The implications of late notification on insurance claims

Late Notification, Insurance, Conditions Precedent, Breach of Conditions Author: Aramayis Galichyan

Late notice of claims to insurers is one of the most common sources of breach of insurance contracts. The reasons of failure to give timely notice to insurers vary from carelessness to force majeure. The consequences, however, vary depending on:

The status of the notification condition, i.e. whether the condition of timely notification is precedent to the insurer’s liability to pay the claim.
The definition, i.e. which occurrences should be notified to the insurer and when.
The consequences of the failure to comply with the notification condition if it is not a ‘condition precedent to liability’.
The legal environment where the contractual term is considered.

Status

The first issue of whether the ‘notification condition’ is precedent to liability has to be considered by looking into the insurance contract wording. It should be unambiguously defined in the insurance contract whether or not the notification condition is precedent to the insurer’s liability to pay the claim.

The issue of the condition’s status and effect was challenged in the case of Aspen Insurance UK Ltd, Brit Insurance Holdings Ltd, David Andrew v Pectel Ltd (2008). The insured had a liability insurance cover with the insurer. The policy Condition (4) ‘Claims Procedure’ provided that the assured had to give immediate notice of “(i) any occurrence which may give rise to indemnity under this insurance...”

Then the policy Condition (13) ‘Observance’ went on to add that “The liability of Underwriters shall be conditional on The Assured paying in full the premium demanded and observing the terms and conditions of this insurance.”

Albeit the fact that the fire which led to the liability of the insured occurred almost three years prior to the notification to the insurer, and the insured first became aware of that the materials used by them were under investigation after 8 months of the fire occurrence, the insured argued that it was not expressly stated in the policy wording that the notification condition was a ‘condition precedent’. The judge, however, held that it was not necessary that a policy provision should contain the words ‘condition precedent’ for it to have that status, provided the clause was apt to make that effect the clear intention of the parties. The parties agreed that ‘immediate’ meant “with all reasonable speed considering the circumstances of the case.” It was also agreed that “any occurrence which may give rise….” meant that there must be a real, as opposed to a fanciful, risk of the insurers having to indemnify the insured.

It can be concluded, that not only the wording of the notification condition has to be looked into, but also the purpose behind the condition has to be determined, regardless of whether or not the notification condition is described as a ‘condition precedent’.

Wording

In deciding the implications of the notification condition it is crucial to read thoroughly the wording of the ‘notification condition’ itself. As it was shown in Loyaltrend Ltd & Anor v Creechurch Dedicated Ltd & Ors (2010), the wording itself may play a decisive role. As per the policy condition (5) entitled ‘CLAIMS’, “(a) on the happening of any Injury or damage in consequence of which a claim is or may be made under this Policy and shall at their own expense within 30 days after the happening of such Injury or ...” This meant that it was the damage and not the cause of the damage (in this case it was subsidence) which ought to be notified to the insurer. Moreover, the Second Defendant ("Brit") insured Loyaltrend for the period of 11th December 2003 to 10th December 2004, but already by November 2003, it was apparent that there was a serious damage caused to the shop. One of the relevant ideas that Brit stated was that “Further once the policy incepted there was an obligation upon the claimant at that stage to give immediate notice of the damage to the interior of the shop in consequence of which a claim might be made. He failed to do so.” Notification of the happening of the material damage did not take place until August 2005 at the earliest. Judge Mackie QC held that “There will be judgment for the Defendants essentially because the Claimants failed to comply with a condition precedent as to notice.”

In case of a physical damage or loss insurance covers, the trigger for the notification to insurers is usually the knowledge of the insured of any loss insured under the policy.

The breach of the condition has undefined consequences

Finally, dependent on the status of the notification condition, the consequences would be diversely implied on claims. The case of Friends Provident Life & Pensions Ltd v Sirius International Insurance (2005) explains how the Insurer may deal with the ‘notification condition’ if it is not defined as a condition precedent to liability. Judge Waller LJ noted that “A claims notification clause like clause 5 is an ancillary provision... But I am unable as a matter of construction or implication to find in clause 5 any provision that insurers will be free of liability in the event of a serious breach and/or a breach with serious consequences. Even if one assumes that it might or would have been reasonable for the parties to agree such a provision, reasonableness is not the test for implying a term”

It can be concluded that unless it is unambiguously construed that a ‘notification condition’ is a condition precedent to the insurer’s liability, a claim can’t be totally rejected on that ground, but the insurer can claim for damages, which would need to be quantified, as it has been implemented in the case of Milton Keynes Borough Council v Nulty & Ors (2011). In the latter case the judge held that as the policy wording didn’t define the notification condition as precedent to liability, therefore the insurer could only claim damages for the prejudice it had suffered, and this had to be considered within the scope of the lost chance to investigate the occurrence, and consequently the lost opportunity to defend proceedings. The valuing of the lost chance to secure a different result in litigation was intangible, as there was no logical way of arriving at an appropriate percentage. Looking at the circumstances of the case as a whole, the judge assessed the lost chance at 15%, and consequently the indemnity was reduced accordingly.

Investigation of claims

Now we can appreciate that there may be many circumstances which should be considered and investigated before the insurer makes a decision on the implications of the ‘notification condition’.

It is noteworthy to bring the example of the Court of Appeal judgment in Kosmar Villa Holidays plc v Trustees of Syndicate 1243 (2008). Kosmar Villa Holidays plc had a liability insurance policy with Trustees of Syndicate 1243. The insured did not notify insurers of the occurrence until 4 September 2003, more than a year later, which constituted a breach of the policy General Condition 7 which stated: “It is a condition precedent to insurers’ liability under this insurance that: (1) The Insured shall immediately after the occurrence of any Injury or Damage give notice in writing with full particulars thereof to insurers.” The Court of Appeal found that the insurer had the right to rely upon a breach of a condition precedent by the insured, albeit the fact that it was only after almost a month that insurers asked the insured for an explanation of the delay in notification, and repudiated the claim on 21 October 2003. The insurers were not aware of important circumstances on the notification of the claim, and they were found being entitled to investigate the claim for a reasonable time to understand the lately notified claim, which didn’t constitute estoppel, as they hadn’t represented unequivocally to the insured that they didn’t intend to rely upon the breach, nor had the insured relied on any such representation to its detriment. Therefore, the insurer was entitled to decline the claim.

The implications of late notification vary depending on the applicable legal environment

The above analysis of the subject is based on English contract law which indeed is one of the most reputable sources of insurance law in general. However, it is of a critical importance to note that other legal environments may impose different implications on late notification and may vary depending on the type of the insurance contract.

For example, in Craft v. Philadelphia Indem. Ins. Co. (2015), a D&O (directors and officers liability) insurance case, the Supreme Court of Colorado (USA) considered the applicability of the so called ‘notice-prejudice rule’ to claims made policies and refrained from extending the ‘notice-prejudice rule’ to claims made insurance policies.

In this case the policy required that the insured gave notice of the claim by not later than 60 days after the expiration of the policy. A lawsuit was brought against the insured’s officer for alleged misrepresentations he made during a merger, and being unaware of the D&O policy, he reported the claim to the insurer approximately 16 months after the policy period had expired. The officer subsequently agreed to settle the claim brought against him, but the insurance claim was denied by the insurer for late notification, and the Court held that the ‘notice-prejudice rule’ didn’t apply to claims made policies.

A claims-made policy covers only those claims which are brought within the duration of the insurance contract, whereas an occurrence based policy covers only those losses which have occurred within the duration of the insurance contract, regardless of when a claim is made. The ‘notice-prejudice rule’ essentially requires the insurer to prove prejudice caused by the late notification to be able to rely upon the breach of the notification condition and repudiate the claim. Ten years before this case, it was held by the same Court in Friedland v. Travelers Indem. Co. (2005) that the ‘notice-prejudice rule’ applied to general liability insurance claims. However, in that case the policy was occurrences based.

On the other hand, in United States Fidelity and Guaranty Company v. Baldwin County Home Builders Association Inc. (2000), a general commercial liability policy claim case, the Supreme Court of Alabama (USA) construed the requirement of notice ‘as soon as practicable’ meaning that the notice is required to be given ‘within a reasonable time under all the circumstances’. It held that only the length of the delay in giving notice and the reasons of the delay should be considered in determining the implications of late notification and that absence of prejudice to the insurer from the delay is not a factor to be considered. As for the reasonableness test, mitigating circumstances may be considered.

In accordance with the Article 1017 (1) of the Civil Code of the Republic of Armenia (CCR),

“The insured under a contract of property insurance, after it has learned of the happening of the insured event, is obligated without delay to inform the insurer or its representative of its happening. If the contract provides a time and/or a means of notification, it must be done in the agreed time and in the manner indicated in the contract. The same obligation rests on the beneficiary who knows of the making of the contract of insurance to its benefit if it intends to use the right to insurance compensation.”

The Article 1017 (2) of the CCR goes further on to add that the non-performance of the obligation of timely notification gives the insurer the right to refuse to pay the insurance compensation, unless it is proved that the insurer was aware about the happening of the insured event or that the insurer's lack of information “could not affect its duty to pay the insurance compensation’. Armenian civil law places a limitation on the circumstances where the insurer may repudiate the insurance claim on the grounds of late notification. However, this limitation is not the ‘notice-prejudice rule’ decided by the USA Courts and applicable to some insurance policies in the USA. We therefore believe that the contractual rights and duties are left intact by the Armenian law as regards the rejection of claims on the grounds of late notification.

Conclusion

A claims notification condition is a contractual term the breach of which has the consequences defined by the contract itself.
Not only the wording of the notification condition has to be looked into, but also the purpose behind the condition has to be determined, regardless of whether or not the notification condition is worded as a ‘condition precedent’.
The wording of the notification condition is crucial in determining what and when should be notified to the insurer.
In case of a physical damage or loss insurance cover, the trigger for notification to the insurer is usually the knowledge of the insured of any loss insured under the policy.
Where the condition of timely notification of a claim to the insurer is a condition precedent to the insurer’s liability, the insurer may reject the claim, and where the consequences of late notification are not defined, the insurer may reduce the payment of the claim in the amount of the prejudice it has suffered caused by such delay.
Insurers are entitled to investigate the claim for a reasonable time to understand the lately notified claim unless they don’t represent unequivocally to the insured that they do not intend to rely upon the breach, and this shouldn’t constitute estoppel.
The 'notice-prjudice rule' or other rules and principles may be applied to the question of determining the implications of late notification, depending on the legal envirnoment where the question is considered.

Finally, depending on the local legal environment where the breach of the term is considered, the question may be answered unalike the way it is provided by the contract of insurance, and the Court may decide the case based on the legal remedies available to it regardless of the contractual terms.