The recent case of J. Rothschild Assurance v Collyear (the JRAcase) may have worrying implications for those underwriting liabilities arisingfrom Y2K related claims as a result of the ruling of the court in respect of thepotential breadth of the right to notify ‘circumstances’ likely to give riseto claims, rather than simply claims themselves .
‘Claims Made’ Policies
The great majority of insurance policies are written on a ‘claims made’basis, ie they apply to claims made during the policy period, regardless of whenthe acts or omissions giving rise to the claim took place. This has allowedinsurers to educate themselves about the potential impact of the Y2K problemand, in most cases, to formulate fairly wide-ranging exclusion clauses toprotect themselves from the claims which are likely to result. Accordingly, evenif an insured currently has a policy which is worded widely enough to providecover in respect of Y2K matters, it is likely to find the insurer insisting uponthe insertion of an exclusion clause as a precondition for renewing cover.
The difficulty which this creates for most insureds is that they may befearful that claims will be made against them in respect of Y2K matters (perhapsas a result of some form of internal review during recent months of theiroperations and likely exposures), but the claims themselves have yet to be madeand are unlikely to be made for at least 12 months from now, by which time thepolicy will almost certainly have come up for renewal and exclusion clausesinserted.
In the light of this, much attention has focused on a clause which featuresin many policies, which provides that an insured can notify ‘circumstances’likely to give rise to a claim at some point in the future, on the basis thatany claim which then arises from them will be treated as if it was made andnotified to the insurer on the date of the original notification of‘circumstances’ to the insurer (and will thus be covered by the policy inquestion).
The JRA Case
The Securities and Investment Board, having concluded in the light of areport prepared by KPMG that there had been wide spread ‘misselling’ ofpersonal pensions, issued guidance to require reviews to be carried out bypensions advisers, and for offers of compensation to be made to any client whowas thought to have suffered loss as a result of past advice.
JRA, who had an insurance policy with the defendants which was written on a‘claims made’ basis, promptly wrote to the defendants advising them of theSIB guidance and purporting thereby to make a valid ‘claims notification’under the relevant section of their policy, notwithstanding the fact that theyhad not at that stage identified any particular clients who might have suffereda loss as a result of JRA’s advice.
Under the policy, JRA were covered for all claims made during the policyperiod and were also covered for claims that arose from circumstances that JRA‘became aware of’ which ‘may give rise to a claim’ which they notifiedto the defendants during the policy period.
The defendants contested the validity of the notification (not least becauseit was made shortly before the expiry of the policy period, following which itappears that it was unlikely that cover would be renewed), and construed thewords ‘may give rise to’ as meaning circumstances which give rise to a materialobjective risk of a claim against JRA. In this respect, they pointed to lettersfrom JRA in which they professed confidence in their own practices as proof ofthe fact that there was no such ‘material’ risk in relation to JRA.
The court however held that the risk notified did not have to be a‘material’ risk for two reasons. First, the policy wording used the words‘may give rise to a claim’, which was weaker than the words ‘which is likelyto give rise to a claim’. Secondly, the ‘price’ for the extended cover wasthe fact that the defendants must be notified as soon as possible of therelevant circumstances which would in turn provide the defendants with theopportunity to set appropriate reserves and suggest ways in which the potentialloss should be mitigated. In view of this, the court found that there was ‘nojustification for demanding too much of the test of the notified circumstancethat may give rise to a claim’.
Conclusions
Insurers have already seen the commencement of purported ‘notifications’in respect of Y2K matters in similar circumstances, ie where there is no directclaimant yet identified but where there is a perhaps unarticulated fear thatclaims will ‘inevitably’ result.
From the insureds’ point of view, the advantage of this is clear; they willbe preserving an argument that Y2K claims (if made at some point in the future)will be covered by the policy, and may be therefore getting the advantage ofcover under a policy which does not yet contain explicit Y2K exclusions. In thisregard, the JRA case set out above is likely to provide them withconsiderable support, in that they will apparently not need to satisfy any testof ‘materiality’, nor identify any specific claimants from whom Y2K claims mayoriginate.
However, the window of opportunity for this approach is likely to be narrow;not only are specific Y2K exclusions likely to be inserted upon renewal of anyrelevant insurance policy, but even if they are not, the wording of theprovisions relating to the notification of ‘circumstances’ is likely totightened up significantly, including potentially a requirement for theidentification of specific claimants and some concept of there being areasonable, objective likelihood that the claimants so identified will actuallymake a claim. In the meantime, insureds are likely to find little sympathy frominsurers when making a ‘blanket’ notification of their exposure to the Y2Kproblem per se, and will need to prepare themselves for the dualproblem of fighting a coverage dispute at the same time as they contest the Y2Kclaim itself.
