The good and the evil of permissive notices of occurrences under the XL-004 Bermuda Form Policy

Introduction

A “permissive society” is a society in which social norms become increasingly liberal. It usually accompanies a change in what is considered deviant.

The same might be said about the provision of permissive notices of occurrences by insureds to insurers under the current XL-004 Bermuda Form Policy (“XL Policy”). As discussed in further detail below, a permissive notice of an occurrence is essentially a precautionary notice of an occurrence which does not involve the policy at the time that notice is given but may conceivably do so at a future point in time.

There appears to be an increasing promiscuity amongst insureds in the use of permissive notices of occurrence in order to protect their right to indemnification and ability to integrate losses as a single integrated occurrence. As permissive notices of occurrence become the socio-cultural Bermuda-Form norm, they are arguably being used by some insureds to obfuscate the need to provide mandatory notice of occurrence when the policy is in fact likely to be involved. Moreover, they are being increasingly deployed as a means to circumvent the insured’s obligation to perform any or any proper evaluation of the potential exposures under the policy as part of its due diligence.

As discussed below, this may prove problematic for insurers facing long-tail excess casualty claims involving millions of dollars when the policy is only likely to be involved many years after the original claim or claims which formed part of the occurrence were made and notified by the insured.

To this end, the permissive notification of occurrences arguably deviates from the fundamental purpose underpinning the notice provision in the XL Policy, namely, to promptly place insurers on notice when there is a reasonable possibility that the policy will be involved. Certainly, the concept of “permissive occurrences” was not expressly mentioned in prior Bermuda Form Policies such as the XL-003 Policy. Moreover, XL’s initial guidelines suggested that precautionary notices should not be given unless the policy was likely to be involved.

This article explores the concept of permissive notices of occurrence under the XL Policy including the advantages and disadvantages of an insured giving notice of a permissive occurrence as a precautionary measure together with practical recommendations for underwriters and insurers. It is assumed for the purposes of this article that, as is typically the case in Bermuda Form Policies, the governing law is that of New York.

The “occurrence”

The Bermuda Form Policy is an occurrence reported policy. In other words, there must be a qualifying “occurrence” within the meaning of the policy which is reported during the relevant policy period. It is essentially a hybrid of: (i) an occurrence-based general liability policy where some “event” such as personal injury or property damage must have occurred during the policy period, and (ii) a claims-made policy where the claim must have been made during the relevant policy period.

The occurrence definition under the XL-004 Policy is in two parts as defined in Article III(V)(1):

“(a) except with respect to actual or alleged Personal Injury or Property damage arising from the Insured’s Products, there is an event or continuous, intermittent or repeated exposure to conditions which event or conditions commence on or subsequent to the Inception Date or the Retroactive Coverage Date, if applicable, and before the Termination Date of Coverage A, and which cause actual or alleged Personal injury, Property damage or Advertising Liability;

(ii) actual or alleged Personal Injury to any individual person, or actual or alleged Property Damage to any specific property, arising from the Insured’s Products takes place on or subsequent to the Inception Date or the Retroactive Coverage Date, if applicable, and before the Termination Date of Coverage A.”

The first type of occurrence above (which may be described as a “Type I Occurrence”), in Article III(V)(a) of the Policy, applies to injuries or damages not arising from the Insured’s Products, and requires an event or a continuous, intermittent or repeated exposure to conditions which event or conditions commenced on or subsequent to the Inception Date or the Retroactive Coverage Date, if applicable, and before the Termination Date of Coverage A and which causes actual or alleged personal injury or property damage.

The second type of occurrence (which may be described as a “Type II Occurrence”), in Article III(V)(b) of the Policy, requires personal injury or property damage arising from the Insured’s products: “[which] takes place on or subsequent to the Inception Date or the Retroactive Coverage Date, if applicable, and before the Termination Date of Coverage A.”

The key distinctions between these two separate occurrences may be shortly identified as follows:

a. The temporal requirement of a Type I Occurrence is circumscribed by reference to the relevant “event or conditions” which must have commenced between the Inception Date or Retroactive Coverage Date and the expiration of Coverage A. A Type I Occurrence will therefore include all consequential Personal Injury or Property Damage even if that Personal Injury or Property Damage took place after the expiration of Coverage A.

b. In contrast with a Type I Occurrence, the temporal requirement of a Type II Occurrence is circumscribed by reference to the timing of the Personal Injury or Property Damage which must have taken place between the Inception Date or the Retroactive Coverage Date and the expiration of Coverage A, irrespective of the timing of any use or exposure to the Insured’s products.

Two simple examples may highlight the differences.

a. An insured, an energy company is insured by an insurer pursuant to a policy which incepts on 1 January 2015 and expires on 31 December 2015. A gas explosion takes place on 1 July 2015. As a result of the gas explosion, many individuals are injured and continue to be injured today. The occurrence in this example is the gas explosion which is the “event” and all of the injuries that were actually or allegedly caused by the gas explosion or by the continuous or repeated exposure to the gas emitted from the explosion will likely fall within the scope of that occurrence even though the injuries might not have taken place until long after the gas explosion itself.

b. By contrast, let us assume that an insured is a car manufacturer which is insured under an excess casualty Bermuda Form policy which incepts during the same policy period i.e., 1 January 2015 to 31 December 2015. A model of car is manufactured between 1990 and 2000 and the brake linings are toxic, releasing toxic chemicals as and when the brakes are used. This causes people to become injured – they get cancer - in 2015. The claims by these people and the insured’s liability will fall within the scope of a Type II Occurrence because the actual or alleged injuries resulted from the use of the insured’s products (the car) and took place during the Policy period. For the purposes of satisfying the temporal requirement in this case, it is the injuries or damages which must have taken place during the relevant policy period.

Notice of occurrence

With this context in mind, the question arises as to when notice of a Type I or Type II Occurrence must be given. By Article V, notice of an occurrence and/or integrated occurrence must be provided (in relevant part) as follows:

A. Notice as soon as practicable

If any Executive Officer shall become aware of an Occurrence likely to involve this Policy, the Named Insured shall, as a condition precedent to the rights of any Insured under this Policy, give written notice thereof to the Company and in the manner provided in Section D of this Article V.

Such notice shall be given as soon as practicable and, in any event, during the Policy Period or the Discovery Period, if applicable, and in accordance with Paragraph 2(b) of Exclusion K, if applicable. Failure to provide written notice as prescribed above shall result in a forfeiture of any rights to coverage hereunder in respect of such Occurrence.

B. Permissive notice

Any Insured may at any time during the Policy Period or Discovery Period give notice of an Occurrence to the Company in the manner provided in Section D of this Article V.

C. Permissive notice of integrated occurrence

The Insured may at its option give written notice to the Company of any Occurrence as an “Integrated Occurrence” by designating it as such and giving such notice in the manner provided in Section D of this Article V. Once the Insured gives Notice of Integrated Occurrence, all Personal Injury or Property Damage that falls within the Integrated Occurrence (as provided in the terms, conditions and exclusions of this Policy) shall be treated as such for all purposes under this Policy irrespective of whether this Policy has been terminated after the Insured has given Notice of Integrated Occurrence. The limit of liability applicable to such Integrated Occurrence shall be the limit described in Article II of this Policy.

D. Manner of notice

(1) Notice of Occurrence must explicitly be designated as such in writing and must be directed to the Company’s Claims Department at the address set forth in Item 8(a) of the Declarations….

The notice provision must be read in conjunction with Article I (Insuring Clause) which requires that notice of an Occurrence shall have been given by the Insured in an Annual Period during the policy period in accordance with Article V.

The timing of an insured’s permissive notice of an occurrence is therefore important because it serves to determine: (i) the applicable retention and limits of coverage, and (ii) the terms and conditions or exclusions, that are in effect at the time that notice is given.

This is particularly important in circumstances where the policy is renewed annually – as is typically the case in Bermuda Form Policies. For example, it may be beneficial for the insured to notify the occurrence in a particular year because the available limits of coverage for that particular policy year are higher or a particular exclusion does not apply to preclude coverage or there are other more favourable terms and/or conditions in the policy.

As set out above, the notice provision is sub-divided into four main parts:

a. Sub-section A deals with “notice as soon as practicable.”

b. Sub-section B deals with “permissive notice.”

c. Sub-section C deals with “permissive notice of an integrated occurrence.”

d. Sub-section D deals with the manner of notice.

Sub-section D is not addressed in this paper since it simply sets out the formal requirements that must be met in order to effect valid notice. For example, it must be sent to the relevant address of the insurers’ claims department and so forth.

The most critical components of the notice provision are contained in the first three parts. The notice provision in prior versions of the Bermuda Form Policy was slightly different and the concept of a permissive notice of occurrence was not expressly mentioned.

The concept and giving of a permissive notice of occurrence was therefore not expressly formalized until the XL Policy came into effect – although certainly it was open to insureds to serve precautionary notices if they chose to do so albeit at their own peril.

Article V(A) notice as soon as practicable

Pursuant to Article V(A), “[i]f any Executive Officer shall become aware of an Occurrence likely to involve this Policy,” the insured is obligated to notify insurers of that occurrence as soon as practicable in accordance with the formalities set out in Article V(D). Failure to do so, may result in the insurer raising a defence of late notice (which is typically strictly enforced in New York) and a forfeiture of coverage.

Several questions emerge in this context:

a. When is there an occurrence which is “likely to involve the policy”?

b. So far as the knowledge of the relevant notifying individual is concerned:

i. Must the relevant individual actually be aware of an occurrence which he or she believes is likely to involve the policy (implying a subjective test)?

ii. Alternatively, is it sufficient if the individual is aware of an occurrence which objectively was likely to involve the policy even if he or she did not think so or did not think about it all (implying a subjective- objective test)?

These issues are addressed in reverse order i.e., (i) firstly, the insured’s knowledge, and (ii) secondly, when there is an occurrence which is “likely to involve the policy.”

Insured’s knowledge

As a matter of New York law, an insured’s obligation to give notice of an occurrence is when the relevant notifying individual (i.e., the executive officer or equivalent level manager as set out in Article III(K)) became aware of an occurrence about which it “could glean a reasonable possibility of the Policy’s involvement” based upon an objective assessment of the information available. See Christiana v. Great American 979 F.2d 268, 276 (1992); see also Century 15 Misc. 3d 1132(a) (NY Sup Ct 2007). The word “likely” does not require that it is “more likely than not” or a probable certainty that the policy will be involved. It is sufficient if there was a real possibility, not just a fanciful possibility, that the policy will be engaged.

Further, the duty to provide notice does not arise on the basis of “mere speculation, rumor, or remote contingencies far removed from the particular policy in question.” Christiana v. Great American 979 F.2d 268, 276. Rather, it arises when an insured complying with its duty to use due diligence in investigating potential claims against it would believe from the information available that its policy would be involved. It is enough that the claim is arguably covered or arguably will reach the policy. It is not deferred or inactive until the insured has reached a certain level of certainty that the claim is covered or will reach the policy.

It has been argued that the correct construction of Article V(A) warrants an entirely subjective enquiry because the provision makes it clear that it is the “manager of equivalent level employee…” who “shall become aware of an occurrence likely to involve this Policy.” The basis of this argument is that there is no express requirement that the occurrence should be one which is, objectively viewed, likely to involve the policy. It is argued that, for example, the provision does not say that the relevant individual shall become aware of an occurrence “which is likely to involve the policy” or “which is objectively likely to involve the policy.”

The better view is thought to be that, as a matter of construction and implication, Article V(A) likely involves a subjective-objective enquiry. In other words, notice should be given when the relevant notifying individual became aware of an occurrence which, objectively viewed, was one in respect of which there was a reasonable possibility of involving the policy and its applicable limits.

An insured might perceive this construction as being too stringent. However, this must be the correct principled approach because if the former approach were adopted (i.e., a purely subjective enquiry), the a relevant notifying individual who was simply lazy, incompetent or simply willing to turn a blind eye to mounting claims likely to give rise to an occurrence likely to involve the policy, escapes scrutiny. Indeed, it would mean that because a risk manager of an insured company never believed, however irrationally, that there was an occurrence likely to involve the policy, the notice provision in Article V(A) was never triggered. This is unlikely to be right under New York law.

Occurrence “likely to involve the policy”

This leads to the next question which is when in practice is there an occurrence which is “likely to involve the policy.”

Being a high level excess liability policy attaching excess of millions of dollars, not every claim will constitute an occurrence which is “likely to involve the policy.” The critical question is: when is there a sufficient level of claims which threatens to engage the excess attachment point of the policy and/or exhaust the applicable limits?

This is a question of fact in any case. The Insured cannot wait until the claim or claims, or defence costs, actually reach the attachment point. The Insured needs to consider the time when claims are made and whether, when those claims are made, they are likely to involve the policy. The Insured needs to be proactive and evaluative.

It follows that, in determining whether there is a reasonable possibility of the policy being involved, one must look at the full facts of each case and consider not just the dollar value of the claims but also factors such as:

a. The number of the claims that have been brought and are likely to be brought.

b. The likely value of the claims.

c. The prospects of their success – for example, there might not be a reasonable possibility of a claim impacting the policy if $1 billion in damages is sought but the insured believes that the claim is entirely spurious and unlikely to succeed.                      

d. Finally one must evaluate the defence costs likely to be incurred even if the specific claim or claims are dubious.

Permissive notice of an occurrence

As noted above, permissive notice of an occurrence is one that is precautionary in nature. In other words, at the time that the insured gives notice of the occurrence, the occurrence is not one which necessarily involves the policy but may conceivably do so at an undetermined time in the future.

By its terms, the current XL Policy permits the giving of precautionary notices but its provision is not mandated. There is no forfeiture of coverage for failure to give a precautionary notice in contrast to the giving of a notice of an occurrence which is likely to involve the policy (Article V(A)). This raises the question as to whether, if permissive notice of an occurrence has been given, the insured is subsequently required to give further notice when it becomes aware of an occurrence which is likely to involve the policy. The XL Policy is silent in this regard.

Some commentators take the view that the precautionary notice is sufficient to trigger coverage under the policy that is in effect at the time that the notice is given.

If this is right, the insured is licensed to notify occurrences without effectively having to perform any or any meaningful due diligence as to when there is a real possibility of an occurrence which is likely to involve the policy. On this basis, the mandatory obligation to give notice when the policy is likely to be involved is seriously diminished.

Despite this, it is open to a Tribunal to conclude that if an insured has given a permissive notice of an occurrence, this is sufficient to trigger coverage under the policy and that a subsequent notice need not be given.

This is because a notice that is likely to involve the policy is given so as to provide the underwriters with advance warning of that occurrence. The permissive notice of an occurrence informs the underwriters of the occurrence and gives them the opportunity to monitor it and require information from the insured and everything they need. Therefore, the requirement for a subsequent notice, as a matter of construction and implication, is unnecessary. However, this is very much an open question which will to some degree depend upon the facts specific to each occurrence and the circumstances giving rise to the insured’s notice.

Permissive notice of an integrated occurrence

Pursuant to Article V(C), the insured may at its option give written notice to the Insurer of any Occurrence as an “Integrated Occurrence” by designating it as such and giving notice in the relevant manner. Once it does so, all personal injury or property damage falling within the scope of the integrated occurrence, may be integrated together as a single occurrence.

An insured must give notice of an integrated occurrence if it intends to integrate a number of claims and/or losses together as falling within a single occurrence. This is made clear by Articles III(V)(2) and (3).

Article III(3) provides that,

“if an Occurrence is not identified in the notice thereof as an “Integrated Occurrence,” then actual or alleged Personal Injury to each person, Property Damage to each piece of property….which commences at any time shall be deemed to be encompassed within a separate Occurrence from which [Personal Injury or Property Damage] which commences more than thirty (30) days prior or later thereto is encompassed.”

However, the timing of the notice of the integrated occurrence is at the insured’s discretion and can be given at any time. To this end, it is regarded as being “permissive.”

The advantages

What are the advantages of giving a permissive notice of occurrence or integrated occurrence?

From an insured’s perspective, the merits of giving a permissive notice of occurrence are several-fold:

a. It protects its right to indemnification in the event that one or more of the claims that form part of the occurrence give rise to an occurrence which is likely to involve the policy in the future.

b. It potentially relieves the insured from having to give a second notice of an occurrence when iti is actually likely to involve the policy at a later date. This is assuming that a further notice under Article V(A) is not required. As noted above, the policy is silent in this regard.

c. The limits of liability in respect of the occurrence are fixed as at the date that the notice was given and the relevant terms and conditions of the policy that are also in effect at the time that notice was given also apply. This might be favourable if the insured chooses to subsequently insure the risk with another insurer on different and potentially less favourable terms and conditions.

d. In circumstances where a notice of an integrated occurrence is given, it means that the insured can integrate into the policy period in which notice has been given, future occurrences which fall within the scope of the insured’s notice and the integrated occurrence provision.

What are the advantages for an insurer?

From an insurer’s perspective, one advantage is the receipt of early notice of an occurrence which may conceivably involve the policy in the future. The Insurer can examine the occurrence and require the insured to keep him abreast of all developments. The Insurer knows the limit of its potential liability and can set reserves as appropriate. The Insurer gains a comforting degree of certainty. This knowledge also supplies the insurer with the ability, upon renewal, to reassess its potential exposure and liability and, if necessary, to impose additional exclusions to or other restrictions upon coverage or to charge a higher premium.

The disadvantages

What are the hazards of the provision of a permissive notice of occurrence and integrated occurrence?

If a permissive notice of occurrence and/or integrated occurrence has been given by the insured, the most significant hazard for any insurer is the uncertainty of when there is an occurrence which is likely to involve the policy. This is especially in cases where an insured faces long-tail risks and the claims which formed part of the original occurrence and/or integrated occurrence are made many years after the original occurrence and/or integrated occurrence was given.

To illustrate the point, let us assume that in 1980, the insured, “The Cinderella Shoe Company” (“Cinderella”) manufactured an iconic glass high heeled pump called “ICON.” The ICON shoe had a distinctive gold-coloured lining. A million of the shoes are sold to women across the United States of America.

However, when the shoes were manufactured from 1980 onwards, the gold lining contained a chemical which was subsequently discovered to be highly toxic.

As a result, ladies who bought the shoes started to develop rashes and sores on the soles of their feet and sued Cinderella from 1980 to 1985.

Cinderella is insured with Bermuda & Co. (“Bermuda”) under an excess liability policy which provides coverage up to a limit of $50 million excess of $50 million which Bermuda renews on an annual basis from 1980 to the present day.

In 1985, Cinderella serves a precautionary notice on Bermuda advising that it has faced claims arising out of its ICON shoes which do not yet impact the policy but might do so in the future. The current claims amount to $15 million.

Cinderella does not face any further claims and nothing is heard from the Insured until 2015 (i.e., 20 years after the original notice was served).

In 2012, the World Health Organization declares that the chemical in the gold lining is a human carcinogen. Cinderella therefore faces mass tort litigation by women across the United States of America who allege that they have suffered various kinds of carcinomas or other types of cancer as a result of their use and exposure to the toxic chemical in the shoes.

By 2015, Cinderella has incurred defence costs and damages in the sum of $150 million. Cinderella therefore serves a demand for an indemnity of the full limits under the policy.

In this hypothetical, Bermuda may be caught off guard because Cinderella did not report any additional claims for three decades. Subject to other coverage defences, the insurer may therefore be obliged to pay the claim as having been properly and promptly notified in 1985. Meanwhile, the insured is arguably able to integrate subsequent losses back to the original 1985 notice of occurrence and integrated occurrence even though it never served a subsequent notice of an occurrence when there was a reasonable possibility of the policy’s involvement. Moreover, the insured is able to capitalize on the limits of cover at the time that the notice was given in 1985.

The main hazard for insurers in this hypothetical is therefore a potential liability of future claims which may be integrated into a notice of occurrence or integrated occurrence which was given many years before the claims arose.

Practical recommendations

In circumstances where an insured has given a precautionary notice, some practical considerations which underwriters and claims professionals might wish to consider are outlined below.

Underwriters

Underwriters may wish to consider the following:

a. To pay more careful scrutiny to the risk upon renewal including whether to impose additional terms, conditions, exclusions and/or other restrictions to coverage or whether to increase the premium in anticipation of future claims and/or a demand for an indemnity in subsequent years to come.

b. Revising the policy language to make it clear that, even if a permissive notice of occurrence and/or integrated occurrence is given, the insured must still provide a further notice when that occurrence becomes one which is likely to involve the policy.

Claims professionals

Claims professionals may wish to consider the following:

a. Actively monitoring the risk and the potential exposures which may involve the policy by requesting from the insured quarterly, monthly and/or annual updates regarding any new claims that have been made, the defence costs and damages that have been incurred and/or projections for future claims.

b. Issuing a reservation of rights letter which includes an express reservation of rights pertaining to notice issues so as to preserve any potential late notice defences under Article V.

Conclusion

In light of the above, if insurers are to continue to survive in a competitive insurance market they should treat the provision of permissive notices of occurrence with careful vigilance. They are the red light district for any insurer which should raise immediate warning bells. This is especially so in relation to potentially long-tail risks. As Andy Grove (a Hungarian businessman) said “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”