Timing is of the essence

28 January 2021

By PETER MORAN, LACHLAN BOUGHTON and CHRISTOPHER HARRISON

Professional indemnity insurance is ordinarily issued on a ‘claims made and notified’ basis.

Subject to the specific policy wording of a ‘claims made and notified’ policy, the insurer’s promise to pay is triggered by:

• A claimant first making a claim against the insured during the insurance period (regardless of when the circumstances giving rise to the claim occurred); and
• The insured notifying the claim to the insurer during the insurance period or, in some policies, within a ‘grace period’ after the expiry of the insurance period.

Often, the claim against the insured that triggers the policy cover is made many years after the circumstances or incident that caused the relevant loss. If an insured hasn’t continually renewed their policy, they may be left exposed without cover for a claim made after the policy has expired, unless the circumstances of the claim were notified to the insurer within a prior policy period.

Timely notification

If an insured becomes aware of a claim, the insurer should be notified as soon as reasonably practicable and, in any event, before the end of the existing policy period.

Similarly, if an insured becomes aware of circumstances that might give rise to a claim, it’s vital that the insurer be notified as soon as reasonably practicable, and in any event, before the end of the existing policy period. By doing so, the insured will likely be entitled to seek cover under that policy for any claim that subsequently emerges, even if that occurs after the expiry of the policy.

This is the case because the policy contains a clause under which the claim is deemed to have been made during the policy period that the circumstances were notified. Alternatively, if the Insurance Contracts Act 1984 (Cth) applies to the policy, notifying the insurer of circumstances triggers section 40(3) that will have the same effect.

If there’s no deeming clause in the policy, no notification of circumstances as soon as reasonably practicable and a claim subsequently emerges, the insured may not be entitled to cover.

Examples of circumstances that might give rise to a claim and should be notified to your insurer as soon as is reasonably practicable include:

• Any mistake, oversight or omission in work, or the work of your partner or employees, that you are aware of that could possibly lead to a claim being made, even if your client is not yet aware of the issue.
• A client has complained about your work and/or is refusing to pay you for work you have completed.
• Any comments or remarks a client makes that indicates that they may make a claim against you, either now or in the future.

Continuous cover

If someone who was insured in unbroken successive periods notifies their insurer of a claim or circumstance in the subsequent period that should have been notified in the earlier period, then ordinarily that claim will be covered under the latter policy, but subject to the lesser limit of the two applicable policies.

The nature of a ‘claims made and notified’ policy is that the insurer bears the risk of indemnifying claims that arise from circumstances occurring before the relevant policy incepted. This means that insurers often offset this risk by excluding those claims made against the insured within the policy period, but which arise from facts or circumstances occurring before the policy period and about which the insured ought reasonably have known might result in a claim.

However, in many cases an insurer will also provide a continuous cover extension that provides cover to the insured, notwithstanding any failure to notify the insurer of prior circumstances. This is the case provided the insured held continuous cover with the insurer from the time when the insured first became aware of the notifiable circumstances and the time when the claim was actually made against them.

Failure to make timely notification

If, after a contract of insurance is entered into, a claim is made against an insured within a policy period but not notified to the insurer, then the insured may be exposed to an absence of cover.

In such circumstances, section 54 of the Insurance Contracts Act may come to the aid of an insured to cure their late notification of the claim. However, an insurer will be entitled to reduce its liability to indemnify the insured by reference to any prejudice it has suffered by reason of any late notification of the claim.

A possible source of prejudice may be a lost opportunity to settle a claim at a reduced level (including by reason of any increased interest entitlement), or increased investigation and defence costs due to the lapse of time.

Importantly for insureds, a timely notification avoids the issue of possible prejudice being raised by an insurer to reduce its liability to indemnify the insured.
 

DISCLAIMER
The information contained in this article, which is current as at the date of publication, provides only a general overview of subjects covered. It is not intended to be taken as legal advice or advice regarding any individual situation and should not be relied upon as such.

Realcover is underwritten by QBE Insurance (Australia) Ltd and managed by Marsh Advantage.