Obtaining an insurance policy and paying the premiums is only the first step to ensuring that your business has insurance cover when it needs it. An often overlooked or at least underestimated aspect is that the typical liability insurance policy has specific requirements about notifying your insurer of a potential claim. If you fail to strictly adhere to these requirements, your insurer could decline you cover.
The requirement to give proper notice to the insurer of possible claims arises from the importance insurers place on their involvement in the resolution or defence of any claim made against the insured. In most liability policies, the insurer has the right to control or manage the defence of any claim, including the right to select or participate in the selection of defence counsel. A delay in giving notice of a claim or potential claim can cause prejudice to the insurer. For example, an insurer may be able to negotiate a cheaper settlement early in the process or raise a viable defence to the claim.
When do I need to notify my insurer?
Liability insurance policies often require you, as the insured, to notify your insurer of any “event”, “circumstance” or “occurrence” that may or is likely to give rise to a claim against you. Often, these terms are not defined in the policy leaving many policyholders unsure of when they need to notify their insurer of a situation to ensure they have cover.
Generally, a “circumstance” will occur when you receive a complaint from a client, or you realise that the service or advice you have given a client has been negligent. If this happens, you need to consider whether, at some stage in the future, a claim could be made against you for which you are insured. If a circumstance arises which you consider may lead to a claim covered by your policy, your policy will likely require you to notify your insurer of the circumstance within a specified timeframe of you or any of your employees becoming aware of the circumstance (or at least when a reasonable person would have become aware).
If the policy requires you to give notice immediately, then your insurer must be made aware of the circumstance as a matter of urgency. If it becomes apparent you have not notified your insurer as soon as you or any of your employees became aware, then you risk losing cover. The requirement to give notice “as soon as reasonably practicable” is a little more relaxed but to ensure cover, you should still notify your insurer as soon as you become aware of a potential claim. Fixed time frames must be strictly complied with. It is also important that your notice gives full details of the circumstances giving rise to the potential claim.
A recent example of what not to do:
The Wellington City Council recently found out the importance of making proper notification to its insurer.
The Council became aware of a potential leaky apartment building called The Lofts in 2004. The Council promptly notified its insurer, Riskpool, of a potential future claim although no formal claim had been made against the Council at that stage. By November 2006, having not heard anything further from the Council, Riskpool closed its file. The Council then changed insurers in 2007.
In September 2011, Riskpool settled all existing claims on its books with its reinsurer for $12m. Given the Council’s claim for The Lofts had been closed some years earlier, it was not taken into consideration by Riskpool when reaching the settlement with its reinsurer.
In August 2013 the Council sought to re-open its claim and notified Riskpool that the owners of The Lofts had filed proceedings against the Council and others in August 2011 seeking $9.2m, largely for the costs to repair the building. Riskpool declined the Council’s claim due to the Council’s two year delay in notifying it of the proceedings. The Council then challenged Riskpool’s decision to decline the claim through the High Court. The High Court found in favour of Riskpool on the basis that the Council had failed to notify Riskpool of the proceedings within the timeframe provided for in the policy and Riskpool had been prejudiced by the Council’s delay as had the Council notified it of the proceedings in August 2011, Riskpool would not have settled with its reinsurer in September 2011 for $12m. As a result, the Wellington ratepayers may have to foot the $10m bill to repair The Lofts building.
It is, therefore, important that you and your employees familiarise yourselves with the notification requirements of your liability policy and ensure proper risk management strategies are in place. If you are unsure of what your insurer’s notification requirements are or need assistance with putting a risk management strategy in place, feel free to contact our litigation team.
 Wellington City Council v Local Government Mutual Funds Trustee Ltd  NZHC 2901
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