Claim Insights — Notifiable Circumstances and Valid Notifications part 1

Insurers are often asked what a notifiable circumstance is and how is it different to the notification of a claim.

Helpfully, there have been recent developments in case law dealing with notifications under claims made policies and the operation of section 40(3) of the Insurance Contracts Act 1984.

In part one of this two-part insight series, we explore the fundamental concepts of a notifiable circumstance and valid notification in the context of claims made policies.

Notifying is not optional

When your client should notify a circumstance to their insurer, what that notification should include and whether a subsequent claim attaches to that notification can give rise to intriguing issues. You might think notifying is optional. This is a common misconception. Here is why:

• Section 40(3) of the ICA gives your client a legal right to provide notice to their insurer of a circumstance that might give rise to a claim before the expiry of the policy period. The insurer cannot later decline liability for the claim (when made) on the basis that the claim was made after the policy expired as long as the notification is a valid notification.

• For your client, failing to notify the insurer about a circumstance creates a risk that a subsequent claim (as defined in their policy) may not be covered under the relevant policy. Valid notifications safeguard your client’s entitlement even if the claim eventuates at a later time. This creates peace of mind knowing that if a claim is made the insurer already knows about it.

• Brokers who invest time educating their clients about notifications can create practical advantages for them when a claim eventuates. Further, and consistent with their professional responsibilities, brokers who have been informed by a client about a circumstance need to understand the circumstance, advise on the requirement to notify, and support lodgement of a valid notification to the insurer on behalf of their client.

What is a circumstance?

Have you ever looked for the meaning of "circumstance" in a policy wording? If you have, there is a good chance you will not find one. This is because "circumstance" is often left undefined in an insurance policy. Accordingly, circumstance is given its ordinary meaning and case law has developed guiderails to assist in this regard.

A circumstance is ordinarily a situation which, objectively evaluated, creates a reasonable and appreciable possibility that certain matters will give rise to or result in a loss or claim made against the insured. Examples of what might constitute a circumstance include:

• a complaint from a customer of your client

• a realisation by your client that a mistake has been made in relation to a particular matter (eg advice provided to a customer)

• the outcome of a review or audit that identifies a systemic error

The obligation to notify a circumstance — let’s call this a "notifiable circumstance" — can often be expressed in policy wordings as arising when the client becomes aware of facts, matters or circumstances which may give rise to a claim against the client.

Breaking down the elements of a "notifiable circumstance" can assist. Think of it this way:

1. “becomes aware” refers to the actual knowledge of the client
2. “circumstance” is an objective matter rather than a subjective state of mind or belief
3. “may give rise to a claim” requires the ‘circumstance’ to be more than the mere existence of a legal liability, rather the bringing of a claim against the client must be a definite risk, a real possibility, or on the cards

There is no need for the client to think the claim has merit. It is the potential for a claim to be made that needs to be addressed — not the potential for it to succeed.

In relation to when to notify, the best practice is to notify early and often. Also, brokers should make their client aware of what their policy considers to be a notifiable circumstance, as the position may be different from insurer to insurer.

This will assist you to identify the point at which a circumstance becomes a notifiable circumstance.

What constitutes valid notification?

In this insight, we have emphasised "valid notification". Why? Simple. Only a valid notification safeguards your client’s right to claim.

The effect of valid notification together with section 40(3) of the ICA is that if a claim is subsequently made in later years, the insurer on risk at the time will be liable (subject to the terms, conditions and exclusions of the relevant policy) to pay the claim if the claim is attributable to the circumstance in the valid notification.

So, what are the necessary attributes of valid notification? Again, case law in Australia provides assistance. Taken from these authorities a valid notification should be in writing and:

• identify the basis of the potential claim

• be specific and not general (i.e. point to specific events, incidents or transactions and when they occurred)

• concern circumstances which, objectively evaluated, create a reasonable and appreciable possibility that it will give rise to a claim against the client

• relate to circumstances the client is actually aware of (i.e. not be speculative)

Another thing to keep in mind when it comes to valid notification is that identifying the claimant may not be essential. Also, valid notification can be given through several communications from the client or an agent acting on their behalf (i.e. you— the broker).

Finally, familiarise yourself with your client’s policy wording and any conditions about what information a notification must contain. This will put you in the best position to support your client to prepare a notification that will protect their right to claim down the line.

Coming Soon

Now that we have worked through the fundamental concepts of a notifiable circumstance and valid notification, stay tuned for part 2 of the Insight Series where we will delve deeper into the key cases which reflect the current position of the law on these matters.