Legal - Why you can't reject a late notification unless you can show prejudice.

(From Reinsurance)

In the recent decision of Sirius v Friends Provident, the Court of Appeal has closed a door previously left ajar in Alfred MacAlpine v BAI (Runoff). The court confirmed that unless a claims notification clause is expressed as a condition precedent to insurers' liability, insurers will not be able to reject late-notified claims unless they can show that they have suffered some prejudice.

Background

Where compliance with a condition - such as a claims notification clause - in a (re)insurance contract is a condition precedent to (re)insurers' liability, an insurer is entitled to reject any claim where the insured has failed to comply. The classic example is a requirement for notification of a claim "as soon as reasonably practicable", which is often expressed as a condition precedent to insurers' liability. This proposition is uncontroversial, and is well known to market professionals.

Where a claims notification clause is not expressed as a condition precedent to liability, then in the event of a breach by the insured, the general rule expressed in the case of Alfred MacAlpine v BAI is that insurers must show that they have suffered prejudice before they have any remedy against the insured. Even then, the insurers' remedy is broadly limited to a right to set off against the insured's claim the amount of the prejudice or "damage" suffered by insurers as a result of the late notification.

In many cases, it will be difficult for insurers to establish that they have suffered damage as a result of an insured's breach. In the context of claims notification, the insurer will typically need to show that if had it been notified "on time", then it would have been able to reduce its overall exposure to the claim.

In the BAI case, the Court of Appeal indicated that insurers may also have an alternative remedy as a result of the insured's breach of claims conditions when they are not expressed as conditions precedent. Lord Justice Waller held that the consequences of the insured's breach of a claims notification clause will vary depending on the seriousness of the breach and its consequences.