Europools versus RSA

Protected Cell Companies – An Efficient Solution for Changing Times

Europools, a manufacturer and installer of swimming pools, discovered an issue with the movement of rising and falling vertical booms used to divide its pools into different swimming zones. The booms were failing to operate as intended. Originally they applied an “air drive” system to fix it. When this solution failed, they later tried inflatable bags, and then a hydraulic system. These solutions were applied across two policy periods.

Background

In February 2007, Europools notified its insurer of a circumstance concerning the weakness in booms and their intention to fix it with air bags. Four months later, before renewal, Europools highlighted the known circumstance being dealt with by using inflatable bags on the proposal form, stating that it was being notified on a precautionary basis should there be any future problems. Europools acknowledged that “they might not have got to the bottom of the problem in the sense of understanding what the root cause of the booms’ failure was”.

In the following policy year, the air bag solution failed and the hydraulic systems were introduced. As there were no third party claims, Europools was seeking mitigation costs for all of its remediation approaches. Europools claimed that they were entitled to cover under both policies, the first year for the first two remediation approaches and the second for the hydraulic systems. 

The Outcome

The Court of Appeal held that as Europools had specifically indicated in June 2007 that it was unsure as to the underlying cause and whether its proposed solution would succeed — and that the subsequent application of the hydraulic system was causally related to the failure of the booms — the first policy would respond to all of the mitigation costs. It was relevant that the potential claims being mitigated would have been generically for the failing booms; if Europools had faced claims based on more specific issues (e.g. air drive failure in year one vs bag failure in year two) this might have supported splitting out the claims over the policy years, but the Court held this was not the case here.

In this situation the result was not what Europools was seeking, since it limited them to one years’ policy limit rather than the two they sought, but for most insureds this will be seen as a positive result.  The first instance decision, which treated the later developments as a separate matter, would have required insureds to review all notifications of circumstances regularly to consider whether investigations into the cause of a situation require new notifications. Although this would have suited Europools, in general it would raise the concern that updating insurers might constitute a new notification subject to a further deductible. The Court of Appeal confirms the existing law (as stated in Kajima v UIC), that so called “hornet’s nest” notifications are valid – an insured can make a valid notification of a problem without knowing the full extent of the claim or claims which may arise.

Points to Consider

It will generally be welcome news for insureds that “hornet’s nest” or “blanket” notifications remain valid and can be capable of broad application to subsequent developments. This should provide insureds with some peace of mind particularly where insurers seek to impose specific matters exclusions on later years following such a notification.

However, the scope of a hornet’s nest notification will be based on facts and will depend on how the matter develops.

As such, an insured should bear in mind the ongoing need to review existing notifications and consider whether developments should be advised as updates or new notifications.