Court of Appeal plunges into notification issues

In a Judgment handed down yesterday, the Court of Appeal considered for the first time in over ten years issues regarding the effect of a notification of a “circumstance” to a professional indemnity policy: Euro Pools plc v RSA [2019] EWCA Civ 808 [1].

Introduction

The commercial background to the dispute was unusual. Typically, a policyholder will argue that its notification was wide in scope, so that in due course its notification will “catch” any ensuing claims. By contrast, the insurer to whom the notification was made will typically argue that the scope of the notification was narrow (or, sometimes, wholly ineffective), so that it is in a position to resist indemnifying the policyholder for the later claim(s).

Here the position was reversed. The insurer (RSA) argued that the notification in question was sufficiently wide to catch the later claims; and the policyholder argued that its original notification was very narrow, so that accordingly the claims in question could be said to arise from the (unquestionably wider) notification which it had made to its successive policy.

The reason for this apparent role reversal was the simple fact that the indemnity limit under the original policy (which was on an aggregate basis, not “per claim”) was exhausted, so that the policyholder needed to establish that the later policy (also written, as it happens, by RSA) would respond.

The facts

Euro Pools plc (“Euro Pools”) designed and installed swimming pools. One particular feature which it offered was the inclusion of vertical “booms”, which could be raised and lowered in order to compartmentalise the pool.

Initially, the booms were powered by an air drive system, whereby air would be pumped into and out of stainless steel tanks housed within the booms.

In February 2007, Euro Pools notified its 2006/07 policy (“the First Policy”) that the booms weren’t working. This was, it said, because of a perceived problem with the stainless-steel tanks. Euro Pools proposed an inexpensive solution whereby inflatable bags would be used instead of the steel tanks.

In June 2007, just before expiry of the First Policy, Euro Pools supplemented its original notification by informing RSA that, while it was continuing to replace the tanks with inflatable bags, the cost of which it expected would fall within its excess, it nevertheless wished “to ensure the matter [was] logged on a precautionary basis should there be any future problems”. [2]

Thereafter, during the course of its 2007/08 policy (“the Second Policy”, also written, as I have said, by RSA), it became apparent to Euro Pools that the inflatable bags were no more successful than the stainless steels tanks had been, and that the air drive system would need to be replaced with a hydraulic system – which would be far more expensive. Indeed, it appears that, with a view to preventing its customers from making claims against it, ultimately Euro Pools spent about £2m replacing the air drive system with a hydraulic system.

By this time, the limit under the First Policy was exhausted. The issue was therefore whether the £2m of mitigation costs had been spent in avoiding putative claims which, had they been made, would have arisen out of the circumstance(s) notified to the First Policy.

The Court of Appeal’s Judgment

Euro Pools argued that its notifications in February and June 2007 to the First Policy had been confined to a problem with the stainless-steel tanks. Relying on the principle that one cannot notify a circumstance of which one is not aware, Euro Pools submitted that when notifying the First Policy it had not been aware of a possible problem with the inflatable bags, let alone with any inherent defect in the air drive system generally, and thus could not have been notifying either of those as a “circumstance”.

That argument was accepted at first instance by Moulder J, who thus held, to RSA’s disappointment, that the Second Policy did respond. However, some commentators had criticised this decision on the basis that the Judge had confused the ability to notify a problem (here, that that the booms were not working) with the cause of that problem. As earlier cases such as Kidsons [3] and Kajima had had held, it is open to a policyholder to make a “hornets’ nest” notification – ie, a general notification of a problem, even where the cause of the problem and/or its potential consequences are not yet known.

The Court of Appeal (Hamblen LJ, Males LJ, and Dame Elizabeth Gloster) largely echoed those criticisms, and held that the notification to the First Policy had not been confined to the failure of the steel tanks and the consequential need to replace them with inflatable bags. Instead, the Court of Appeal agreed with RSA that the circumstances notified in February 2007 were that “multiple failures had taken place in relation to the [booms] and….[Euro Pools] was not sure what was causing the failures” and that the circumstances notified in June 2007 were that “in the face of continuing boom failures, Euro Pools had developed a potential solution involving the use of inflatable bags, but that it nevertheless wished to make a notification in case of ‘any future problems’ giving rise to possible third party Claims”. 

“In other words,” said the Court of Appeal, “Euro Pools appreciated that it might not have got to the bottom of the problem in the sense of understanding what the root cause of the booms’ failure was. Thus, although Euro Pools hoped that it could make the boom design work by using bags in place of tanks, and that solution would fall within the deductible, it nonetheless wanted to make a general precautionary notification.”

Conclusion

In allowing the appeal, the Court of Appeal has re-stated the orthodox approach, as set out in previous cases such as Kidsons, Kajima and McManus [5]. Although the Court of Appeal’s decision was undoubtedly disappointing to this particular policyholder, in the long run its approach is likely to be beneficial to policyholders since it will assist them when, as is often the case, they wish to make a precautionary notification of a problem when the cause of that problem and/or its potential consequences are as yet unknown.

Notes:

[1] The full Judgement is here: https://www.bailii.org/ew/cases/EWCA/Civ/2019/808.html

[2] This request seems to have been prompted by a realisation on the part of Euro Pools’ broker that, owing to an administrative error, RSA had not opened a claims file following the original notification in February 2007.

[3] HLB Kidsons (a firm) v Lloyd’s Underwriters [2008] Lloyd’s Rep IR 237.

[4] Kajima UK Engineering Limited v The Underwriter Insurance Company Limited[2008] EWHC 83.

[5] McManus v European Risk Insurance Co [2013] Lloyd’s Rep IR 533.

Jonathan Corman is a partner at Fenchurch Law.