16th August 2010
The Claims Conditions could be described as the “ultimate elephant trap”. Time and again Insureds find themselves without cover because the insurers claim that they have failed to comply with the claims notification conditions.
First of all there is a very good reason why Insureds fall into the trap. It is well known that when a claim or circumstance is notified to a PI insurer it automatically assumed that there will be an increased premium or excess at the next renewal. This is a considerable disincentive for Insureds to notify circumstances or claims unless they are fairly sure that they absolutely have to do so. In fact this assumption is erroneous. Very often the insurers will not increase terms unless there is a good reason to do so.
This is a good reason for not placing the PI insurance yourself but rather engaging one of the BIBA Accredited Brokers to it for you. They can make a better representation of your case, independently, than you can usually make for yourself and by doing so avoid unreasonable and premature premium increases along with explaining the implications of the most important policy terms and conditions. It is never a good idea for a physician to try to heal himself. So with your PI insurance. Do not assume that you are your own best adviser when it comes to placing your insurance, or more importantly, defending your own claims. Objectivity is essential at these times and this is best supplied by an independent expert.
Understanding the scope and power of the claims notification conditions is essential not only to whoever buys the policy on behalf of the firm but also to everyone in the firm who may be in a position to recognise and therefore responsible for notifying, a circumstance that could give rise to a claim.
The function of the Claims Condition.
Typically, a Claims Condition will include:
- Your obligations regarding the notification of a Claim.
- Your obligations regarding the notification of a Circumstance
- Time limits regarding the notification of Claims or Circumstances
- The nature of the information that must be notified
- To whom the notification must be given
- Insurers’ rights in respect of a claim.
This list is not exhaustive and sometimes key elements of this information will appear in other parts of the Policy such as the Insuring Clauses or the Definitions. It is also important to note that the relevant condition(s) may not be called the Claims Clause.
It cannot be over emphasised that you must be aware of and comply with all conditions concerning claims.
“As a condition precedent to the right to be indemnified under this policy the Insurer must be Notified as soon as practicable during the Period of Insurance:
- of any Claim;
- regardless of any previous notice, of receipt of any Claim Form, Particulars of Claim, Arbitration Notice or any other formal document commencing legal proceedings;
- of any circumstance(s) of which the Insured shall become aware which is (or are) likely to give rise to a Claim supplying full details of the civil liability, its date, the name(s) of the potential claimants, the name (s) of the individuals involved and the potential amount involved;
- of any circumstance(s) of which the Insured shall become aware which is (or are) likely to give rise to an entitlement to be indemnified under this policy supplying full details of the act, omission, event, transaction or loss likely to give rise to an entitlement to indemnity.
In the event that the Insurer is Notified during the Period of Insurance of any circumstance(s) which in the Insurer’s reasonable opinion is (or are) likely to give rise to a Claim or an entitlement to be indemnified under the policy then any subsequent Claim which arises directly from the circumstance(s) so Notified shall be eemed to have been made during the Period of Insurance”.
Note the following points;
It is not, in this example, called the “Claims Clause” but “Notification”.
This is simply a matter of labelling but it does indicate the importance of understanding the substance of the clause.
It is a “condition precedent to the right to be indemnified”.
This is important because until the terms of this clause have been fulfilled there is no right to any benefit under the terms of the Policy. The breach does not need to be of any importance, the insurers’ position does not need to have been prejudiced; the simple fact of a breach means there is no right to indemnity.
Notification must be made “as soon as practicable” and “during the Period of Insurance”
This puts a limit to the time available to notify a Claim or a circumstance. The clause may say, instead, any of the following:-
- “as soon as practicable” – a term that is subject to the usual rules of interpretation which take into account all relevant circumstances such as the availability of information.
- “Immediate” – a term that is subject to the usual rules of interpretation but implies a shorter time than “as soon as practicable”.
- . “Within 14 days” this term (or one specifying any other period of time), requires absolute compliance to the day; this will generally be enforced by the Courts. The slightest amount of time in excess of the fourteen days will allow the Insurer claim a breach of the condition and avoid paying the claim.
4. The clause requires notification “during the Policy Period”. In the absence of any “days of grace” (which are not a usual feature of a PI policy), this means that there is no cover for claims notified after the policy has expired. This applies even if the claim/circumstance became notifiable only a matter of hours before expiry.
5. The clause then lists what must be notified.
- a “Claim”, What constitutes a Claim should be defined under the heading “Definitions”.
- receipt of any Claim Form, Particulars of Claim, Arbitration Notice“any other formal document commencing legal proceedings”. This is regardless of any other notice that may have been given.
- a circumstance likely to give rise to a claim; this term is sometimes defined and sometimes not. It will be interpreted in accordance with the normal use of English.
- a circumstance likely to give rise to entitlement to indemnity
NB The expression “likely to give rise to a claim” has been held to mean “at least 50% likely”.
The expression “may give rise to a claim” has been held to mean “less than 50% probability”.
The expression “could give rise to a claim” is the most onerous.
6. Finally, there is a paragraph setting out the effect of notification; however, there is an important proviso in it.
“In the event that the Insurer is Notified during the Period of Insurance of any circumstance(s) which in the Insurer’s reasonable opinion is (or are) likely to give rise to a Claim or an entitlement to be indemnified under the policy then any subsequent Claim which arises directly from the circumstance(s) so Notified shall be deemed to have been made during the Period of Insurance”.
There are two important features in this:
- it confirms that subsequent claims arising from the notification will be deemed to have been made during the policy.
- the expression “which in the Insurer’s reasonable opinion is (or are) likely to give rise to a Claim or an entitlement to be indemnified under the policy” gives the insurer a right to refuse to accept a notification if the Insurer does not think it is reasonable. There are serious weaknesses for the Insured in this clause and it is not to be recommended.
Claims and Circumstances- the difference
The distinction between a Claim and a Circumstance is important.
A Claim is a formal decision by a third party to hold you liable for the consequences of something that has allegedly caused them loss or damage.
It may be in the form of a Claim form (formerly a writ) or a letter or even a verbal communication.
A “Circumstance” is something that can reasonably be foreseen as capable of giving rise to a formal claim. This can include a threat on the one hand or, on the other, a recognition by you of a mistake that has been made, of which the Client (or third party potential claimant) have no appreciation or knowledge at the relevant time, but that you recognise that could develop into a claim given the right conditions. The difficulty that arises concerns the fact that whereas the test as to what does or does not constitute a claim is an objective one, the test for what does or does not constitute a “Circumstance” is a subjective one and both the insured and the insurer may have different views.
POINTS to CONSIDER
- Are there any time limits and can you live with them?
- What obligations do the claims conditions impose upon you?
- Are there any definitions relating to key terms in this clause? if so
Do they alter your understanding of what is covered and what you must do?
- Are the conditions, “Conditions Precedent”?
- Are there other clauses in other parts of the policy that affect the workings of this clause?
- Does your office/business run in a way that can accommodate the requirements of the Policy and the Claims notification Clause in particular?
Claims notification conditions must be capable of being complied with and depending on the size and infrastructure of the firm it may be necessary to negotiate special claims notification provisions that meet the practical issues of achieving compliance.
This can include giving you authority to deal with certain types of amounts of claim without immediate reference to insurers or other procedures by which the governance of circumstances and claim recognition can be properly controlled. Insurers are very often willing to negotiate on these matters to mutual benefit.