Late notification under a D&O claims cooperation clause
A Lloyd's syndicate writes a claims-made directors' and officers' policy for a UK-listed retail company. The policy contains a claims cooperation clause, a condition requiring notice of claims 'as soon as practicable', and no claims control clause. In June the company receives a notice from the FCA commencing an investigation into historical sales practices. The company's annual report in September discloses the investigation. The broker notifies the syndicate in November, five months after the FCA notice. By then the company has incurred £1.2m of defence costs and has appointed its own solicitors. The syndicate's claims handler believes that, had notice been given in June, the syndicate could have issued a reservation of rights, appointed panel counsel and influenced the defence strategy; she also notes that the company's September annual report described the investigation as 'routine and immaterial'. The insured argues that the investigation is not a 'claim' and that notice was therefore not required.
1. Can the syndicate decline the defence costs on the ground of late notification? Distinguish a claims cooperation clause from a claims control clause.
Read the worked answer
Identify the clause type first. A claims cooperation clause requires the insured to cooperate and to keep the insurer informed, but it does not give the insurer control of the defence or a right to decline for breach. A claims control clause gives the insurer the right to control the defence and to require the insured not to settle without consent; breach of a control clause may entitle the insurer to decline, depending on its wording and on prejudice.
Here the policy has a cooperation clause, not control. The syndicate cannot decline simply because the insured appointed its own solicitors or failed to consult it.
The notification condition is the real battleground. 'As soon as practicable' can operate as a condition precedent to liability, in which case late notification may entitle the insurer to decline even without proof of prejudice. But that result depends on clear wording. Under the Insurance Act 2015, a term of that kind in a commercial policy must be clear and unambiguous, and the insurer must have taken sufficient steps to draw it to the insured's attention. If the condition is not a condition precedent, the insurer's remedy is damages for breach, which requires proof that the late notice caused loss.
Prejudice: the handler's assertion that earlier notice would have allowed a reservation of rights, panel counsel and influence over strategy is arguable but not automatically sufficient. The insured had competent solicitors and the defence costs were incurred in any event. The syndicate would need to show what would probably have been different.
Conclusion: the syndicate's best position is a reservation of rights and a detailed prejudice analysis, not an immediate denial.
2. Was the FCA investigation a 'claim' or a 'circumstance' requiring notice, and does the September annual report disclosure affect the analysis?
Read the worked answer
Definition of 'claim'. D&O policies typically define a claim to include a written demand, a civil or criminal proceeding, and a formal regulatory investigation. An FCA notice commencing an investigation is usually within that definition, or at least a 'circumstance' that may give rise to a claim. The insured's argument that the investigation is not a claim is unlikely to succeed on a modern D&O wording.
When did notice run? The obligation runs from when the insured became aware of the investigation, not from when it decided the investigation was material. The company received the FCA notice in June. The September annual report disclosure confirms that the company was aware and treated the matter as disclosable. The description 'routine and immaterial' is the company's own judgement and does not postpone the notification obligation.
Claims-made significance. The policy responds to claims notified during the policy period. If notice is delayed beyond the period, the claim may fall outside cover altogether. That is a more serious risk than the 'as soon as practicable' condition.
Does the annual report help the syndicate? It supports the inference that the company knew the investigation was significant. It also shows that the company had the information needed to notify in June. It does not, however, prove that the syndicate suffered prejudice.
Practical point: the broker's November notification may still be effective if it is the first notification of the claim, but the insured's failure to notify in June is a breach that the syndicate should investigate and reserve over.
3. How should the claims handler proceed? Set out the practical steps and the coverage position.
Read the worked answer
Immediate steps:
- Acknowledge the claim in writing and issue a reservation of rights, expressly reserving the late notification point.
- Request a full chronology of when the company, its directors, its in-house counsel and its brokers became aware of the FCA notice.
- Obtain the FCA correspondence, board minutes and the annual report drafting file.
- Confirm the policy period and whether the claim was first notified within it.
Coverage analysis:
- Check whether the notification condition is a condition precedent and whether it was transparently drafted.
- Assess prejudice: what would the syndicate have done differently in June, and what difference would that probably have made?
- Consider whether the insured's own defence was reasonable and whether panel counsel would have been appointed in any event.
Claims handling:
- Offer to appoint panel counsel or a monitoring counsel with the insured's agreement, without prejudice to the reservation.
- Monitor defence costs against any sub-limit and request a budget.
- Consider a negotiated contribution to costs if prejudice is arguable but not strong; a blanket denial is likely to be challenged and may damage the market's reputation.
- Notify reinsurers if the claim may reach their layer, and follow any claims cooperation obligations in the reinsurance.
Market conduct: keep the broker informed and avoid any suggestion that the syndicate is using a technical point to avoid a genuine claim. The strongest position is a documented, reasoned coverage analysis.