A LATE NOTIFICATION

You Cannot Reject Claim Unless You Can Show Prejudice

In the recent decision of Sirius v Friends Provident, the Court of Appeal has
closed a door previously left ajar in Alfred MacAlpine v BAI (Runoff). The
court confirmed that unless a claims notification clause is expressed as a
condition precedent to insurers' liability, insurers will not be able to reject
late-notified claims unless they can show that they have suffered some
prejudice.

Background

Where compliance with a condition – such as a claims notification clause – in

a (re)insurance contract is a condition precedent to (re)insurers' liability, an
insurer is entitled to reject any claim where the insured has failed to comply.
The classic example is a requirement for notification of a claim "as soon as
reasonably practicable", which is often expressed as a condition precedent to
insurers' liability. This proposition is uncontroversial, and well known to
market professionals.

Where a claims notification clause is not expressed as a condition precedent

to liability, then in the event of a breach by the insured, the general rule
expressed in the case of Alfred MacAlpine v BAI is that insurers must show
that they have suffered prejudice before they have any remedy against the
insured. Even then, the insurers' remedy is broadly limited to a right to set
off against the insured's claim the amount of the prejudice or "damage"
suffered by insurers as a result of the late notification.

In many cases, it will be difficult for insurers to establish that they have
suffered damage as a result of an insured's breach. In the context of claims
notification, the insurer will typically need to show that if had it been notified
"on time", then it would have been able to reduce its overall exposure to the
claim.

In the BAI case, the Court of Appeal indicated that insurers may also have
an alternative remedy as a result of the insured's breach of claims conditions
when they are not expressed as conditions precedent. Lord Justice Waller
held that the consequences of the insured's breach of a claims notification
clause will vary depending on the seriousness of the breach and its
consequences.

If an insured's late notice of a claim is sufficiently serious and has "serious

consequences" for the insurer, the insurer would be entitled to reject the
claim even if unable to prove prejudice. In effect, the Court of Appeal was
saying that in cases of "serious breaches with serious consequences", a
breach of a condition can have the same effect as a breach of a condition
precedent.

It is this proposition that was considered by the Court of Appeal in Sirius v

Friends Provident.

The decision in Sirius v Friends Provident

In Sirius v Friends Provident, the Court of Appeal held that the claims
notification clause was not a condition precedent to insurers' liability.

This led to the question of whether the insured's breach was sufficiently
serious with serious consequences so as to allow insurers to reject the claim
as suggested in the BAI case.

The Court of Appeal ruled not only that insurers could not reject this claim
for late notice, but also rejected altogether the proposition put forward in the
BAI case. It ruled that there was no justification for granting insurers any
alternative remedy.

The Court of Appeal stated that if insurers can show "serious" consequences
as a result of the insured's breach of the claims notification clause, then
those consequences will often be quantifiable (even if only as a loss of a
chance). If so, then there is no need to depart from the rule of setting off
such damage or "prejudice" against the amount of the insured claim.

If insurers wished compliance with the claims notification clause to be a

condition precedent to the insured's rights to an indemnity, then insurers
should have provided for this in the contract wording.

What does this mean to you?

If a (re)insured has delayed for a significant period of time before notifying a

claim, then it will often be very difficult for (re)insurers to obtain enough
evidence to prove that they have suffered "measurable" prejudice as a result
of the delay. This point was made by Lord Justice Waller in his dissenting
judgment.

The majority of the Court of Appeal did recognise that these difficulties can
arise, and suggested that in those circumstances the Court "should incline to
a quantification favourable to insurers." In reality, this may be cold comfort
to (re)insurers who receive notice of claims at the end of the limitation
period, and thus lose the opportunity to investigate a claim or exert any
control over its defence.

The message to underwriters coming from the Court of Appeal in Sirius v

Friends Provident is that the courts will not allow (re)insurers to rely upon
breaches of claims conditions (such as claims notification clauses) unless
they are able to show some quantifiable prejudice. If (re)insurers want to
make timely notification of claims a condition precedent to liability, they
should do so by drafting appropriately worded claims conditions.

Unless conditions are expressed as conditions precedent, then insurers will

have to show prejudice.