NZILA President's message
Jonathan Scragg

Court explores liability policy trigger

When is cover triggered under a claims-made-and-notified liability policy?

My first foray into insurance law was acting in professional indemnity (PI) claims and it remains my principal area of practice in insurance law today. It will come as no surprise therefore that I was interested to read the High Court decision in Minister of Education v McKee Fehl Constructors Ltd [2018] NZHC 1177 in which Justice Thomas discusses the important question of exactly when cover is triggered under a claims-made-and-notified liability policy.

The McKee case concerned a correspondence school operating out of premises in Wellington. In 2009 and 2010 work was conducted to re-roof two of the blocks. Several contractors and sub-contractors were engaged, including a project management company (RDT), a roofing company, and architects (Interact). Interact was insured under a PI policy written in standard claims-made-and-notified terms.

The policy period was 1 December 2014 to 30 November 2015. The primary cover was for claims made against the insured and notified to the insurers immediately and within the policy period. The extended cover was for any future claims arising out of circumstances known to the insured which could give rise to a claim and which were notified to the insurers immediately and within the policy period, in which case the claim was deemed to be made within the policy period.

A certificate of practical completion was issued in 2010. In November 2014 the Ministry of Education (MoE) contacted RDT about leaks in the roof. A series of communications between RDT and Interact took place between March and May 2015.

In the High Court, Justice Thomas, having reviewed the evidence, concluded that, as a result of those exchanges:

• Interact had reviewed the initial contractual documents with the roofing contract and was aware the membrane used did not comply with the contractual documents
• RDT was pursuing the roofing contractor to repair the membrane
• RDT had advised Interact the MoE’s legal team was examining the matter
• Interact did not notify its insurers of those events.

In March 2017 the MoE and the correspondence school launched proceedings against several defendants, including RDT and the roofing company, seeking damages of at least $NZ1,282,521.

Section 9 claim

The judgement was on an application by RDT to join Interact to the proceedings. Interact had been removed from the Companies Register, so RDT sought leave under s9 of the Law Reform Act 1936 to launch proceedings against Interact's PI insurer. It was common ground that leave could be given if three conditions were met:

• there was a prima facie claim by RDT against Interact
• Interact had a prima facie claim under the policy, and
• Interact was not a perfectly good common law defendant.p

The first and third conditions were readily satisfied. The dispute was over the second.

Interact would have a prima facie claim under the policy if either a claim had been made against it and notified to the insurers in 2015; or if Interact knew of circumstances that might give rise to a claim against it and had notified those circumstances to the insurers in 2015. No notifications had been made to the insurers. The lack of notification was not necessarily fatal. S9 of the Insurance Law Reform Act 1977 states that:

"A provision of a contract of insurance prescribing any manner in which or any limit of time within which notice of any claim by the insured under such contract must be given shall … bind the insured only if … the insurer has in the particular circumstances been so prejudiced by the failure of the insured to comply with such provision that it would be inequitable if such provision were not to bind the insured."

No real thought was given to PI cover when the provision was drafted, but the NZ courts afterwards decided it meant the court was given a discretion to extend time if the notification was out of time, providing there had been something capable of notification in the policy period. As was said in Sinclair Horder O'Malley Ltd v National Insurance Co of New Zealand Ltd [1992] 2 NZLR 706, s9 could not breathe new life into the policy, but only rescue a claim that could otherwise have been made.

In Minister of Education v McKee Fehl Constructors Ltd, it was common ground no claim had been made against Interact in 2015, so to that extent s9 could not help. However if, after the correspondence in the first half of 2015, Interact had knowledge of circumstances that might give rise to a claim, s9 would permit the court to allow an extension of time. The insurers did not contend that lack of notification had caused them prejudice. The questions thus became whether Interact had appropriate knowledge and whether the circumstances might have given rise to a claim.

Result

Justice Thomas reviewed various authorities in NZ, England and Australia on the appropriate test to be applied in answering that question. She noted there was no consistency between authorities, with the English courts adopting a laxer approach than NZ. Her conclusion on the correct test was:

"... the test is an objective one, requiring notice when a reasonable person in the insured's position would consider there was a reasonable possibility of a claim. Notice is not required if the possibility of a claim is remote or unlikely. However, providing there is a real or definite risk of a claim, notice is required even if the claim is not probable."

Applying that test to the facts, Justice Thomas was satisfied that by May 2015 there were circumstances known to Interact that might give rise to a claim, and notification should have occurred then. S9 of the 1977 Act was thereby triggered and, in the absence of any prejudice to the insurers, it could be said there was prima facie case Interact had a valid claim under the policy.

Commentary

There are numerous decided cases on the operation of this type of cover. Issues that typically arise are: what is a claim; what are circumstances; what is the test for the insured's knowledge of such circumstances; when can it be said a claim might be made; and do circumstances notified to the insurers encompass the actual claims later made? Inevitably, each case necessarily turns on its own facts. Policy wordings differ and that will also impact on policy response. 

It is not appropriate for an insured to notify a possible circumstance every time something untoward or unexpected occurs. There is indeed a danger in doing so. If there is a premature – and therefore invalid – notification, the insured might not see the need to make further notification at the right time. Exactly what is notified is also a matter of difficulty: a notification in general terms will not encompass claims that arise from unrelated circumstances that later come to light. This is an area of great difficulty for insureds, brokers and insurers alike.

NZILA Conference, Christchurch, 19-21 September 2018

NZILA's annual conference returns to Christchurch this year after an eight-year break due to the Canterbury earthquakes. The conference theme, appropriately, is "Beyond Adversity". 

The conference is not only a chance for delegates to catch up and enjoy the conference itself, but also an exciting opportunity to reflect on and witness the exciting progress of the city's rebuild. 
  
The business program features a variety of interesting topics and speakers. The first keynote session on Thursday morning is about the future of the city of Christchurch, with speakers from Otakaro Ltd, a Crown-owned company responsible for delivering Crown-led anchor projects and precincts in Christchurch. There will be sessions about topical issues, such as global risks, emerging risks in the NZ market, Earthquake Commission reform, and cyber risks. For the first time, this year there will be concurrent sessions on the Thursday where delegates can choose to attend one of three sessions.

On a lighter (or more serious) note, Dr Tom Mulholland will speak about "How to live to 100 and stay out of the emergency department".

In addition to a stimulating business program, there will be the usual lively and much anticipated social program, with a welcome function on Wednesday evening, the president's shout and a conference dinner on Thursday evening, and the long lunch on Friday to finish the conference. I look forward to seeing you there.

Thanks to Rob Merkin QC, Duncan Cotterill special counsel, for assistance in preparing the section of this column on Minister of Education v McKee Fehl Constructors Ltd.