When to spill the beans?

While having liability insurance is essential in today’s uncertain economic climate, the issues around when to give notice of a claim can be confusing

“Typically, an insurance policy stipulates that notice of a claim must be given as soon as possible, or within the time limit stipulated by the policy,” notes Garth Rowe, principal claims officer at Aon South Africa – a provider of insurance and reinsurance broking, risk consulting and employee benefit solutions.

“While this may seem simple enough with a straightforward assets policy, liability insurance is markedly different,” he points out. “The issues around when and why to provide notification of a liability claim often give rise to much confusion.”

Rowe adds that in the case of a liability insurance policy, the insured is required to give written notice to the insurer as soon as practicable. “Not only of any actual claim made against it by a third party, but also of any circumstance that could potentially give rise to a claim being made by a third party in the future,” he notes.

He points out that this requirement has nothing to do with whether the insured believes they are liable or not. “It has to do with whether the insured is aware that a claim could arise, irrespective of where the liability is thought to lie.”

It is necessary to spill the beans, as a liability policy isn’t used only to settle third-party claims where the insured person is found liable, but it also covers legal costs incurred when defending a claim by a third party.

“This form of indemnity arises where the policy provides for legal defence costs and where the insurer is of the view that the claim by a third party should be defended rather than settled,” Rowe highlights. He adds that before the insured incurs any legal defence costs, the written consent of the insurer is usually required.

“The defence of a claim by an insurer is an important component of indemnity under a liability policy, and the cost to defend a claim from a third party could entail considerable legal costs,” Rowe continues.

“Thus, if the insured does not notify the insurer of a circumstance that could give rise to a claim as soon as he or she becomes aware of that possibility, the insurer may decline to assist on the grounds of late notification when the letter of demand or a summons is served at a later date.”

Insurers don’t want to use this obligation as a means to not pay. They want enough time to investigate the circumstances to protect both the insured and insurer.

“In Thompson versus Federated Timbers 2010 JDR 1543 (KZD), the court pointed out that where a reasonable person insured in the same position would appreciate the possibility of a claim arising, the fact that the insured in question did not notify, cannot relieve it of the consequences of its failure to notify the insurer of the event in question,” Rowe explains.

“In this case, the court relied upon an objective test for determining whether an insured should have appreciated the possibility of a claim arising.”

He notes that in situations of liability, it is better to be safe than sorry. “The insured should capture all circumstances in respect of which he or she has an awareness of the possibility, however remote, that a claim might arise, and notify the insurer or broker in writing as quickly as possible in order to protect their rights under the policy.”

Rowe concludes: “If there is any doubt, discuss the merits with your broker, who will be in the best position to provide qualified advice.”