How should the courts approach the scope of an insured’s notification of circumstances to insurers? What, if any, limit to the scope arises from the subject knowledge of the insured? In its most important decision on notification of circumstances since the Kidsons case, the Court of Appeal has addressed these questions in Euro Pools Plc v Royal and Sun Alliance Plc  EWCA Civ 808: part-reversing the decision of Moulder J and finding that Euro Pools’ initial notification had a ‘hornet’s nest’ aspect as regards causation.
The Court of Appeal’s decision is considered by Jamie Smith QC of 4 New Square.
All counsel in the case were from 4 New Square: Jon Hough QC and George Spalton appeared for the appellant insurers, while Ben Elkington QC and Josh Folkard appeared for the insured.
EP and the booms
Euro Pools (“EP”) installed and fitted out swimming pools with a system of movable ‘booms’ – vertical walls used to divide the pools into different swimming zones. Owing to concerns in respect of their safe and reliable operation, EP at various stages adopted three different mechanisms for raising and lowering the booms, namely:
- At the outset: an ‘air drive’ system whereby air was pumped into and removed from stainless steel tanks;
- At stage two: the same air drive system, but with inflatable bags replacing the steel tanks;
- At stage three: a hydraulic system in replacement of the air drive system.
EP and RSA’s policies
RSA wrote two consecutive professional indemnity insurance policies for EP: from 30 June 2006 to 29 June 2007 and 30 June 2007 to 29 June 2008 (respectively, the “First Policy” and the “Second Policy”).
- Contained a primary insuring clause whereby RSA promised to provide EP with an indemnity in respect of “Claims … first made against [EP] and notified to [RSA] during the Period of Insurance”;
- Provided cover in respect of “Mitigation Costs” being: “costs and expenses necessarily incurred in respect of any action taken to mitigate a loss or potential loss that otherwise would be the subject of a claim under this Insurance”;
- Obliged EP to give prompt written notification “after becoming aware of circumstances … which might reasonably be expected to produce a Claim … for which there might be liability under this Insurance”;
- Contained a ‘circumstances’ attachment mechanism such that “any Claim arising from such [notified] circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given”;
- Excluded RSA from liability in respect of “the consequence of any circumstance … notified under any insurance which was in force prior to the inception of this Insurance”.
The notification history
The relevant facts, as found by Moulder J, were as follows:
|30 June 2006||First Policy incepts|
|February 2007||EP becomes aware of problems with steel tank system at two sites: air is leaking out and water in, preventing booms from rising properly|
|23 February 2007||Meeting between RSA, EP and broker (AON):|
(a) Steel tanks problem mentioned as notifiable circumstance under the First Policy;
(b) EP reports that one option is to install air bags.
Later the same day, Mr Wyllie of EP phones Mr Hill of AON (who left the meeting early) to summarise the notification as “concerning a weakness in booms”.
|9 June 2007||Mr Wyllie completes proposal form for renewal with RSA describing known circumstances as “tanks on booms but we are fixing these with inflatable bags”. Notwithstanding the proposed fix, Mr Wyllie nonetheless wishes to make a notification “on a precautionary basis, should there be any future problems”.|
|29 June 2007||First Policy expires|
|30 June 2007||Second Policy incepts|
|2 May 2008||Mr Wyllie notifies AON of failure of the bags and that EP was “thinking of going hydraulic”. AON informs RSA, who respond that loss adjuster is being instructed “in relation to this potentially new matter”.|
THE RELEVANT COVERAGE DISPUTE
EP never was the subject of a third party “Claim”. Rather, the relevant dispute (the subject of the appeal) concerned RSA’s obligation to indemnify EP as to Mitigation Costs, specifically which of the Policies were triggered.
EP contended that both Policies responded:
- The First Policy in relation to the steps to remedy cracking in the stainless steel tanks and to introduce replacement air bags.
- The Second Policy as regards the introduction of the hydraulic system.
RSA countered that all mitigation steps attached to the First Policy, and the Mitigation Costs indemnity was consequently the subject of a single £5m limit of indemnity (much of which had been spent on rectification of other problems with EP’s pools).
MOULDER J’S JUDGMENT
(As well as addressing various other disputed issues) Moulder J found in favour of EP as regards the Mitigation Costs point.
Moulder J identified and answered three key questions, as follows.
First, was there a valid notification on 2 May 2008 under the Second Policy? Moulder J considered that there had been.
Secondly, what was the scope and effect of the notification in February (and/or June) 2007? Here, Moulder J’s reasoning and conclusions were:
- Mr Wyllie made a notification of circumstances at the meeting on 23 February 2007. That notification concerned problems with the steel tanks (and the prospect of remedying those problems by introducing air bags), but it did not extend to the hydraulic system.
- The judge was fortified in her reasoning by the expert evidence, as she found it to be, namely that there was no fundamental problem with the ‘air drive’ system such as might render foreseeable the need to discard that system and replace it with the hydraulic system. As such she concluded that there was no or insufficient causal link between the notified circumstances and the later claim.
- The judge further held that the February 2007 notification could not in any event extend to the hydraulic system as Mr Wyllie was not aware of any fundamental defect in the air drive system and so, purportedly following Kajima UK Engineering Limited v The Underwriter Insurance Company Limited  EWHC 83 (TCC) (Akenhead J) (at paragraph 99(d)), he could not notify something of which he was unaware.
Moulder J’s third and final question asked whether the hydraulic system Mitigation Costs fell under the First Policy or the Second Policy. Her answer (flowing from her findings on the first and second questions) was that the Second Policy, and not the First Policy, was triggered.
THE DECISION OF THE COURT OF APPEAL
Moulder J’s second question
The Court of Appeal (addressing RSA’s Appeal Ground 1) considered first Moulder J’s findings in respect of her second question, viz. the scope of the 2007 notification.
The Court of Appeal unanimously held that the judge had fallen into error. As set out in the main judgment, of Dame Elizabeth Gloster DBE, the Court identified the following key strands in the argument:
- In February 2007 EP was notifying a possible claim by third parties in relation to design problems in the pools. The essential notification was that “booms were failing – i.e., not rising and lowering properly” (paragraph 44).
- In June 2007 the notified circumstances critically included EP’s recognition that “it might not have got to the bottom of the problem in the sense of understanding what the root cause of the booms’ failure was” and that the air bags solution might not work; hence, EP “wanted to make a general precautionary notification” (paragraph 45).
- It was inapt to “over-analyse” the failure of the booms “by dissecting every potential cause of the problem as a different ‘notifiable’ circumstance” (paragraph 47). Instead, EP were aware “that there was a serious problem in the failure of the booms to rise and fall properly”. So, as Akenhead J said in Kajima “a notification of circumstances will be taken to cover the defects causing and the symptoms and consequences of the circumstances notified” (paragraph 47). I.e., EP was notifying all potential causes of the failure of the booms and all the consequences of those causes, including necessary remediating steps.
- The judge’s limiting factor, namely that Mr Wyllie did not know of the need to introduce a hydraulic system, failed to recognise that it was possible to notify a ‘hornet’s nest’, i.e., that “the insured can notify a problem in general terms without fully appreciating its cause or its potential consequences (e.g., because the insured is not a technical specialist)” (paragraphs 39(iii) and 39(iv)). Insurance will then “cover claims which have some causal connection to the problem notified” (paragraph 39(iv)).
- The judge’s limiting factor also failed to differentiate between the subjective and objective aspects of a notification. It was not an end of the analysis to fix the limits of the insured’s subjective knowledge. Rather, such knowledge then provided the platform to determine objectively whether Claim A or Claim B arose therefrom (paragraph 39(vii)).
Having reached that point, the Court of Appeal then turned to whether the hydraulic system Mitigation Costs fell within the First Policy. As to that:
- The Court took care to frame the correct question, given the wording of the Mitigation Costs clause: the hydraulic system Mitigation Costs would fall for cover under the First Policy if the costs were directed to the mitigation of a third party “Claim” that “arise[s] from” circumstances notified under that Policy (paragraph 48).
- The Court concluded that the relevant third party “Claim” by owners of swimming pools would be “based on booms in supplied pools failing to rise and fall” (paragraph 51). It would not matter to the owners “what the technical reason was for the non-functioning of the booms” (paragraph 51).
- The remaining question was whether such a third party “Claim” did “arise from” the circumstances notified in 2007 in the sense of there being the requisite causal link? The answer to this question was yes, because: (a) all that was required was a connection that was other than “purely coincidental” (per Kajima) (paragraph 55); (b) EP’s notification in 2007 was explicitly pregnant with the possibility that the air bags solution would not work, and thus that other remedial steps would be needed (“which is precisely what happened”) (paragraph 54); and (c) there was a ‘but for’ link between the repeated failures of the steel tanks and the installation of the hydraulic system in that if the former had not happened, the latter would not have been needed (paragraph 55).
That left the Court to deal with Moulder J’s reliance on the expert evidence (RSA’s Appeal Ground 2). Its conclusion was that such evidence was irrelevant. What mattered was what EP knew (subjectively) about the causes of the booms failing to rise and fall properly (answer: it did not know the cause) and then, which “Claims” (objectively) arose from the notified circumstances. The expert evidence could not address Mr Wyllie’s state of mind; nor could it impact the objective question when EP “was not obliged to notify the actual cause of the mechanical defects in the tanks … and did not do so” (paragraph 65).
Other aspects of the appeal
Having allowed RSA’s appeal on Appeal Grounds 1 and 2, the Court of Appeal did not address all of the other submissions of the parties. Those it did address are:
- RSA’s Appeal Ground 5: RSA argued that there was no separate requirement of foresight, on the part of an insured, as to which “Claims” might arise from the notified circumstances. All that mattered was that there was, objectively speaking, the requisite causal connection; not that that connection was foreseen at the time of notification. Had it been necessary to decide the point, Dame Elizabeth Gloster would have agreed with RSA’s submission (paragraph 74).
- EP’s Respondent’s Ground 1: the Court did not accept that any relevant notification was made to the Second Policy in June 2008 (paragraphs 77 to 79).
- EP’s Respondent’s Grounds 2 and 3: the Court concluded that, as the notification under the First Policy was sufficiently wide to embrace all Mitigation Costs, EP did not and could not notify relevant circumstances under the Second Policy and was precluded from obtaining an indemnity under the Second Policy in respect of those costs (paragraphs 81 to 89).
The illuminating aspect of this decision by the Court of Appeal is how ‘hornet’s nest’ notifications, which traditionally arise in the context of suspicious activity by a particular individual carrying out work for the insured (such that the notification may relate to all cases handled by that individual) or relate to claims of a particular type (e.g., pensions claims), may be made in relation to aspects of a much more specific problem or situation. The key feature of the Court’s analysis, which was the foundation stone for its disagreement with Moulder J’s reasoning and result, was that the February/June 2007 notification by EP expressly left open the cause of the problems with the booms. As such, any later “Claim” that had a non-coincidental connection to the cause (as ultimately identified) or to the symptoms/consequences of that cause arose from the notified circumstances.
Viewed this way, the basket of “Claims” arising from this type of ‘hornet’s nest’ notification is wide. Take the contractor (with a design responsibility) who notifies the fact that the front doors to a number of new-build flats, within a development, are chafing the frame; but overtly recognises that the cause is unknown. Is the insurer thereby on risk for a later third party “Claim” seeking damages for the defective foundations of the development, on the premise that, as subsequent investigations revealed, the cause of the chafing was the misalignment of the walls referable to the defective foundations? Euro Pools would suggest the answer is: yes!
Insurers will be alive to the prospect that Euro Pools – a decision that is broadly pro-insured as a matter of principle albeit pro-insurer on the facts and in the result – will militate towards earlier and less specific notifications by insureds.
 Unless otherwise stated, references to paragraph numbers are to Dame Elizabeth Gloster’s judgment.
 Hamblen LJ agreed with Dame Elizabeth Gloster on these points, without any further comment (paragraph 115). Males LJ expressed himself in more tentative language (at paragraph 114).
Keywords: Mitigation costs, Notification of claims and circumstances, Professional Indemnity Insurance