Notification provisions - Validate and be damned

Notification provisions in claims-made policies allow insureds to inform their insurers of when they become aware of circumstances that might later give rise to a claim; subsequent claims arising from the changes notified are then covered by the policy. As the notification can be given by brokers on the insured's behalf, brokers play an important part in ensuring that the required notification is valid.

Two High Court cases, HLB Kidsons v. Lloyd's Underwriters (2007) and more recently, Kajima UK Engineering Limited v. The Underwriter (2008), have clarified what is required for a notice to be valid.

The cases concluded that the notice must be given in writing, not orally, to each underwriter as soon as is reasonably possible after the insured first becomes aware of the relevant circumstance.

The notification must be clearly and unambiguously worded so that the insurer is in no doubt that the insured is giving notice of a circumstance under the notification provision in order to trigger coverage under the policy: it must include any circumstance that may give rise to a loss or claim against the insured. The circumstance should create "a reasonable and appreciable possibility that it will give rise to a loss or claim against the (insured) ... " A circumstance may lead to a loss or claim when there is a possibility, or perceived possibility, that it will do so at some stage in the future; there need not be a certainty or likelihood that it will do so. All that need exist is a state of affairs from which the prospects of a claim, whether good or bad, or loss emerging in the future are real as opposed to false, fanciful or imaginary.

Where valid notice has been given, an extension of cover under the notification clause is triggered and cover extends to claims arising from the circumstances notified. In Kidsons, the court concluded that "the loss or claim should be sufficiently causally related to the fact, event, happening or condition which comprises the notified circumstance, that it can be fairly said to have arisen out of it." Similarly in Kajima, the court observed that "there must be some causal, as opposed to some coincidental, link between the notified circumstances and the later claim".

Strict compliance with a notification provision is necessary for an insured to secure an extension of cover under a claims-made policy. It is essential, therefore, for insureds and their brokers to exercise care when giving a notification of circumstances. At the same time, insurers and their brokers should scrutinise any notifications received to examine whether or not they are valid and extend to the loss or damage that they are being asked to indemnify.