Claims handling: Notification issues

In our latest article regarding claims handling issues, we are going to look at the importance of notifications to insurers.

Most policies for professional service firms and financial institutions often operate on a claims made basis.

Following an event that is potentially covered by an insurance policy, it is vital that the notification provisions detailed in the policy of insurance are complied with. The policy may stipulate when and how to notify insurers and what information needs to be provided in order for a policyholder to obtain cover.

When and what must be notified

It is often a condition precedent to insurer’s liability that notification of claims is made promptly – often defined as “as soon as possible” or “as soon as reasonably practicable” or within a defined period of time; usually measured in days – particularly when it comes to adjudications in construction disputes.

As a general rule, when a “claim” is made it is easy to spot and therefore notify in accordance with the policy terms and conditions. A “claim” may be defined but there is usually “a demand for or assertion of a civil right or damages” usually by way of a letter or email which clearly states that a loss has occurred, compensation is sought or a claimant intends to seek a particular remedy.

When it comes to circumstances, it can become a little greyer so it is important to have regard to the terms of the policy. Unhelpfully some polices do not define what a circumstance is and therefore it is left open to interpretation what needs to be notified. Generally speaking a circumstance is a fact or event that may or is likely to give rise to a claim. Policyholders need to appreciate what these thresholds mean: in broad terms whether circumstances can be notified because a claim is a “possibility” or “is more likely than not”. The wording may also state that the policyholder should notify regardless of whether they think a complaint is justifiable or not. 

Some policies state that the insured “may” notify any circumstances they become aware of during the policy period. In this case, if the circumstance eventually evolves into a claim, even after the policy period has ended, the claim will be considered to have been made when the circumstance was notified and covered under the policy in effect at that time.

Other policies may state that the insured “must” notify any circumstances they become aware of during the policy period. These requirements stand independently from but are related to the policyholder’s obligation of fair presentation under the Insurance Act 2015. 

Who to notify

The policy will often state who must be notified. It can be direct to the insurance company (possibly via a prescribed central email address) or to a notification agent, such as a law firm acting as the agent for the insurer.

Consequences of failing to notify – either properly or at all

Failure to notify a claim or circumstance in accordance with the policy provision may lead to the insurer denying cover. This could be the case even if no actual prejudice has been caused to the insurer.  

Alternatively, an insurer may seek to recover any “prejudice” they have been caused by the policyholder if notification is late. For example, if there is a delay that leads to the issuing of proceedings the insurer may seek to claim the increased costs (both claimant and defendant) from the policyholder - this could run into the tens of thousands of pounds.

If the notification is not made promptly, or within the policy period, a claim that eventually arises in a subsequent policy year may well be excluded due to the prior facts and circumstances exclusion common to most policies or the insurer could exercise its rights as a result of a breach of the policyholder’s duty of fair presentation.

Top Tips

Notification of events and circumstances is an important element of insurance coverage:

• Policyholders and brokers should be au fait with the specific policy terms and conditions – being mindful that they can differ between policies.
• Ensure effective risk management procedures are in place to make sure staff are aware of the company’s obligations.
• Do not delay in notifying.
• If the work or project is ongoing, revisit the scope of the initial notification to see whether it encompasses any new events or incidents that have occurred.  If in doubt, make a new notification. 
• Failure to notify an insurer of a claim that is stated to be a condition precedent could result in any claim not being covered by the insurance.