When it comes to insurance, brokers are in a unique position. We’re neither the client nor the insurer, we’re privy to the unique notifications from clients when there is a situation that may give rise to a claim, and the reactions from insurers to those notifications. This is a complex and evolving area, and in the post-pandemic era, we’ve observed that insurers are scrutinising all aspects of the claims process. Following a loss, the claims process can be stressful, complex, and long. This article outlines the paradigm shift in insurer’s perception of an acceptable notification of circumstances which may give rise to a claim, from a broker’s perspective.
What do you need to notify?
One of the most contentious issues is the way insurers perceive s40(3) Insurance Council of Australia (ICA) notifications of circumstances. s40(3) of the Insurance Contracts Act provides the legal framework for what should be notified to the insurer, and when it should be notified. Insureds are required to disclose, in writing, to the insurer, any facts that might give rise to a claim as soon as they become aware of the circumstance in question, to gain the benefit of cover in the future when and if a claim does arise.
There is a difference between a claim and a fact which may give rise to a claim (that is, notification). For liability policies and other financial lines products, a claim is where the insured has some kind of legal liability. A notification is merely a situation where the insured could become liable.
In reality, anything could be a notification. Insureds often ask us “exactly what do I need to notify?”, to which the response is usually “good question”. The legislation around what constitutes a notifiable event is vague, but in theory, anything which could lead to a dispute and claim on the policy, ought to be notified.
I usually encourage the insured to ask themselves “what would a reasonable person in this situation think?” However, it can be extremely difficult to have the foresight to notify certain circumstances. Often the link between the circumstance and the eventuating dispute is remote.
Limitations of the Legislation & Implications for Insureds
S40(3) of the ICA further specifies that a notification must be made within the period of insurance, but even if it is not, the insurer is not relieved of its liability under the insurance contract entered into with its insured.
The legislation does not allow for this type of complex human deliberation and consideration. It is also quite rigid when it comes to the insured’s notification requirements of a fact that might give rise to claim. However, this is contradicted by stating that regardless of the insured’s compliance, an insurer cannot be relieved of their liability. This is designed to compensate for the inadequacy of the legislation by attempting to capture how and when a circumstance should be notified, but in practice it causes confusion for insureds.
To remedy this, insurers exercise discretion in assessing claims and notifications. S40(3) is designed as a framework for insurers, yet it also provides them with room for interpretation. The variability between insurers’ interpretation of notifications of circumstances is vast and this can result in a variance in claims outcomes.
Bridging the Gap Between Legislation & Reality
Between the chasm that is legislation and reality exists Common Law to try and fill in the gaps. The application of s40(3) has been tested in court on numerous occasions, however we’re no closer to answering what a notification should look like.
The pros and cons of a detailed notification: two examples
- The case Esined No. 9 Pty Ltd v Moylan Retirement Solutions Pty Ltd1, supports the view that notifications must be sufficiently detailed and precise to attract the remedial effect of the legislation. The key learning from this case was that very broad and unspecific “blanket notifications” present practical issues for claims handlers, underwriters, and brokers leading up to renewal because it becomes extremely hard to assess the risk. It suggests notifications of facts or circumstances that may give rise to a claim must be sufficiently detailed and comprehensive so that the insurer is well aware of how the circumstance could lead to a claim, who the likely claimant is, and how the insured may have breached their duties etc. This example shows that when there has been a “broad” notification accepted, insurers are chasing up exact details at renewal to appropriately assess and price the risk. The problem is that sometimes further details simply do not exist, but the Esined No.9 decision supports insurers to seek out this information. An example of this is where a company goes into liquidation and has a runoff policy in place. A broad notification of a circumstance is made because there are no further details available at the time of.
- A recent case of MS Amlin Corporate Member Ltd v LU Simon Builders2 supports that notification of facts concerning a “wide problem” can be made under s40(3), and highlights that the notification is in the details. In other words, even if an insured isn’t exactly sure how a circumstance may lead to a claim, the insurer should accept it and simply request further information. A common example of this is companies, directors or board members being questioned by regulators. It isn’t always obvious how this could lead to a claim, as defined in the policy, but insurers should not withhold indemnity pending further information where there has been no non-disclosure by an insured. The case suggests that providing as much information as possible when a notification is vague, should be enough for the insurer. It notes that providing things like media articles i.e. journalist commentary on a director who may have been negligent, should be enough for the insurer to connect the dots on how a very vague circumstance could lead to a claim.
Whilst the second example provides a greater amount of breathing space for the insured, not every notification can be likened to another. Providing media print outs or expert opinions is not always possible.
The key takeaway from this should be that a notification needs to be made to the insurer as soon as reasonably possible, and it should also be as detailed as possible. When brokers make notifications on behalf of insureds, they ought to identify when a notification is too vague, and seek as much information as possible, identifying when an insurer might take issue with a notification that is too vague.
At Honan, we take this very seriously. Drafting notifications and providing all the appropriate information, no matter how vague, is key to unlocking cover under the policy.
Senior Claims Executive