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Liability insurance policies written on a ‘claims-made ’ basis are designed to reduce the danger to the insurer of unforeseen long-tail losses. Invariably, however, the assured s need for uninterrupted cover requires the policy to include an extension clause, by virtue of which cover is extended beyond claims made during the period of cover to claims arising thereafter from circumstances notified to the insurer in accordance with the terms of the clause. The interpretation and operation of this pivotal provision, considered in this article with particular reference to the litigation in HLB Kidsons v. Lloyd’s Underwriters, demonstrate the interaction of these two commercial concerns.
Liability insurance is written on either an “occurrence” or a ‘claims-made” basis. Under an occurrence-based policy, the insurer accepts the risk of liabilities flowing from defined events that occur during the period of cover regardless of the length of time that may elapse between the relevant event and resulting loss or damage emerging to trigger a claim against the assured, and irrespective of whether it was or could have been known that a liability-generating event had occurred during the period of cover. Such potential long-tail liabilities engender considerable financial uncertainty for insurers; a “claims-made” policy addresses this uncertainty by confining cover, in principle, to claims falling within a specified type of liability and made against the assured during the period of cover. However, to avoid a commercially unacceptable insurance gap that would otherwise result, claims-based policies invariably contain an extension clause by virtue of which cover is extended beyond claims made during the period of cover to claims arising thereafter from circumstances notified to the insurer in accordance with the terms of the clause. This article considers a number of issues relating to the interpretation and operation of an extension clause, with particular reference to the litigation in HLB Kidsons v. Lloyd’s Underwriters.1
II. THE ANATOMY OF A CLAIMS-MADE POLICY
There are three aspects to the cover provided under a typical claims-made policy. First, the insurer agrees to indemnify against any claim in respect of specified liabilities made