A recurring issue in the context of claims-made policies is whether a subsequent claim falls within the scope of a prior notification of circumstances. In Euro Pools, against the background of a number of complex and developing claims, the court had to decide which of two policy years those claims fell within (notifications having been made in both). The case also gave rise to disparate, but interesting, issues about when limitation arises in a policy providing for mitigation cover, how interim payments were to be allocated, whether the insured was entitled to an indemnity in respect of legal costs incurred in the context of litigation commenced by insurers in the insured’s name, and the effect of the deductible on the limit of indemnity.
Moulder J’s decision is considered by Neil Hext QC of 4 New Square.
The claimant insured specialised in the installation and outfitting of swimming pools. Particular features of the pools were (i) movable floors enabling variation of the usable water depth in the pool, and (ii) vertical “booms” that could be made to rise and fall allowing division into different swimming zones. The insured encountered problems with the design of both features, leading to the potential for claims in respect of several pools for which it had provided services, and incurred mitigation costs as a result.
The claimant was insured under two design and construct professional indemnity policies provided by the defendant insurers for the period June 2006 to June 2007 and June 2007 to June 2008 respectively. The policies were on materially identical terms and covered the insured for third-party claims arising out of the insured’s professional activities. Each had a limit of indemnity of £5 million, and was subject to a deductible in the form of an “Insured’s Contribution.”
The policies contained a clause requiring notification to be given to insurers:
““as soon as possible after becoming aware of circumstances… which might reasonably be expected to produce a Claim… 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“
Each policy also contained cover for costs incurred in respect of any action taken to mitigate a loss that would otherwise be the subject of a claim under the policy.
The insured’s design for the raising of the booms originally involved controlling the amount of air in the booms themselves. During the course of the first policy year the ballast tanks in the booms were found to be failing. The problem was notified to insurers in about February 2007, but the insured believed that the introduction of inflatable bags would solve the problem and that the cost would come within the insured’s contribution. In 2008, the insured started to experience problems with the bags too, and it eventually concluded that it would need to redesign using a hydraulic mechanism rather than one dependent upon control of air within the booms themselves. The insured notified this new issue as a circumstance under the second policy year, and it led to a substantial claim under the mitigation costs cover.
The Pool Floors
At about the same time as the initial problems with the booms, the insured also experienced problems in relation to the movable pool floors. What was reported to insurers in February 2007 – during the first policy year – was that there was a major design fault and that the insured would need to change to a system involving stainless steel rope and hydraulics, the cost of which it wished to claim under the policy.
In October 2007, during the second policy year, the movable floor at a diving pool in Leeds failed, which in turn gave rise to claims against the insured. This was notified in November 2007. The parties disagreed as to whether the claims came within the scope of the February 2007 notification, or whether they arose from the notification subsequently made in the second policy year.
In 2010, insurers instructed loss adjusters to seek recovery of its outlay from consultants engaged by the insured in the design of the pool systems. Proceedings were issued against those consultants, and the insured had considerable input in the day-to-day running of the claim. It appears that the action that was brought benefited both insurers and the insured and it was the insured who paid the fees of the solicitors in question. In due course a dispute arose as to insurers’ liability to indemnify in respect of those costs, and the action was subsequently prosecuted by the insured solely for its own benefit. The policy contained a clause permitting insurers to prosecute any claim and to have full discretion in the conduct of it. It was, however, silent on the question as to who should pay the legal costs.
Proceedings against insurers in respect of these matters were only brought in January 2016 and an issue arose as to whether any part of the claim for mitigation expenses was statute-barred, and if so, how various interim payments that had been made by insurers were to be allocated. Moreover, the mitigation costs that were incurred in respect of some of the potential claims exceeded the limit of indemnity. That led to a question, first, as to whether there was either a free-standing agreement that insurers would pay whatever the reasonable cost of mitigation was, irrespective of the limit of indemnity (or whether there was an estoppel preventing insurers from applying that limit), and second, whether the limit of indemnity included or excluded the insured’s contribution.
Thus the main issues that the court had to resolve were:
- whether the booms claim fell within the first or second policy year;
- whether the failure of the floor at Leeds fell within the first or second policy year;
- to what extent were insurers liable for legal costs incurred by the insured;
- when for limitation purposes did the cause of action against insurers accrue in respect of mitigation costs, and how were interim payments to be allocated;
- whether there was an agreement or estoppel preventing insurers from relying upon the limit of indemnity;
- whether the limit of indemnity included or excluded the insured’s contribution.
The expert evidence showed that the problems that had been encountered in 2008 arose as a result of welds in the tanks failing. The judge found that this was a different issue from that which had been identified, and notified, in February 2007. Insurers were unable to show that the more fundamental problem of failure of welds was either known to the insured in 2007, or that it was causally connected to the issue that had been notified in 2007. Thus, applying Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd  EWHC 83, para 99, the cost of replacing the system with a hydraulic system was referable to the notification that had been made in 2008.
(2) The Leeds Pool
What had been notified in 2007 was a problem with the pre-existing rope and winch system and it was this problem that had led to the decision to replace that system with one that involved stainless steel rope and hydraulics. It was the new system that had been installed in Leeds, and this had failed because of a design fault permitting the stainless steel rope to get trapped. Insurers argued that the original notification had been a general one, namely the insured’s failure to develop a working design for pool floors; the Leeds failure was simply a further manifestation of this broad issue. The judge disagreed. What had been notified was the insured’s awareness of a problem with the use of a rope and winch system. At that time, the insured was not aware of a problem with the proposed replacement system. Nor could it be said that the failure of that replacement system was causally related to what had been notified in February 2007. Therefore, the claims arose from the second notification and fell within the second policy year.
(3) Legal Costs
The judge found that the proceedings against the consultants were prosecuted by insurers, and that insurers retained full discretion in the conduct of those proceedings, notwithstanding the insured’s active involvement and benefit. However, she held that there was no implied term that insurers would indemnify the insured for legal costs. Such a term was not necessary, given that it was always possible for insurers to make payment to the relevant lawyers direct. The judge did accept that there was a term implied that insurers would indemnify the insured in respect of adverse costs orders made during the period for which insurers had prosecuted the claim. However, this indemnity only applied for adverse costs orders made during that period, not to later costs orders, even if those orders related in part to the period for which the insurers had been in control. And it only covered the proportion of the costs which were related to the claim covered by the policy, not to those that were outside the scope of the policy.
(4) Limitation and Allocation
The judge held that the cause of action for mitigation costs ran from the date that the relevant expense was incurred. Although primarily a liability cover, the mitigation costs aspect of the policy was cover for first party financial loss, and was subject to the same rules as other first party cover. Thus mitigation expenses incurred prior to 28 January 2010 were time-barred.
The insured argued that it was entitled at trial to allocate interim payments already made by insurers chronologically so that they were treated as paying the earliest costs first. The judge held that, prima facie, an insured is entitled to appropriate monies received from insurers as it chooses, provided that the appropriation is made bona fide and without collusion. However, that did not apply to an appropriation that took place after commencement of proceedings in respect of a time-barred obligation. In the absence of a valid appropriation, the right approach to interim payments that were made by insurers after 20 January 2010 was to treat them as being made pro rata between unpaid expenses incurred before that date and expenses incurred thereafter.
(5) Limit of Indemnity
On the evidence the judge rejected the insured’s contention that there was an express agreement that insurers would pay the full amount of mitigation costs irrespective of the limit of indemnity. Just because insurers had agreed the scheme of remedial works in advance did not lead to the inference that they agreed to abandon the limit of indemnity. As to estoppel, there was no representation by insurers that they would pay irrespective of the limit of indemnity, nor was there a common assumption by the parties to a similar effect. Moreover, there was no detrimental reliance by the insured in any event.
(6) Insured’s Contribution
On the final issue, the judge held that the limit of indemnity did not include the insured’s contribution. Although the policy was unclear on the point, application of contra proferentem meant that the limit of indemnity operated without a deduction for the insured’s contribution.
Like Kajima, this case nicely illustrates the difficulties that can arise when notification takes place during the course of a developing problem. There is a tension in the manner in which claims made policies work. The insured must notify at an early stage – when it first becomes aware that a claim may arise. But that will often mean that the full story is not yet known; further issues may well become apparent, and may indeed become bundled up in one claim. The question of what is and what is not within the scope of the notification can be difficult to determine. The two principles from Kajima applied here – that the insured must know of a circumstance to notify it, and that there must be a causal connection between the notified circumstances and the later claim – are helpful. But they need careful handling. An insured may become aware of a problem for which the cause is at that stage unknown, but that would not per se prevent a subsequent claim relating back to that notification. Likewise, the requirement for a causal link between notification and claim works best where what has gone wrong is known; it is less easy to apply where what is notified is a symptom rather than a cause. On the facts as found here by the judge, it was possible to say that what was subsequently discovered was truly unconnected to what had been originally notified. But there will be other cases where that clear distinction will be less easy to discern.
The second issue of interest is the judge’s ruling on the legal costs of the claim instigated by insurers. Many will find the decision surprising. Having concluded that (a) the claim was prosecuted by insurers and subject to their control, and (b) insurers would often in practice bear the financial costs burden, the judge’s answer that there is no implied term for an indemnity, where for whatever reason the insured had paid the lawyers itself, seems unsatisfactory. The assumption seems to have been that an insured would ordinarily insist on insurers paying the lawyers’ fees directly. But what would have happened if insurers had ultimately refused to pay and the solicitors had looked to the insured, as a joint client, for payment of their fees? Once it is established in principle that those fees are insurers’ responsibility, it is difficult to see why there is no implied term that they will indemnify. Moreover, the decision as to where the dividing line for responsibility for adverse costs lies has the potential to create arbitrary results.
Lastly, the examination of the difficult issue that arises where a claim in damages that is in part statute barred has been the subject of historical interim payments is welcome. The judge’s conclusion that a claimant cannot simply appropriate those interim payments to the statute-barred element of its claim prevents the claimant from sidestepping limitation rules. But it begs the further question as to whether it would be open to a claimant immediately before commencing proceedings, but after part of its claim has become statute-barred, to allocate those payments in that way. No doubt in future those advising prospective claimants will advise their clients to do just that. It remains to be seen whether that will be effective.