Hiding under the blanket (notification)

Go Back 11.2.19 INSIGHTS

Those of us who deal with insurance tend to attach undue significance to individual words or short phrases. I have lost count of the number of articles I have seen, following some court decision, trumpeting something along the lines of “now we know what an ‘event’ is?” Usually a review of the judgment confirms that we already knew what an event was: the court having yet again reached for the dictionary and recited the relevant definition while lamenting that it has been asked to opine on the meaning of a word in the abstract and outside its contractual and factual context.

This type of thing becomes even more problematic when a word or phrase becomes the subject of received wisdom as to its meaning and effect, and that received wisdom is wrong. One such phrase is “blanket notification” used in the context of an attempt to fix a circumstance, or circumstances, to a claims made policy. The received wisdom is that a blanket notification is ineffective to achieve that objective. Consequently, insurers like to reach for the phrase “blanket notification” in the manner of someone clutching at a crucifix to see off a vampire.

Before explaining why the received wisdom may be wide of the mark, it is worth making clear what is meant by a “blanket notification”. Really we are looking at two kinds of notification:

  1. The notification arguably so wide as to be devoid of meaning. The worst kind of example of such would be sending the insurers a list of all the insured’s client files saying, in effect, “its human nature that we are bound to have made some mistakes”. The difficulty is that there is no way of telling from the notification whether or not there are any problems at all and, putting that to one side, no way of determining where and what they may be.
  2. The notification which is drafted to maximise “wriggle room” for arguing that unforeseen problems at the time of notification were actually alluded to in the notification and so should be treated as within the scope of it. This is an extreme example of what the courts have recently begun describing as the “hornets’ nest” notification.

The first challenge to the received wisdom regarding blanket notifications is this: the courts have accepted that there can be valid notifications, both on a “blanket” basis and a “hornets’ nest” basis. Such notifications are not objectionable in principle, the real issue is whether and how they can be made to work in order to fix circumstances to a policy.

Both types of notification have to avoid the same mischief in the eyes of the court: the insured cannot be permitted to keep their options open as to the potential scope of their covered liabilities. The courts have endorsed the view that the very purpose of a “claims made” policy from an insurer’s perspective is that, very soon after the end of the policy period, the insurer is in a position to make a sensible estimate of what their ultimate liability might be. Handing the insurer all of the insured’s client files by way of notification and saying “let’s see what happens” is, of course, not going to be sympathetically received by the courts against this background.

Similarly, the courts see the ability to notify circumstances as a relaxation of the strict claims made approach by the insurer, giving the insured the ability to avoid exclusions which might be imposed under successor policies, and take the view that this concession should not be abused by insureds.

The key to a successful blanket notification is recognising and confronting these considerations which are so influential over the attitude of the courts. The mere fact that it might be possible to characterise a notification as “blanket” is in no way determinative of whether or not it is a successful notification. Everything turns on what is known at the time and how the notification expresses that.

Aside from any specific policy language, the key consideration appears to be whether the notification sets out an existing basis of fact from which it can be concluded that there is potentially a wider problem, either as to the number and identity of claimants or bases of liability, than can be precisely identified at the time of the notification.

Facts either exist or they don’t, but this doesn’t mean that the insured and their advisers cannot take precautions in drafting a notification which may help a blanket notification be accepted. The fundamental point is doing the groundwork as to how and why the current problem might extend beyond what is currently known and properly explaining that groundwork, and the conclusions drawn from it, in the notification. Any independent third party verification of the existence and potential scale of the problem will be enormously helpful towards establishing the validity of the concerns and, hence, the notification.

This is potentially made easier in cases where a problem is not specific to an individual insured but appears to affect an entire industry or sector. If a regulator or government body, by reference to its own research, is saying “this industry has a problem” or “this product is flawed” then simply knowing that the client operates in that sector or is involved with that product may, in and of itself, create a solid basis for notification. Any additional information which the insured can provide will, of course, be helpful.

Another factor which is potentially overlooked in making these notifications is the potential appearance of exclusions in a successor policy. If the insurance market has decided that a problem is sufficiently clearly in prospect to merit exclusion then, faced with a notification of that very problem in the run up to renewal, it strains credibility for the notified insurer (especially if the same insurer is imposing the exclusion in the proposed renewal terms) to assert that the problem is insufficiently apparent to merit notification. If an issue is “real” enough to be excluded, then it ought to be real enough to be notified.

Stuart Hill

Stuart is a founding partner of Wynterhill LLP.

This post is intended to provide guidance of a practical nature but does not contain legal advice or advice as to what action you should or should not take specific to your insurance needs or those of your business, or with regard to any particular situation.