A recent High Court decision provides helpful guidance to firms about what constitutes a valid notification of a circumstance under the solicitors’ minimum terms and conditions professional indemnity insurance (PII) policy.
McManus Seddon Runhams v European Risk Insurance Company [2013] EWHC 18 (Ch) (McManus) considers the vexed issue of 'bulk notification' of circumstances.
The facts
McManus Seddon Runhams (MSR) received several claims arising from the former client of Sekhon Firth, a firm to which MSR was a successor practice (‘the predecessor practice’).
By May 2012, a total of 17 claims had been made and duly notified to MSR’s insurers, European Risk Insurance Company (ERIC). Once MSR was aware of the extent of the claims, employed a consultant to review a sample of 32 Sekhon Firth files.
It also conducted an extensive review (known in the case as the ‘Saturday review’) of 110 other files from the predecessor practice. These audit processes identified a clear and consistent pattern of breaches including failure to report required information to lenders and matters being conducted by staff with insufficient expertise.
The policy
There is an obligation under the PII policy for an insured to give notice in writing to their insurer, as soon as reasonably practicable of any circumstance of which any insured first becomes aware during the period of insurance.
A circumstances is defined as ‘an incident, occurrence, fact, matter or act or omission which may give rise to a claim in respect of civil liability’.
This requirement is necessary because of the ‘claims made’ nature of PII policies. The insurer of the policy is liable to cover any losses arising from circumstances that may give rise to a claim in the future so long as these circumstances were notified to the underwriters during the period of cover.
The MSR policy wording required the firm to notify ERIC if it became aware of circumstances that might give rise to a future claim.
The notification
On the basis of the conclusions of its file audit, MSR sent a Notification Letter to ERIC notifying circumstances on the files from its review and which further estimated that there were potentially 5,000 matters that contained similar breaches. The Letter stated that ‘every file conducted by [the predecessor practice]…is more likely than not to contain examples of malpractice negligence and breach of contract and so that each and every file…should properly be notified to you as individually containing shortcomings on which claimants will rely for the purposes of bringing claims’.
The rejection
This notification was rejected by ERIC. It accepted that the 32 matters reviewed by the consultant had circumstances that gave rise to a claim and therefore was a valid notification. However, it rejected the other notifications because MSR had failed to identify ‘the specific incident, occurrence, fact, matter, act or omission which would give rise to a claim on each individual file’.
The judgment
MSR sought a declaration from the High Court that its blanket notification was indeed valid. The judgement referred to two well-known decisions when considering whether the blanket notification to the defendant was valid.
In the case of J Rothschild Assurance Plc v Collyear [1998] C.L.C. 1697 the insurer objected to a blanket notification on the basis that no particular concerns specific to 2,500 pension transfer policies were identified. The notification focused on the surrounding circumstances and climate of pension mis-selling reviews at that time. The letter of notification referred to a KPMG report that had found conduct breaches on a representative sample of files. It also purported to notify claims relating to clients who had been advised to opt out of pensions, although it was not possible to identify each transaction where this advice was given. Both elements of the notification were held to be valid.
In the case of HLB Kidsons (A Firm) v Lloyd's Underwriters [2008] EWCA Civ 1206, a firm of accountants communicated concerns to their insurers about the efficacy of certain tax avoidance products that they had provided to clients. The way in which they communicated these concerns were described as "limited and anaemic" by the court. Nevertheless, the Court of Appeal held that this was a valid notification. It was sufficient that in the view of the tax manager the implementation of certain products might be criticised and might give rise to possible claims or losses.
The judge in McManus stated that the key point arising from these two decisions was that notifications were valid (in relation to claims that arose from the circumstances notified), notwithstanding that the notification did not refer to the specific defects from which later claims might arise.
"The assumption was that, provided circumstances exist which may give rise to a claim, and provided these circumstances are notified, then any future claim arising out of those circumstances must be paid out by the insurer at risk at the time of the notification, whether or not the particular transaction or possible claimant has been identified at the time of the notification."
The judge therefore held that the blanket notification was valid in respect of all of the matters to which it referred.
How does this affect me?
The failure of insurers to accept a ‘blanket’ notification can lead to problems obtaining insurance. If your current insurer declines a bulk notification, and also to renew your cover, then other insurers may be reluctant to insure your firm unless the notification is accepted.
The McManus judgment will, hopefully, provide solicitors with greater comfort that ‘blanket notifications’ are likely to be construed in their favour. It is important to remember, however, that often the focus of decisions in this area are the level of probability needed to trigger the a circumstance that ‘may’ give rise to a claim. It is likely that this threshold was met in McManus because of the level of review and investigation carried out by the firm prior to notification.
Editorial note: McManus is a decision at first instance and could be appealed. Having said that, this decision follows the two earlier decisions mentioned above, one of which was in the Court of Appeal.