New Page on NT Cases

I have started today to build a new page here which will list all the relevant decided cases on the notification term in insurance contracts.

A Biter Bit

It is three years old now, but the decision in Dornoch Ltd & ors v Royal & Sun Alliance Insurance Plc(which I will call "the Coca Cola case") by the London Court of appeal is interesting for at least five reasons. (Hat-tip yet again to both Davies Laveryand Cameron McKenna).

First, it involved a dispute between a well-known insurance company and its own re-insurers.

Second, the dispute demonstrated that even an insurance company can nearly "come a cropper" in one of the many traps for the unwary in every contract of insurance.

Third, the dispute highlighted the difficulties that gave rise to the Contract Certainty project.

Fourth, it involved Coca Cola.

Fifth, it arose from one of those peculiarly American class actions by discontented shareholders unhappy at a loss in the value of their shares.

The insurer Royal Sun Alliance (RSA) provided cover to the Coca Cola Group in respect inter alia of claims that its directors or officers had misled investors. In turn, RSA re-insured its potential liability with Dornoch. The notification term ("NT")in RSA's contract with Dornoch required it to notify it by cable within 72 hours of "any loss or losses which may give rise to a claim". (Note that this language is unusual for a liability policy, which is what was involved here. More usual would be a reference to "circumstances which might give rise" or similar.) Compliance with this term was agreed to be a condition precedent to liability: in layman's language, the claim would not be payable if notification was late.

In October/November 2000, actions were commenced against Coca Cola and three of its directors in the U.S.. It was alleged that Coca Cola's financial well-being had been exaggerated, which had had the usual effect of pushing up its share price. Consequently, the claimant investors claimed to have bought their stock at inflated prices and that they suffered loss when the price fell again. The two actions were notified to RSA on 12 December 2000. On 19 January 2001 RSA informed the Reinsurers of the claims.

That looks pretty late, no ? Just imagine how a lay policyholder would struggle to get out of that one !

The reinsurers unsurprisingly - but incorrectly, as it turned out - believed that they had no liability. RSA disagreed and among the issues that were raised were:

* whose loss was relevant - that of the Coca Cola shareholders, of Coca Cola itself, or RSA's ?

* Had a loss actually occurred before January 19 2001 ?

* If not, did the possibility of a loss trigger the obligation to notify ?

* If it had occurred, when did the loss occur ?

(If you find these questions mind-numbingly boring, insurance coverage law may not be for you ! I find them fascinating, but then I have personal experience of how such issues can have real-world effects.)

Briefly, the result of the trial and appeal was a decision that there had been no notifiable loss, and that the effect of the NT wording quoted above was that there was no obligation on RSA to notify anything less than an actual established loss. Until the aggrieved shareholders proved their case, there was no actual loss established by anyone.

The re-insurers, not unreasonably, protested that to read the NT in this way was contrary to the purpose of such provisions, which is to give early warning of adverse developments. The Appeal Court per Longmore L.J. dealt briskly with this: It was not part of the Court's function to go out of its way to give a purposive construction to allow one party to take advantage of the draconian consequences of a clause where, if the parties had taken appropriate care with its wording, would probably have had very different requirements. Further, it is a well established principle that a party who relies on a clause exempting liability can only do so if the words are clear.

It was also significant, Longmore J. said, that the Reinsurers did not suggest that they had been prejudiced by the late notification. ( I may return to the implications of this observation in another post).

Once again, I recommend that you read the judgment itself - this one is relatively short and well-expressed.

Trap for The Unwary #24,534

"Life is just one damn thing after another" (Elbert Hubbard).

Nearly every insurance contract has a term ("the notification term"or "NT") which obliges the policyholder to promptly notify the insurer once there is even the possibility of a claim arising. It will usually read something like this:

The Assured shall give immediate notice in writing, with full particulars, of the happening of any occurrence likely to give rise to a claim

Such a straightforward sentence, one might think. And the requirement is not unreasonable:

The authorities concerning such clauses recognise that the purpose of [an NT] is twofold. First, it is intended to enable insurers to investigate potential claims at the earliest possible opportunity, before the trail of evidence goes cold, and to take, or require the assured to take, such steps as insurers think appropriate to minimise liability under the policy; see e.g. Pioneer Concrete (U.K.) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd's Rep 274 at 278, per Bingham J; Rothschild Assurance at 22, per Rix J; Friends Provident at paragraph 20, per Moore-Bick J; McAlpine v BAI [1998] 2 Lloyd's Rep 694 at 698, per Colman J; Clarke, The Law of Insurance Contracts, paragraph 17-4D4

(The quotation is from HLB Kidsons (A Firm) v Lloyds [2007] EWHC 1951 (Comm)[2007] which, on what has been my first reading, appears to be a model of clear judicial exposition. Take a bow, Gloster J.!)

However, human nature being what it is, and life being as Elbert Hubbard described, problems arise. In practice, the NT is, or is becoming, yet another hurdle at which policyholders with otherwise valid claims can fall.

In Layher, for example, the issue was how prompt did "immediate" notification have to be. The insurer argued that the notification should have taken place no later than 26th January 1990, even though accepting that the policyholder - a manufacturer of scaffolding components - did not have any knowledge of the incident (an alleged failure of scaffolding) giving rise to the claim at that date. I was reminded of Monty Python's Four Yorkshiremen, one of whom boasted that, in his impoverished youth, his routine obliged him to get up half an hour before he went to bed.

Other difficulties which have arisen with the NT have been whether a notification qualified to be described as such at all, whether one delivered to a branch of the insurer, or to an agent of the insurer, was effective, and whether an occurrence should really have been recognised as likely to give rise to claim (as in Coster).

In the latest case(a grateful hat-tip once more to Cameron McKenna ), a builder ("Kajima")did send a notification in what appeared to be good time, but it was deemed not to have been sufficiently detailed and only part of the builder's claim under the policy was successful.

Akenhead J., of the London High Court, sets out the opposing contentions thus:

In summary, the Claimant's case is that the investigation referred to in the notification led in time (after expiry of the insurance) to further investigations both by JRF's consultants and Kajima's own. Over the years which followed further defects and deficiencies were uncovered resulting in the discovery finally of defects which brought about the final settlement with JRF. Mr Williamson QC for Kajima effectively said that there was a "continuum" from 2001 onwards and the losses, costs and liabilities incurred by Kajima all in effect therefore arose from the notified circumstances. He argued that it mattered not that the defects uncovered as time went on were different from those which were or which gave rise to the specific notified circumstances. In the alternative, he argued upon a narrow basis that at the very least Kajima would be entitled to those losses which were attributable to the specifically notified circumstances.

Mr Catchpole QC and Miss Ansell for TUIC argued that the notified circumstances were relatively narrow. The 'investigation' referred to in the notification was clearly intended to be an investigation into the notified circumstances as opposed to some general investigation into the possible existence of other defects. They argued that the coincidental later discovery of other defects or damage had nothing to do with the originally notified circumstances directly and was not covered by the notification; alternatively such defects or damage and any claim arising from them did not arise from the notified circumstances.

While this was a case with what appear to me to be an unusual set of facts, it does seem odd that a policyholder might lose its cover through a failure, not to notify, but to draft its notification carefully enough.

Are You Sure That You Do Not Have Cancer ?

"Life is a congenital condition", someone once said,"and it is terminal". If this were taken to a logical extreme, health and life insurance would become impossible. Sometimes, though, insurers like to test the logic.

Imagine it: you are in good health as far as you know, confirmed by the recent opinion of your own GP, and someone persuades you, as they do, that you need to buy some life insurance. So, you fill in the forms as diligently and honestly as you can, and the insurance company asks you to undergo a medical examination, which turns up nothing adverse. The policy is issued, but within weeks you have abdominal pains and before long you die of advanced pancreatic cancer.

"Wow, here is a great insurance coverage story" says Boston lawyer Stephen D. Rosenberg(from whom I learned of this case), and who would disagree ?

The life insurance policy contained a term - described as a condition precedent - under which the coverage only applied if the policyholder was in good health at the time of issuance. It was not in dispute that a)the policyholder did not know of his cancer and b) the cancer must have been present at the time of issuance. The life insurer sought to deny the claim, after his death, for the life insurance proceeds on the ground that the good health requirement was not met.

Mr Rosenberg hits it right on the head:

... what applicant would buy coverage, after being examined and having his medical records reviewed by the insurer prior to coverage being approved, if the coverage would vanish if, contrary to the knowledge of both the insurer and the insured, he was thereafter found to be terminally ill ?

The Massachusetts court agreed, but apparently had to discard precedent to do so, which is strange. It apparently invoked the "legitimate expectations of the insured" to do so, which is stranger still to a common-lawyer on this side of the Atlantic: over here, "legitimate expectations" has no place in contract law.

I doubt if the insurer would have succeeded over here, either, but to get the legal analysis right might pose problems.

Suggestions welcome !