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Breach
of policy terms: a clause requiring notice in an excess layer professional
indemnity policy was not a condition precedent and was capable of sounding
only in damages. A breach, however serious, could not entitle the insurer
to reject the insurance claim.
The appellant insurers, Sirius and others, provided excess layer professional
indemnity insurance to London & Manchester Assurance Co. Ltd ("LMA")
(predecessors of the respondents, Friends Provident) for the period
1 February 1993 to 31 January 1994. The primary layer of cover was provided
by a Lloyd's syndicate. Both layers were placed by the same brokers
and were on a "claims made" basis, in that indemnity was provided
against losses arising from claims made during the period of the policy.
On 28 January 1994 the legal services manager of LMA wrote to Lloyd's
underwriters at the broker's address in the context of negotiations
for the renewal of cover. The letter stated that there were no circumstances
likely to give rise to a claim under the policy except for "Pensions
Transfers and Opt Outs". This was a reference to investigations
proposed by regulators into financial advice provided to employees in
relation to pension scheme transfers or opt outs from company schemes
to personal pension plans which later became known as "pensions
mis-selling". As a result of these investigations, LMA had to pay
£9m to clients in compensation.
Clause 2 in the primary policy obliged LMA to notify underwriters as
soon as possible of any circumstances that might give rise to a claim
and provided that any claim arising from circumstances notified to the
insurers in accordance with that clause should be deemed to have been
made during the period of the policy. The excess layer policy incorporated
the AWGS Excess Wording, clause 5 of which required LMA to give immediate
notice to underwriters in writing of any loss or circumstances likely
to give rise to a claim or loss under the excess policy.
LMA sought to recover its loss from underwriters for the 1993-4 year
on the grounds that, although the claims had not been made during that
year, they arose out of circumstances described in the letter of 28
January 1994 and should therefore be treated as having occurred during
the period of cover. The Lloyd's syndicates accepted liability under
both the primary and excess layer policies but Sirius and others did
not. This was on the grounds that their policies only covered claims
actually made within the policy period and that even if their policies
did extend to claims arising out of circumstances notified within the
policy period, LMA did not notify them of any such circumstances within
that time, notice not being given to them until 2002.
A number
of different issues were determined at first instance. Whilst Moore-Bick
J's decisions were largely upheld, the Court of Appeal ruled against
the reasoning of the Commercial Court on the important matter of construing
clause 5 of the excess wording.
The Court of Appeal held:
1) The
excess policies did cover claims arising out of circumstances notified
to the underwriters during the policy period. A "claims made"
policy could only work on this basis. (First instance decision upheld.)
2) Notice to the primary layer underwriters was sufficient to bring
the claim within the excess layer policies. The clause in the primary
policy required notice of the relevant circumstances to "the
underwriters" and on the evidence it was the intention that this
clause be incorporated into the excess layer policies. (First instance
decision upheld.)
3) The letter of 28 January, although addressed to the prospective
insurers for the 1994-5 policy year, was still adequate notice to
primary layer underwriters of the circumstances which may give rise
to a loss. (First instance decision upheld.)
4) LMA was obliged to give notice to excess layer underwriters of
claims and circumstances in accordance with clause 5 of the excess
layer wording. In overturning this aspect of the Commercial Court
decision, it was held that clause 5 was not an innominate term, capable
of having the effect of a condition precedent with regard to the particular
claim, with the result that any breach of its provisions meant that
insurers were not bound to meet the claim. It was in fact an ancillary
provision and damages were the appropriate remedy for breach. Clause
5 did not provide, either as a matter of construction, or of implication,
that insurers would be free of liability in the event of a serious
breach or breach with serious consequences. In so doing Mance LJ,
with whom Sir William Aldous agreed, did not accept the Court of Appeals
conclusions in Alfred McAlpine v BAI (Run -Off) Ltd [2000] 1 Lloyd's
Rep 437.. Waller LJ, who also gave the judgment in Alfred McAlpine,
gave a strong dissenting judgment reiterating his view that a clause
which provides that notice of a claim must be given "as soon
as possible" may be not be a condition precedent, but may, if
it is breached in a way which seriously prejudices the insurer, give
a right to reject a claim rather than leave the insurer simply with
a claim for damages.
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