Professional indemnity policies may either be on a "negligence" basis, which covers the insured's negligent acts or omissions, or on a "civil liability" basis, which covers any civil liability of the insured.
The Architects Registration Board recently imposed mandatory professional indemnity insurance for architects on a civil liability basis. Cover may be on an "each and every" basis, which provides cover for each claim up to the limit of indemnity, or on an "in aggregate" basis, which provides cover up to a maximum fixed sum in respect of claims made during the policy period.
As a result, the date of notification of a claim to insurers may be critical in determining whether sufficient cover is available.
In the past few years, a number of insurers have introduced a form of hybrid cover – indemnity is provided on an each and every basis generally but with an aggregate limit for environmental and pollution claims.
Some insurers are now treating date recognition problems in the same way. A few are introducing policies whereby cover is excluded but can be bought back if certain conditions are fulfilled. These may include requiring the insured to write to clients to advise them of the date recognition problems and to undertake an assessment of their computer systems.
Some insurers incorporate a "millennium break" clause that allows them to amend the basis of cover, subject to notice. However, the majority are (on renewal) declining to provide any cover for date recognition problems.
This raises the question of which claims should be notified by a professional at renewal. Most policies require notice when circumstances arise that are "likely to give rise to", or "may give rise to", a claim. If a professional notifies outgoing insurers of the possibility of a claim shortly before the expiration of a policy the insurers may reject the notification on the basis that it falls outside the test of likely to give rise to a claim. Incoming insurers may exclude any claims notified to previous insurers even if the circumstances became circumstances likely to give rise to a claim during the time the new insurers are on risk. "Likely" means a probability of greater than 50%, whereas "may" or "might" indicates a lower probability. However, if a professional does not notify a claim until he feels that the prospects of its being brought are greater than 50%, the new insurers may reject the claim for late notification.
- The date of notification of a claim to insurers may be critical in determining whether sufficient cover is available
- Most insurers are refusing to provide cover for date change claims
The professional should try to ensure that only claims that are both notified and accepted by outgoing insurers are excluded by new insurers.
Particular difficulties arise where a professional cannot name all the potential claimants. This could happen with date recognition problems.
A professional may have specified or designed systems for many different clients and many different projects that could turn out to be non-compliant. Can the professional give a blanket or general notification to insurers and obtain the protection of his existing policy? In one case, the insured gave notice to its insurers that one of its employees had been investigated by the Fraud Squad and that a number of properties were involved.1 The insured provided a list of properties surveyed by the employee. The insurers refused to accept the list as a valid notification because the policy wording required notice "of circumstances which could reasonably be expected to produce a claim". The court held that the notification was effective.
In a more recent case, an employee in a firm of estate agents and valuers undertook a number of valuations for mortgage lenders in order to participate in frauds.2 The insured was required to notify insurers of "the discovery of dishonesty or fraud on the part of any … employee", and to give full details. The insured gave notice that it was only aware of the frauds against one lender, named this lender, and gave a list of properties that the employee had valued for that lender. Subsequently, the insured discovered that frauds had been perpetrated against another lender and gave notice to insurers. The insurers denied cover for these later matters.
The Court of Appeal held that the initial notification was to be viewed as a general notice of dishonesty on the part of the employee, or at least as a general notice of dishonesty or fraud in respect of unauthorised valuations in respect of lending institutions. Everything that subsequently emerged was within the ambit of the notification and formal identification of the victim was not required.
Thus, although general or blanket notifications given by a professional to cover a potential problem shortly before a renewal are unlikely to be accepted by insurers, notifications based on specific errors or circumstances should be accepted.
Rachel Barnes is a partner at solicitor Beale and Company