16th August 2010
Frequently encountered difficulties
The most frequently encountered difficulties concern:-
- late notification or non disclosure of circumstances or claims
- non-acceptance of a notification of circumstances
- reservation of rights and acting as “prudent uninsured”.
- inadvertent breach of policy conditions
- non disclosure of material information
- the solicitor representing the best interests of the insurer but not the insured
Notification of circumstances and claims
Every PI policy will require you to notify “circumstances” within a specified time limit;. The expressions used concerning notification of circumstances can vary considerably and the expressions can affect the insurers’ entitlement to deny liability.
Notification is a strict obligation and Insurers will often, immediately, deny liability if the obligation is breached. There may be a temptation for the broker to leave notification to the last minute in the hope that the “circumstance” will come to nothing. This often leads to a dispute with the insurer. It is a grave mistake to fail to notify insurers at the earliest moment. The BIBA Accredited Brokers can help to advise what and how to notify a circumstance or claim
Brokers sometimes try to use their business relationship with an insurer to negotiate their way out of a potential claim but this can be dangerous; it can invalidate the insurance intermediary’s PI insurance. If you intend to do this first get the permission of your insurer.
Duty to understand
Unsurprisingly Insurers expect insurance intermediaries to better understand risk and insurance than any other Insured and to:-
- Observe the duty of disclosure and the nature of material information
- Understand and comply with policy terms and conditions.
- Fulfil all regulatory and legal obligations
CAUTION – There are strict notification obligations in Brokers’ PI policies. Experience has shown that many insurance brokers are unaware of just how strict are these obligations. In particular, employees are often unaware of the obligation to notify circumstances. Failure to adhere to these obligations can result in loss of cover and increased future premiums.
Non- Acceptance of notified circumstances
Insurers should never reject a notification made properly and in good faith.
Some insurers are reluctant to accept notified circumstances even when notified in compliance with the policy terms and conditions, because they do not consider them to be sufficiently specific. They are persuaded that they have the right to make a judgement about what constitutes a notifiable circumstance. This is contrary to good practice and very unfair to the Insured who is obliged to notify, unconditionally, in accordance with the terms of the policy. Insureds finding difficulty in notifying a circumstance should seek specialist advice. This is now available to members through BIBA.
This problem has largely been brought about by so called blanket notifications of circumstances that could give rise to a claim. This has occurred most recently in connection with Pension and Endowment mis-selling and it is for this reason that some policy wordings set out a list of more specific information required to notify a circumstance.
For example a broker could report to insurers that they know of 28 clients who may have a claim against them arising from an endowment policy that has been identified in the press as “questionable”. The insurers may well refuse this as being not specific. However, If the broker fails to disclose this material information and later seeks to claim then the insurers at the time will be able to deny liability for late notification or non disclosure of material information. Further, if the matter is disclosed to an insurer then it will be excluded from cover by future insurers.
The points to consider are as follows.
Professional indemnity insurance is on a “claims made” policy basis. This means that a policy must be in force at the time that the notification or claim is made against the insured. That notification must therefore be made within the policy period.
A policy runs from 1January 2006 to 31December 2006. The insured notifies a circumstance that they believe might give rise to a claim on 15 November 2006. No claim has actually been made at th time but the client has not paid their fees to the insured for the past three months and the insured recognises that there are significant difficulties with the client that may give them reason to make a claim. The insurers reject the notification of the circumstances that could give rise to a claim on the grounds that no claim, threat or allegation has been made. If the policyholder accepts the rejection of the notification they run the risk of being uninsured at a later date.
How does this happen? When the insured submits their request for renewal of the policy (or for a new policy with a different insurer) on 1 January 2007 they will be asked if there are any circumstances of which they are aware that could give rise to a claim. They would be obliged to refer to the notification given to insurers on 15 November 2006. The new insurer would automatically exclude any claim arising out of that circumstance from the 2007 policy. If on, say, 20 January 2007, having renewed the policy on 1 January 2007, the matter referred to on 15 November 2006 comes to fruition and results in an allegation, threat or claim then the insured cannot go back to the old insurers and the new insurers have already excluded the claim.
If an insurer rejects a notification you should immediately seek specialist advice .
Inadvertent breach of policy conditions –no excuse
A typical PI policy contains several Conditions that have more impact than may at first be apparent. The Conditions impose obligations upon the Insured which, if not met can entitle insurers to rebut the claim. It is frequently found in the course of managing the claim that the Insured had not appreciated the extent of their obligations until they were pointed out at the time of notification. Some of these concern the interpretation of words, phrases, expressions or definitions but more often than not there is evidence that the Insured had simply not read the policy and understood what is required of them. This is not a mitigating excuse.
Who is the Insurer’s solicitor representing?
The Insured is entitled to expect that the solicitor appointed by the insurers is representing the best interests of the Insured. Where the solicitor is obliged to represent the interests of the insurer before those of the Insured (i.e to advise the Insurer whether the claim falls within the policy, whether any exclusions apply and whether conditions have been breached) there are well established conventions for the management of this conflict of interest.
In brief, the solicitor is representing the insurer when advising whether the claim is covered by the policy and representing the Insured when negotiating the defence of the allegation or claim.
Specialist legal skills are needed to:
- Know when to defend or negotiate
- Conduct a full investigation of the facts and issues
- Gather and analyse relevant evidence
- Liaise between insurer and Insured
It is important that Insurer’s solicitors receive the full cooperation of the Insured at all times. This can be a time consuming and onerous responsibility. Inevitably there are occasions when the Insured feel they are not getting the best advice or service from the solicitor. The Insured is entitled to question the solicitor in these circumstances and to ask for support from the Insurer. The solicitor is the agent of the Insurer, by whom they are paid but the also owe a duty of care to the Insured as well as to the Insurer.
Under English law, a solicitor instructed in by Insurers owes a duty of care to the insured: Groom v Crocker  1 KB 194. More recently, the Court of Appeal confirmed the position in K/S Merc-Scandia XXXXII v Underwriters  EWCA Civ 1275; 1 Lloyd’s Rep IR 802 at 809. It is a duty to ‘protect the insured’s interests and to carry out his instructions in the matters to which the retainer relates by all proper means.’ It is a duty to act reasonably in the interests of both the assured and the insurers.