HLB Kidsons v Lloyd's Underwriters and others
Kidsons, a firm of chartered accountants, claimed under their professional indemnity policy in respect of claims made by clients relating to Solutions at Fiscal Innovation Limited (S@FI), a company owned and managed by the firm which marketed tax avoidance schemes.
During the summer of 2001, one of the insured's tax managers suggested that a particular product (a discounted option scheme, or DOS) and S@FI's tax avoidance schemes generally were fundamentally flawed and that the administrative procedures needed to implement them were likely to fall foul of the Inland Revenue.
On 29th August 2001, Kidsons' board decided to review the DOS product and notify insurers. The general view, however, was that the manager's wider concerns were unjustified. The subsequent investigation was confined to the DOS product.
On 31st August, Kidsons wrote to its placing broker stating that "a tax manager… has expressed the view that the Inland Revenue, if minded, could be critical of some procedures followed in certain cases" and that the board intended to investigate. The letter continued: "this might be regarded as material information for insurers".
The letter was shown to the placing underwriter for the lead syndicate on 27th September. In October 2001, a further copy was presented to the two leading Lloyd's syndicates, together with a claims file and a bordereau, which noted "Nature of claim: possible tax errors in fiscal engineering work".
A subsequent letter written in March 2002 reported on the outcome of the investigation, suggesting that the "technical efficiency" of the DOS product was accepted, "but in some instances there might be procedural difficulties involving the trustees for each scheme".
This letter was presented by the brokers to some of the insurers in April 2002 and to the remainder in July. The full extent of S@FI's problems did not become apparent until September 2003.
Kidsons' insurance policy ran from 1st May 2001 to 30th April 2002. As a "claims made" policy, it responded to claims first made against the insured during the policy period.
General condition 3 stated it was a condition precedent to the insured's right to an indemnity that the insured give insurers notice "as soon as practicable" of any claim made against them.
General condition 4, however, was a standard "circumstances" clause, requiring the insured to give insurers notice: "as soon as practicable of any circumstances of which they shall become aware during [the policy period] … which may give rise to a loss or claim against them. Such notice having been given, any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of [the policy period] … shall be deemed for the purpose of this insurance to have been made during the subsistence hereof."
The issue was whether the firm had validly notified insurers about "circumstances" of which they became aware during the policy period that might give rise to claims against the firm.
The judge held that the extension of cover provided by General condition 4 was contingent on notice of the circumstance having been given as soon as practicable.
She found that, in August 2001, the firm was sufficiently aware of wider concerns about the whole S@FI operation to notify insurers of a circumstance. The letter of 31st August was, however, "coy in the extreme". No valid notification took place in September or October 2001 because a reasonable recipient would have had no idea what circumstance, if any, was being notified.
In the judge's view, no notification took place until April 2002 and that only covered the DOS product, not the wider problems. Any claims relating to S@FI's other activities had not been notified until after the policy expired and so were not covered by the insurance.
Kidsons appealed, claiming that the presentation to insurers in October 2001 was an effective notification of all the issues raised by the tax manager.
They also challenged the judge's decision that the notification made in April 2002 was limited in its scope and that the presentation in July 2002 was ineffective because it was not made "as soon as practicable".
Insurers were ready to concede that a notification was made in October 2001, but said it was limited to circumstances relating to the implementation of the DOS product. By that time, the firm was satisfied there was nothing in the tax manager's wider concerns and so had ceased to be "aware" of any wider circumstances.
The Court of Appeal held that a notification was made in October 2001 that covered the tax schemes as a whole, but that it went no further than their implementation. It did not cover the validity of the products themselves or any mis‑selling.
Generally, a party's subjective intention in giving a notice is not relevant to the interpretation of the notice itself. Objectively considered, the letter of 31st August, accompanied by the comment on the bordereau and a claims file, was clearly intended to be a notification of circumstances.
Insurers' argument that the insured's awareness of the manager's wider concerns had somehow ceased by October 2001 was dismissed. The firm was plainly aware of those concerns, whether or not it agreed with them.
The Appeal Court acknowledged that the letter of 31st August was not very satisfactory, but there was no allegation of bad faith. The question was what the letter said to a reasonable recipient, not what it did not say.
What the letter actually said was that the Inland Revenue "could be critical of some procedures followed in certain cases". The majority of the Court of Appeal held that this gave effective notification that the implementation of some of S@FI's products might be criticised and that this might give rise to possible claims.
The presentation to insurers in March 2002 merely updated the October one and reiterated the same concerns about implementation.
The Court of Appeal unanimously agreed with the judge that the presentation in July 2002 was made out of time. The requirement to give notice as soon as practicable was a condition of the extension of cover to subsequent claims that arose out of the circumstance. This was a "paradigm example" of a condition precedent.
Otherwise, however late a notice of a circumstance was given, a claims made policy would extend to cover any claim arising from that circumstance. The policy would become entirely open-ended.
Kidsons' appeal was therefore dismissed, save to the extent that the October 2001 presentation effectively notified the two leading Lloyd's syndicates of circumstances concerning the implementation of S@FI products generally, not just DOS. The presentation in April 2002 was similarly effective in relation to those insurers to whom it was made.
For insureds, deciding when a potential problem has become a notifiable circumstance can be very difficult, particularly when, as in this case, there has been no complaint from a third party and the concern is wholly internal.
Lord Justice Rix thought it was doubtful that, in a normal case, the insured's own concern that it might have made a mistake, without more, would be a notifiable circumstance, "otherwise, every insured could extend his policy indefinitely simply by a notification based on his own lack of confidence".
He also disagreed with the judge's approach that a notification had to be sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to what it was intended to notify. He thought few notifications would survive if there were such a stringent test. Instead, his decision concentrates on what the notification, viewed objectively, actually says.