Full disclosure imperative for insurance policyholders
Businesses renewing polices such as Directors & Officers insurance and Professional Indemnity need to understand the importance of what is included in claims and notifications to ensure they are drafted correctly.
Prompt notification to insurers is essential to prevent the possibility of breaching insurance policy conditions by “late notification”. This could prejudice the insurer’s ability to investigate properly and/or defend the claim, and could result in loss of insurance protection.
Businesses must identify the relevant circumstances and use the right wording to describe the issue in the notification so that the insurer is required to indemnify for the loss. That is why policyholders should consider carefully what is included in those notifications and how those notifications are drafted.
Prior to renewal, policyholders have a duty to disclose any facts known to them that might give rise to a claim. Claims which later arise from the facts disclosed will be excluded from the renewed policy - either expressly or by virtue of the exclusion for “prior known circumstances” - but will typically be covered by the expired policy.
Below are two claim examples from Australia that demonstrate that how and when claims are notified is a contentious area, these claims are subject to Australia law however similar arguments occur in D&O and PI claims in jurisdictions around the world.
Policy cover is triggered by claims being made and notified to the insurer by the policyholder during the period of cover. Cover can also be activated by giving formal notice of facts that might give rise to a claim, even if the claim does not arise until after the policy expires (under a policy option or s.40(3) of the Insurance Contracts Act). Notification of claims and facts which could give rise to a claim must be made in accordance with the claims procedure conditions written into the policy of insurance.
Policyholders must be wary of playing down potential risk or opting to try and mitigate any premium increase by not fully disclosing facts. There are similarities between the Laws of Disclosure in most common law jurisdictions and below are examples of where this arises under Australian Law.
First case – Cosmetic Surgery
A cosmetic surgeon who performed surgery at The Cosmetic Institute Pty Ltd (TCI)’s premises argued that his professional indemnity insurer was restrained, by reason of s40(3) of the Insurance Contracts Act, from denying indemnity under a claims made and notified policy. The Federal Court in Australia upheld his claim.
The Court examined whether, in light of the history of interactions between the surgeon and the Insurer, the subsequent denial of indemnity gave rise to a breach of the insurer’s duty of utmost good faith.
Justice Moshinsky, of the Federal Court, held that a professional indemnity insurer was required to indemnify a surgeon who had been joined to a class action approximately 11 months after the insurer went off risk. The surgeon held professional indemnity insurance with the Insurer for the period September 27, 2011 to June 30, 2019. The Insurer had refused indemnity on the grounds that no claim was made or notified during the policy period.
The class action proceeding was commenced in September 2017. The surgeon was not a party to the class action, However, in March 2018 the surgeon was served with proceedings commenced by a former patient.
The allegations on the issue of liability made against the surgeon in the patient proceeding were substantially similar to the liability allegations made against the surgeons in the class action. The surgeon gave written notice of the patient proceeding to the Insurer on 27 March 2018 and indemnity was granted to the surgeon for in respect of the claim.
In January 2019 the plaintiffs in the class action served a subpoena to produce documents on the surgeon along with 10 other surgeons.
When the surgeon was served with the subpoena, he contacted the medico-legal advice helpline operated by the Insurer and sought advice on responding to the subpoena. The helpline solicitor suggested the surgeon provide the Insurer with a copy of the subpoena. The surgeon did not provide the subpoena to the Insurer. The Insurer went off risk for the surgeon on June 30, 2019.
In June 2020 the surgeon and the 10 other surgeons were joined to the class action. The surgeon made a claim for indemnity on the Insurer, which was denied on the basis that the claim was not made and notified during the policy period.
The surgeon framed his claim for indemnity in respect of the class action proceeding on six alternative grounds. The Court held that the Insurer was notified of the circumstances of the class action claim by virtue of the fact that two years earlier, after granting indemnity in the patient proceeding, the insurer received updates from the surgeon’s solicitors.
The Court examined the correspondence sent by the solicitors to the Insurer and determined that the solicitors had provided updates which referred to the possibility of the surgeon being joined to the class action if the former patient elected not to opt out of it. The Court held that when considered collectively the correspondence constituted written notice of a potential claim in the class action.
The Court found that the Insurer, whilst aware of the class action proceeding, did not inform the surgeon of the effect of s40(3). While the Insurer suggested the surgeon provide it with a copy of the subpoena, the Insurer already had a copy of the subpoena schedule as it had been served on other doctors that it also insured.
Crucially, the Court also found that the Insurer had adopted a position that if an insured doctor who received the subpoena provided a copy to it, then this constituted written notification of the class action claim. The Court found the refusal to grant indemnity was unfair and unreasonable.
The Court held that if s40(3) had not been enlivened then it would have concluded that the insurer’s denial of indemnity constituted a breach of the duty of utmost good faith.
Second case – Financial Planner
The importance of being completely open about the risk of a claim being made was highlighted by a case involving a financial planner who between 2006 and 2009 advised clients on a number of investments which he put through a company in which he was the sole director and shareholder.
In 2014, the clients sued the financial planner’s professional indemnity insurers directly (under s 601AG of the Corporations Act 2001 (Cth)).
The New South Wales Supreme Court last year handed down a decision that provides guidance on what is required to be included in a notification of facts that might give rise to a claim.
An issue in dispute concerned whether a notification provided to the firm’s professional indemnity insurers during the course of the 2012/2013 policy year was a sufficient notification of facts that might give rise to a claim so as to trigger the operation of section 40(3) of the ICA.
The notification in question, which was provided to the professional indemnity insurers with the renewal proposal prior to the expiry of the 2012/2013 policy year, included the following:
A small number of clients have invested/lent funds to property investments and/or companies that have to date been unable to repay those funds in total.
At the time of the investment all appropriate disclosures were made and clients invested/lent funds with full knowledge of the circumstances at the time.
At this stage no loss has been crystallised and no claim or complaint has been formally lodged.
We wish to advise the insurance company that there is a chance of a claim against [MRS] in relation to any loss that may be incurred.
The first instance Court held – and the Court of Appeal has confirmed - that the answer given was insufficient to amount to a notification of “facts that might give rise to a claim” which would have triggered cover under the 2013 policy.
The statements made in the context of renewal were misleading and constituted a fraudulent misrepresentation of the facts, given the financial planner’s knowledge of what had really happened which meant there was no cover under the 2014 Policy either.
If the financial planner had made a full disclosure it would have at least triggered the 2013 policy, even if insurers had refused cover for 2014. This is an example of how failing to make a complete disclosure can leave you exposed.
W Denis Insurance Brokers have a specialist professional lines broker team, who are able to assist businesses with their Professional Indemnity and Directors & Officers Insurance requirements. For further information, please contact Richard Bowdidge on firstname.lastname@example.org or +44 (0) 204 537 2453
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