Euro Pools Plc v Royal & Sun Alliance Insurance Plc
This recent English Court of Appeal decision provides useful guidance to insurers in relation to notifications of circumstances under liability policies where related claims arise in different policy years and there is an issue about which policy responds.
The insured, Euro Pools, specialised in the installation and fit out of advanced swimming pools with two key features – raising and lowering floors and movable vertical walls, called “booms”, which were used to divide pools into different swimming zones.
Euro Pools had professional indemnity insurance with Royal & Sun Alliance Insurance for the 2006/2007 (First Policy) and 2007/2008 (Second Policy) policy years. Both policies provided primary liability and mitigation costs cover up to an aggregate limit of £5 million for each year. They contained the usual notification obligations (emphasis added):
“[Euro Pools] shall as a condition precedent to their right to be indemnified under the insurance give written notice to [the insurer]… as soon as possible after becoming aware of circumstances… which might reasonably be expected to produce a Claim… for which there may be liability under this Insurance. Any Claim arising from such circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given”
In February 2007, Euro Pools became aware that its air-driven boom system was failing and causing booms not to rise properly. It identified the problem as a failure of the bracing of the steel air tanks in the system and suggested that the installation of inflatable bags could be a solution. Euro Pools notified its insurer of the issue and the proposed solution.
On 9 June 2007, Euro Pools completed a renewal form ahead of purchasing the Second Policy. Euro Pools was asked if it was “aware of any circumstance which may give rise to a claim” and responded by stating, “tanks on booms but we are fixing these with inflatable bags”. Euro Pools was hopeful that its proposals would succeed, but made a precautionary notification under the expiring policy in case they did not. As it transpired, the inflatable bags failed to fix the issue.
On 2 May 2008, Euro Pools notified its insurer that its inflatable bag solution had begun to fail and that it intended to change from an air-driven boom system to a hydraulic system. The following month, Euro Pools informed the insurer that installing a hydraulic system was the only realistic solution to the problem of failing booms.
The insurer confirmed that it would cover the costs of installing such systems as mitigation costs but insisted that the claim had been notified under the First Policy. The costs of installing the replacement systems exceeded the First Policy’s limit.
Euro Pools contended that its further notification in May 2008 brought the claims for hydraulic installations under the Second Policy. This was because there was no causal connection between the initial notification regarding failing bracing and the later failure of the inflatable bags intended to remedy that problem. Euro Pools sued the insurer for the booms claim.
In the first instance, the High Court ruled in favour of Euro Pools on three grounds.
- The email sent on 2 May 2008 was treated by the insurer as a valid notification of circumstances under the Second Policy.
- The scope of the notification in February 2007 was limited to problems with some of the steel tanks. There was no causal link between these issues with the tanks and the decision to switch to a hydraulic system.
- Even if there had been a link, an insured can only give notification of a flaw that they are aware of at the time. Euro Pools was not aware of the flaw in the air drive system that led to the adoption of the hydraulic system in February 2007, so they could not give notification of it.
The Judge held that there was no notification of the circumstances giving rise to the installation of the hydraulic system under the First Policy. The relevant notification was made in May 2008 and thus the mitigation costs fell under the Second Policy.
Court of Appeal
The Court of Appeal overturned the High Court decision. Its key finding was that there was a sufficient causal connection between the 2007 notification of circumstances and the installation of hydraulic systems as a potential solution to avoid claims being made:
“… the remedial works were carried out in order to mitigate a loss or potential loss that might have been the subject of a potential Claim from a third party on the grounds that the booms, powered by an air drive system, were not rising and falling properly.”
The following key principles come through in the short judgment:
- In order to give a valid notice to the insurer, the insured must be aware of the circumstances in question – it is that awareness which triggers the duty and the right to notify. Knowledge of the problem is all that is required, the insured need not be aware of the solution;
- The insured must only have a reasonable expectation that the circumstances in question may produce a claim falling within the policy. Whether the policy responds is determined with when a claim is eventually made against the insured by a third party;
- If a claim is subsequently made against the insured, “the question will be whether [it] is one‘arising from such circumstances’. This requires‘some causal link’, but this is not a particularly demanding test of causation.” The following three questions will generally need to be answered where circumstances are notified in one year and a claim made against the insured in the next:
- What was the scope of the circumstances which were notified? The notification is to be considered according to ordinary principles of interpretation.The High Court in this case was found to have erred in applying a narrow interpretation to the 2007 notification.
- Does the necessary causal link exist? Keeping in mind the reasonably low bar for causation as discussed above.
- Is there liability under the policy for the defect in question?
- The causation question is slightly different where the insured expends mitigation costs.
The issue remains whether there is a causal link, but the question is whether the costs were incurred to mitigate or avoid a claim “which might reasonably be expected to arise from the notified circumstances”.
We see two key lessons coming out of this case:
- When reviewing claims notifications, care should be taken to identify the practical problem that is notified, in the context of the facts known to the insured. A practical, rather than narrow, approach should be taken; and• When reviewing claims notifications, care should be taken to identify the practical problem that is notified, in the context of the facts known to the insured. A practical, rather than narrow, approach should be taken; and
- The question is then whether there is a causal link between the original claim and the later notification. The bar is low. A useful frame of reference when considering whether a claim arises from what appears to be a connected notification is whether there is only a “purely coincidental” connection between the original notified circumstances and the later claim.
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