When can insurers reject for late notification?

Friends Provident is the successor to London & Manchester Assurance, which provided financial advice on pension plans. Sirius provided LMA with excess layer professional indemnity insurance cover on a claims-made basis for the period 1 February 1993 to 31 January 1994. The policy incorporated the AWGS Excess Wording, Clause 5 of which required LMA to notify immediately in writing any claim made against them or any circumstances of which they became aware during the indemnity period that were likely to give rise to a claim, if it appeared likely that the claim might exceed the primary layer cover.

Pension mis-selling claims were made against LMA, who had to pay more than £9m in compensation to various clients. Sirius rejected their claim for cover on the grounds that, although LMA became aware during the policy year 1993-1994 of circumstances that might give rise to a claim against LMA, no notice was given to Sirius until 2002.

There was a trial of several preliminary points on the legal effect of the policy wording, including Clause 5. The Court of Appeal decided that compliance with Clause 5 was not a condition precedent to Sirius' liability, so Sirius was not entitled to reject the claim merely because they had been notified late. The clause did not use the words "condition precedent", unlike other clauses in the policy.

Sirius also argued that a breach of Clause 5, which had very serious consequences for them, should entitle them to reject the claim. They relied on comments in the earlier case of Alfred McAlpine v. BAI (Run off). A majority of the Court of Appeal rejected this argument. It said a claims notification clause like Clause 5 is an ancillary provision. If it is broken, insurers are entitled to damages for any loss they can show. However, it was not an express or implied term of the policy that insurers would not be liable to pay in the event of a serious breach.

The judgment strikes a balance between insureds and insurers. If there is late notification, insurers can claim damages for any losses they can prove, but they cannot reject the claim unless the notification clause is stated to be a condition precedent. However, the only safe course for insureds is still to notify all claims and circumstances as soon as possible.