In Euro Pools Plc (in administration) v Royal & Sun Alliance Insurance Plc  EWHC 46 (Comm), the High Court provided a timely reminder of the significance of the insured’s actual knowledge at the time of making a notification of circumstances. The decision also confirms the limitation period applicable to claims for mitigation costs and deals with liability for adverse costs orders made in recovery actions after the insurer’s involvement has ceased.
The Claimant, Euro Pools Plc (in Administration) (Euro Pools), was a company specialising in the installation and outfitting of swimming pools. It was insured by the Defendant, Royal and Sun Alliance Insurance Plc (RSA), under two professional indemnity policies providing cover between 30 June 2006 and 29 June 2007 (the First Policy) and 30 June 2007 and 29 June 2008 (the Second Policy). The limit of indemnity for each policy was £5 million . Both policies were written on similar terms and contained the following provisions:
- As to notification, Euro Pools was required to notify RSA “as soon as possible after becoming aware of circumstances… which might reasonably be expected to produce a Claim”;
- As to coverage, RSA agreed to “indemnify [Euro Pools] against costs and expenses necessarily incurred in respect of any action taken to mitigate a loss or potential loss that otherwise would be the subject of a claim under this insurance”; and
- As to recovery actions, RSA was entitled to “prosecute in the name of the insured for its own benefit any Claim and shall have full discretion in the conduct of any proceedings”.
The proceedings were factually complex. The dispute concerned a number of policy claims made by Euro Pools arising from deficiencies associated with movable booms and floors systems installed in its pools. Booms are vertical walls that divide a swimming pool into different zones, with the booms able to rise and fall so that a pool can be used in different configurations. Movable floors are underwater platforms that move vertically through water to vary the depth of swimming pools to accommodate various activities. As a result of deficiencies with the booms and floors systems, Euro Pools suffered losses, principally mitigation costs, exceeding its £5 million limit of indemnity.
The key issues in the claim included whether Euro Pools’ claims for mitigation costs attached to the First or Second Policy; whether the limitation period for claims for mitigation costs started to run when the costs were incurred or from a subsequent date when cover was declined; and whether RSA was liable for adverse costs orders made in a recovery action after it ceased to have any interest or involvement in that action.
The Booms Claim
In February 2007, Euro Pools notified RSA of a problem with the stainless steel tanks which raised the booms in pools when filled using an air drive system. In May 2008, Euro Pools notified RSA that it wanted to abandon its air drive system in favour of changing to a hydraulic system. The issue was whether the scope of Euro Pools’ first notification in February 2007 under the First Policy was broad enough to cover the mitigation costs associated with the subsequent decision to replace the air drive system with a hydraulic system in May 2008.
The relevant principles applicable to determining the scope of a notification of circumstances were summarised in the dicta of Akenhead J in Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd  EWHC 83 (TCC). These include that only circumstances of which an insured is actually aware can be the subject matter of a notification; and that there must be a causal link between the notified circumstances and any later claim made by an insured.
Adopting these principles, Moulder J held that Euro Pools was only aware of a problem with the stainless steel tanks under its booms in February 2007 and not the wider problem with its air drive system. Accordingly, the mitigation costs arising from replacement of the air drive system attached to the Second Policy in light of the notification made in May 2008.
The Leeds Diving Pool Claim
In February 2007, Euro Pools notified RSA of a problem with the design of a “Vectran winch and rope system” installed at a diving pool in Leeds. The system was designed by a consultant called WYG. Euro Pools indicated to RSA that it had become aware that Vectran ropes were no longer industry best practice and that stainless steel ropes ought to be installed. RSA gave its consent for Euro Pools to undertake mitigation works to replace the Vectran ropes with stainless steel ropes.
In October 2007, a newly installed stainless steel rope became trapped under the pool floor resulting in a catastrophic failure. It was later found that this failure was caused by the omission of a restraining bar in the pool’s design plans prepared by WYG.
On 26 November 2007, Euro Pools made a notification of circumstances to RSA in respect of this incident, reserving its right to seek indemnity under the First Policy should it be determined that the failure arose from its notification made in February 2007. RSA asserted that the notification in February 2007 was limited to design deficiencies inherent in the use of stainless steel ropes and did not extend to issues causes by the absence of a restraining bar.
Again applying Kajima, Moulder J held that the scope of the February 2007 notification extended only to Euro Pools’ knowledge of issues relating to the ropes, and that Euro Pools was not at that stage aware of the defective design issues which ultimately caused the pool floor failure. Similarly, it could not be said that there was the necessary causal link between the matters notified in February 2007 regarding the ropes and the subsequent restraining bar failure that occurred in October 2007. The Leeds Diving Pool Claim thus also attached to the Second Policy.
Limitation period applicable to claim for mitigation costs
There was an issue in dispute about whether mitigation costs incurred in the above claims, and also in a claim in relation to the pool floors, were time barred from recovery on the basis that they were incurred by Euro Pools more than six years prior to commencing proceedings against RSA (i.e. before 28 January 2010).
Euro Pools argued that the 6-year limitation period in contract commenced when RSA was in anticipatory breach upon refusing to pay any further amounts to Euro Pools in respect of the claims during 2013. RSA argued that the mitigation costs were a first party financial loss, such that time started to run when they were incurred.
Moulder J held that while there was no authority directly on point, the mitigation costs clause in the policy was drafted as a first party financial loss clause. This meant that RSA had agreed to hold Euro Pools harmless against such loss and, once the costs were incurred, RSA was in breach of contract.
Moulder J agreed with RSA on this issue and found that any mitigation costs incurred by Euro Pools prior to 28 January 2010 were thus time barred and unrecoverable. As no payment was made to Euro Pools after this date in respect of the Leeds diving pool claim, RSA was successful in defending this claim. As the booms claim and floors claim concerned various payments made both before and after 28 January 2010, Moulder J determined that they should be divided pro rata between expenses incurred before that date and expenses incurred after that date.
The WYG recovery action
In October 2010, RSA authorised Euro Pools to commence proceedings against WYG for design failures arising from the Leeds diving pool claim. RSA advanced an initial sum of funds to Euro Pools to cover its solicitors’ costs in preparing the claim.
In June 2013, the funds advanced by RSA began to run out and Euro Pools requested that RSA confirm whether it wished to take over the proceedings. Euro Pools said that it was happy to continue the case on its own behalf, but that RSA should be aware that if it did so it would lose all rights to recovery.
In July 2013, with the matter due in court the following day, RSA stated that there were still enough funds left in the prior advance to cover the legal costs of the hearing, but that its position was without prejudice as to whether it would fund the costs of the legal action going forward. Euro Pools responded that it would give RSA two weeks to decide whether to cover the costs of the legal action or not. No response was provided by RSA and, in October 2013, Euro Pools informed RSA that it considered that RSA no longer had any interest in the proceedings.
The insurance policies provided that RSA was entitled to “prosecute any Claim for its own benefit in the name of Euro Pools” and would have “full discretion in the conduct of any proceedings”. The key question was whether RSA was liable to indemnify Euro Pools for adverse costs orders made once RSA’s interest in the recovery action had ceased. In that regard, the judge held that the recovery action had initially been prosecuted by RSA in the name of Euro Pools. However, she rejected Euro Pools’ case that it was necessary to imply a term that RSA would indemnify Euro Pools for any costs incurred. There was no reason why Euro Pools should incur any costs and thus the term did not satisfy the test (i.e. whether without such term the contract would lack commercial or practical coherence) to be implied.
Moreover, Moulder J held that once an insured excludes an insurer from the conduct of recovery proceedings, the costs of those proceedings cease to fall for coverage under the policy as it can no longer be said that the insurer is “prosecuting” the claim and retaining “full discretion” in the conduct of the proceedings. The judge found that the costs covered by the policy extended only up to this point in time, and that RSA was not liable for any costs or adverse costs orders after that point in time.
This was a decision that touches upon a number of important issues in the context of liability insurance.
This decision once again highlights the need for policyholders to take care when notifying circumstances under professional indemnity policies. The willingness of English courts to adopt a strict application of the knowledge and causation requirements serves as a timely reminder of the need carefully to analyse the terms of any policy notification provision; and then ensure that notifications are framed in terms which capture all relevant aspects known by the insured. This is particularly important in so called ‘can of worms’ and ‘hornet’s nest’ type circumstances of which the final scope of a particular issue is unknown as at the time of notification . And things should not be left there. The insured’s actual knowledge may continue to develop and accrue during the policy period, and hence notifications should be kept updated during the policy period (including any grace period for notifications following policy expiry). Furthermore, appropriate notifications should continue to be made (as here) to subsequent policy years unless it is clear that all matters will attach back to the first policy year and cannot attach to, or are excluded under, subsequent policy years.
As to mitigation costs, Moulder J’s decision also confirms that time starts to run for limitation purposes from when such costs are incurred, rather than from any subsequent date when the insurer declines cover. Subject to policy terms, the same may well also be true as regards investigation or defence costs incurred under a standalone indemnity. Policyholders must therefore take great care to ensure that limitation deadlines are monitored, starting from when costs are first incurred, particularly in long running matters where these points may not otherwise be front of mind. As potential limitation deadlines approach, consideration should be given by policyholders to taking appropriate and timely protective measures such as standstill agreements.
Finally, subject to the policy wording, in circumstances where insurers initially bring recovery proceedings in the name of the insured, but subsequently their interest ceases, policyholders should be mindful that they may be liable for their own costs and adverse costs awards going forward if they choose to continue that action on their own behalf.