Insurance claim notification - hornets nests and cans of worms

In Ahmed & Ors v White & Company (UK) Ltd & Anor the court considered whether a number of claims alleging professional negligence by an insolvent accountancy firm had been properly notified to a PII policy.

Summary

In Ahmed & Ors v White & Company (UK) Ltd & Anor the court heard a coverage dispute relating to the purported notification of a variety of claims and circumstances arising out of advice on tax mitigation schemes by an insolvent insured. It was held that while specific claims and circumstances in relation to negligent advice on specific investments had been notified to insurers, these notifications were limited in scope and, in the majority of instances, were not considered to be a “block” or “hornet’s nest” notification. Further, communications with a law firm instructed on a dual retainer to defend the insured’s position on specific third-party claims were determined not to constitute a valid notification to insurers.

Background

Individual investors alleged that advice from a chartered accountancy practice (White & Co - the insured) in respect of accountancy, investment and/or tax matters was negligent, and/or that secret commissions were paid. Following the insured’s insolvency the claimants pursued its professional indemnity insurer, Allianz, under the Third Party (Rights Against Insurers) Act 2010.

The claimants asserted that a number of documents (individually and in combination) were to be construed as notifying insurers of circumstances, namely that the insured’s tax and/or investment advice to clients (whether named or not) may give rise to claims. Alternatively, that the circumstances were a “hornet's nest notification” and so “did not require specificity as to the quantum or character of the potential claims”.

The Policy provided that:

• the Policyholder shall as soon as reasonably practicable during the Policy Period notify the Insurer … of any circumstance of which any Insured becomes aware during the Policy Period which is reasonably expected to give rise to a Claim. (emphasis added); (The ICAEW 2016 Minimum Terms, on which the claimants would have been entitled to rely if more favourable to the insured than the Policy, provide for notice in writing in broadly the same terms).
• the notice must include details of the claim(s) and the date and manner by which the insured became aware of it/them, the reasons a claim is anticipated, and a statement that the notice is “intended to serve as a notice of a circumstance of which an Insured has become aware which is reasonably expected to give rise to a Claim”; and
• as long as proper notice has been given in accordance with these terms, “any later Claim arising out of such notified circumstance (and any Related Claims) shall be deemed to be made at the date when the circumstance was first notified …”

Notification

There was no dispute as to the fundamental principles that apply in relation to notification (cf. Gloster LJ in Euro Pools plc (in Administration) v Royal & Sun Alliance Insurance plc), as follows:

(1) A deeming provision relating to notification is to be construed and applied with a view to its commercial purpose, namely “to provide an extension of cover for all claims in the future which flow from the notified circumstance”;

(2) Consistently with that purpose, a provision which refers to circumstances that "may" give rise to claims sets a deliberately undemanding test;

(3) a notification need not be limited to particular events - the insured may give a "can of worms" or "hornet's nest" notification, namely the “notification of a problem, the exact scale and consequences of which are not known” (Euro Pools);

(4) A requirement of the notification of circumstances of which the insured is or becomes aware “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” (Euro Pools, citing McManus v European Risk Insurance Co);

(5) Where proper notification of circumstances is given, any claim arising out of the notified circumstances will be considered to have been made within the requisite period of insurance but there must be a causal (rather than coincidental) link between the notified circumstances and the later claim;

(6) Conventional principles of interpretation are to be applied when construing a communication to determining whether it is a notification and, if so, its scope.

The arguments on notification centred on:

• the “Akbar Letters”, namely documents and correspondence with the insured in relation to proposed claims and a disclosure request by a small number of claimants (the “Akbar claimants”) in relation to specified companies/schemes;
• a “Block Notification”, which notified an enquiry from HMRC (and subsequent exchanges) in relation to a discrete issue arising in relation to the timing of relief being claimed under several schemes; and
• the “Kennedys Documents”, comprising communications with Kennedys, the law firm instructed by insurers and engaged on a joint retainer to defend claims by the Akbar claimants.

The court held that the passing to insurers of the “Akbar Letters” was the clearest notification of specific claims, in the sense of a written demand for compensation in respect of wrongful acts. The Akbar Letters contained claims from eight individuals who made allegations in relation to specific investments and coverage in relation to these individual investments was not in issue in the proceedings. However, the court did not consider that the Akbar letters constituted a notification of a wider set of circumstances (i.e. putting insurers on notice of a general issue with the advice given by White & Co). The contents of the Akbar Letters were not to be interpreted broadly, but was to be looked at on the face of the words used. There was no suggestion in the letters that there may be greater problems than those identified, or an implication that there were other claims to be brought. Whilst there is nothing in principle to prevent the same communication being both notification of one or more claims and a notification of circumstances (although this should be made clear on the face of the notification), these documents were a notification of specific claims.

The Block Notification was not valid notification of circumstances which might give rise to claims against the insured. However, as it expressly referred to work undertaken by a separate firm and, as such, did not put insurers on adequate notice of broader, potential claims against White & Co.

The Kennedys Documents did not constitute a valid notification to insurers. Kennedys' express retainer related to the investigation and defence of the claim notified by virtue of the Akbar Letters; its role in receiving documents and sending them to its co-principals was easily explained by its performance of its role pursuant to the joint retainer. The court rejected the argument that Kennedys sent certain emails and/or passed on documents to insurers as the agent of the insured (not least, this would have created a potential conflict in acting on defence and coverage). The Policy contained a condition precedent requiring notification by the “Policyholder” and, as the documents were sent by Kennedys, this requirement was not met. In reaching this conclusion, the court discussed the decision in Barrett Bros (Taxis) v Davis [1966] 1 WLR 1334, which determined that an insurer learning of the relevant matters by other means would be sufficient (even where the Policy required the Policyholder to notify). The court expressed doubt on this decision in view of more recent authorities and considered that it should be confined to its facts.

Had the Kennedys Documents been validly notified, then taken together they would have provided a hornet's nest notification of circumstances. The Kennedys Documents “give every impression that the broader range of issues referred to may well give rise to claims, albeit that the details of those claims cannot be given” and do describe a problem, "the exact scale and consequences of which are not known" in the words of Gloster LJ (see Euro Pools).

Aggregation

The Policy contained a “Tax Mitigation Endorsement” by which, in respect of tax mitigation schemes, any Related Claim made after expiry of the Policy Period will be accepted by insurers as having been made and notified at the same time as the notified claim or the relevant circumstance, with all Related Claims deemed to be one Claim. "Related Claims" are defined as meaning "any Claims alleging, arising out of, based upon or attributable to the same facts or alleged facts, or circumstances or the same Wrongful Act, or a continuous repeated or related Wrongful Act."

The court held that the Related Claims provision acts so as to aggregate all claims based on particular investments, where the insured’s advice that investment was compliant with the legislation was the same in each case, but not otherwise. The use in the definition of Related Claims of the word “same” in respect of the unifying factor of “fact(s)” or “alleged fact(s)” and “circumstance(s)” is a bar to aggregating where the claims relate to advice given to different investors or relate to advice given to the same investor in different tax years. The word “same” significantly qualifies the Related Claims provision, so that it must be distinguished from a mere similarity of circumstances, and it cannot be shown here that the advice given to different investors (or to the same investors but in different tax years) was identical.

Commentary

Whilst not breaking any new ground, given the number of different approaches to the question of notification by the claimants the court ‘s analysis provides a useful reminder of the principles that apply to notification of claims and circumstances, as set out in the Euro Pools decision.