English Court of Appeal says a ‘hornets’ nest’ or ‘can of worms’ is a valid circumstance notified under a claims-made policy
The English Court of Appeal recently overturned the High Court’s decision in Euro Pools Plc v Royal and Sun Alliance Insurance Plc  EWHC 46. We discussed the English High Court decision in our Insurance Newsletter 2018 – 4. The Court of Appeal allowed the appeal in Euro Pools Plc v Royal and Sun Alliance Insurance Plc  EWCA 808.
Euro Pools specialised in the installation of swimming pools.
The moveable partitions in one of its installed pools would not rise and fall correctly as designed. The partitions allowed the pool to be divided into smaller pools. The partitions were hollow, allowing air to be pumped into them to force them to rise. Leaks developed in the partitions.
Euro Pools thought they could remedy the leaks by placing inflatable bags inside the partitions. It notified its liability insurer of the partition problem as a circumstance.
After the liability policy renewed, Euro Pools discovered that the bags did not work and it had to install a more costly hydraulic system instead. The policy provided cover for mitigation costs and Euro Pools claimed for the cost of the hydraulic system as a mitigation cost in the second policy year.
A dispute arose as to whether the claim for the mitigation costs fell to be covered in the first policy year because of the notification of the circumstance, or in the second policy year when the mitigation costs were incurred and claimed for.
In essence, the High Court said the notification of the circumstance in the first policy year was limited to the inflatable bag solution. It noted that it wasn’t until the second policy year that the insured discovered this didn’t work, necessitating the cost of the hydraulic system.
Court of Appeal
Reversing this, the Court of Appeal found that the claim for the mitigation costs attached to the first policy year as a result of the notification of the circumstance in that year.
The Court of Appeal found:
- The term of the policy deeming a subsequent claim to have been made back in the year the insured notified the related circumstance should be interpreted with a view to its commercial purpose.
- A requirement to notify a circumstance that ‘may’ give rise to a claim only requires a possibility of a claim in the future.
- A circumstance can be a ‘hornets’ nest’ or ‘can of worms’ situation where the exact scale and consequences of the problem are not fully known at the time.
- Although the insured had to be aware of a relevant circumstance, that did not mean the insured had to know at the same time the cause of the problem or the likely consequences of it.
- A claim arising from a properly notified circumstance must have some causal link to the circumstance. A coincidental link alone is not enough.
The Court of Appeal said it does not make any difference to the validity of a notified circumstance that the insured does not know the fundamental cause of the problem at the time. The notification will validly cover the defects causing, and the consequences of, the circumstance. The Court of Appeal said it is inappropriate:
… to over analyse the problem by dissecting every potential cause of the problem as a different ‘notifiable’ circumstance.
As there was a causal connection between the circumstance notified and the mitigation cost of installing the hydraulic pumps, the costs were covered in the year the circumstance was notified.
We welcome the Court of Appeal’s decision.
It confirms that an insured can validly notify general circumstances that may give rise to a claim, without having full knowledge of the cause of the problem or the consequences of it. Once notified, any subsequent claim with a causal link to those circumstances will be covered.
It is interesting to note that the insured’s desire to find cover in the second policy year and not the first appears to have been driven by the fact that the limit of cover in the first policy year had nearly been reached. Full cover was available in the second policy year. However, the law must determine the matter objectively and consistently without consideration of levels of cover in any particular policy year.
Please feel free to contact us if you require any further information.