialises in the design and outfitting of swimming pools. The pools were designed with movable floors, so that the depth can be increased and decreased. The design was insured under a "Design and Construct" professional indemnity insurance policy provided by RSA which renewed annually. This case concerns the policies for the period between June 2006 - June 2007 (1st Policy) and June 2007 - June 2008 (2nd Policy). Both policies had a limit of indemnity of £5 million. The policies contained a clause requiring notification to be given "…as soon as possible after becoming aware of circumstances…which might reasonably be expected to produce a Claim…Any Claim arising from such circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given."
During February 2007, Euro Pools discovered a major design fault with the "booms" (vertical walls used to divide a pool into different swimming areas), where the bottom of the tank was not airtight, resulting in the booms not raising and lowering as intended. This design fault was discussed with RSA during a meeting at which it was recorded that "…the bottom of the ballast tank in the booms has failed…looks like a failure is of original bracing…other options is to install what looks like a balloon/bag into tanks." This was noted in Euro Pools Proposal Form (during policy renewal) as circumstances which may give rise to a claim, which could be resolved within the policy excess by fixing the problem with inflatable bags.
During May 2008, Euro Pools experienced problems with the inflatable bags which led to Euro Pools informing RSA that they would need to redesign using a hydraulic system (rather than one using air in inflatable bags) and sought cover for the cost of doing so. Euro Pools notified this new issue as a circumstance under the 2nd Policy year.
As the 1st Policy was already exhausted, it was in RSA's interest for the claim to attach to the 1st Policy. The Court had to consider which of the two policy years the claim fell under.
Moulder J decided that Euro Pools' claim in relation to the change to the hydraulic system which was validly notified in the 2nd Policy year, did not fall within the scope of the 1st Policy in circumstances where Euro Pools "…was not aware in February 2007 of problems with the air drive system such that it could not notify the circumstances which led to a claim for the expenses of the move to a hydraulic system."
The Court relied on Kajima UK Engineering Limited v The Underwriter Insurance Company Limited  EWHC 83(TCC) where Akenhead J set out the principles in relation to notification:-
(1) "…it is only circumstance of which the Insured is actually aware which can be the subject matter of a notification…the factual context is important, not only as a matter of interpretation of the notification but also, because it is only matters of which the insured is aware that can form the basis of a valid notification…" and
(2) "...there must be some causal, as opposed to some coincidental, link between the notified circumstances and the later claim…the claim which is later pursued must arise not only from the notified circumstances but also only from the circumstances of which the Insured was aware. It cannot arise from any other circumstances which may have happened or been discovered either after the notification or in any event after the expiry of the insurance cover."
In this case, although certain problems were known and notified by Euro Pools to RSA during the 1st Policy year, other problems only came to light during the 2nd Policy year and those problems were validly notified under the 2nd Policy. Furthermore, expert evidence confirmed that there was no causal link found between the different issues (i.e. between the failures in the tanks which arose as a result of the failure of the welds in the tanks, and the decision to abandon the "air drive system" to the hydraulics system).
This case illustrates the difficulties that can arise when notification takes place during the course of a developing problem (notifiable event). It is possible to notify an awareness of a general problem at the time of the first notification (i.e. with one aspect of the swimming pool design) but only become aware of problems with another aspect when changes to rectify the first problem are introduced (i.e. change to hydraulics systems).
On the basis of this decision, the insured should notify the insurer of circumstances which might reasonably give rise to a claim in general terms, and be careful to make separate notifications (under a subsequent policy) in case the subsequent problem (notifiable event) turns out to be different. The principles in this case are likely to impact upon the interpretation of the notification of circumstances under professional indemnity policies in Hong Kong.
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