Notification of Circumstances Across Two Policy Years
Bright Engineering Consultants Ltd is a structural engineering firm. Its professional indemnity (PI) policy with Meridian Insurance runs from 1 April 2023 to 31 March 2024, on a claims-made basis, with a retroactive date of 1 April 2015, a limit of HK$20 million each claim and in the aggregate (including defence costs), and a deductible of HK$500,000 each claim. In November 2023, site staff saw cracking in a footbridge Bright designed in 2017. On 15 January 2024 Bright wrote to Meridian: 'we have observed cracking on the Tuen Mun footbridge and believe it may be attributable to our design of the bearings.' Meridian did not respond. On 20 June 2024 the developer sued Bright for HK$8 million. Bright's 2024/25 PI policy with a new insurer, Northline, incepts on 1 April 2024 and excludes claims arising from circumstances known before inception. Meridian says the claim was made after its policy expired.
1. Which policy should respond? Explain the claims-made trigger and what counts as a notifiable circumstance.
Read the worked answer
The trigger is claims-made: the claim must first be made against Bright during the policy period. The developer's claim was made in June 2024, after 31 March 2024, so on the bare trigger Meridian's 2023/24 policy would not respond. The answer turns on the notification-of-circumstances extension.
Most PI policies provide that if the insured notifies the insurer during the period of 'circumstances which may give rise to a claim', any later claim arising from those circumstances is deemed made in that period. The test is not certainty; it is whether there is a real, as opposed to fanciful, risk, identified with enough specificity to allow the insurer to investigate.
The 15 January letter names the Tuen Mun footbridge, the cracking and the suspected bearing design. That is specific: project, symptom and suspected cause. It is more than a general concern about quality. On balance, the 2023/24 policy responds.
That engages Northline's prior-known-circumstances exclusion: Bright knew of the matter before 1 April 2024 and did not disclose it. Northline is entitled to decline and could also avoid for non-disclosure.
If the letter had said only 'we are reviewing our design procedures', the outcome would reverse: no specific circumstances, no deemed claim, and the 2024/25 policy might respond, subject to the exclusion and disclosure issues.
2. Apply the limit and deductible, and explain the effect of defence costs being inside the limit.
Read the worked answer
The limit is HK$20 million each claim and in the aggregate, including defence costs, and the deductible is HK$500,000 each claim.
Assume the claim settles at HK$8 million and defence costs are HK$1.2 million - a total of HK$9.2 million.
- Deductible: HK$0.5 million is borne by Bright.
- Insurer's payment: HK$8.7 million.
- Aggregate remaining: HK$20 million − HK$8.7 million = HK$11.3 million.
The key judgement is the inside-the-limit wording. If defence costs are inside the limit, they consume cover that would otherwise be available for damages; a long-running defence can exhaust the limit before indemnity is paid, leaving Bright exposed for the balance. If costs were outside the limit, the full HK$20 million would remain for damages. Bright should compare costs-inclusive and costs-exclusive options and consider a higher limit.
Also reserve for the possibility that the developer increases its claim; HK$8 million is a claim, not a proven loss. The insurer should reserve rights and monitor defence costs against the eroding limit.
3. Bright asks whether it can simply claim on the 2024/25 policy instead, because the limit is higher. Advise.
Read the worked answer
No. Three reasons:
- Prior-known exclusion. The cracking and the January letter predate 1 April 2024. Northline's policy excludes claims arising from circumstances known before inception, so the June 2024 claim falls outside.
- Non-disclosure. Bright was asked, or should have been asked, about known circumstances in the proposal. Not disclosing the footbridge issue allows Northline to avoid the policy for non-disclosure, and a deliberate non-disclosure could be treated as fraud.
- The insured cannot elect. The claims-made trigger and the notification extension fix which policy responds. Bright cannot choose the better limit by ignoring the January letter.
The right course is to hold Meridian to its 2023/24 policy, notify Northline 'for information only, without prejudice' so that it is on notice if Meridian's position succeeds, and keep a complete file. If there is a genuine gap, Bright should negotiate with Meridian rather than risk a coverage dispute with both insurers.