Known circumstances exclusion

From the Apex Insurance Wiki, a citation-driven UK insurance reference

At a glance
Category	Core PI concepts
Also known as	prior knowledge exclusion, known claims and circumstances exclusion
First codified	clause varies by insurer; the underlying common-law framework predates the Insurance Act 2015
Related legislation	Insurance Act 2015, Marine Insurance Act 1906

A known circumstances exclusion removes cover under a professional indemnity policy for any claim arising out of a fact or matter that the insured knew, or ought reasonably to have known, was likely to give rise to a claim before the policy period began.

Definition §

The known circumstances exclusion is a standard feature of claims-made professional indemnity (PI) policies. It bars cover for claims that arise out of facts, matters, errors, omissions, or circumstances that the insured, or any person within the insured firm with relevant knowledge, was aware of (or should reasonably have been aware of) prior to the inception of the policy and which a reasonable professional would have appreciated could give rise to a claim.^[1]

The exclusion serves two functions. The first is moral hazard control: it stops a professional from purchasing or extending insurance immediately after spotting a problem in their work, having previously avoided notification. The second is the maintenance of the claims-made structure itself. A claims-made policy responds to claims first made against the insured during the policy period; if insureds were permitted to bring forward pre-existing known matters into a fresh policy year, insurers would be unable to price the risk and would be effectively writing cover after the loss had occurred.^[1]

The threshold for engaging the exclusion is generally objective. The test is not whether the insured subjectively believed a claim was likely, but whether the facts known to them were such that a reasonable professional in their position would have appreciated the potential for a claim. This objective gloss is important because professionals are often optimistic about their own work, and a purely subjective test would render the exclusion all but inoperable.^[2]

A linked concept is the notification of circumstances. PI policies typically allow the insured to notify any circumstance that may give rise to a claim. Once validly notified, any later claim arising from that circumstance is treated as having been made during the policy in force at notification, regardless of when the claim itself crystallises. This is the bridge between the known circumstances exclusion (a backward-looking bar) and the deeming provision (a forward-looking preservation of cover).^[3]

Legal / Regulatory basis §

The exclusion operates against the statutory duty of fair presentation in the Insurance Act 2015. Sections 3 to 8 of the Act require a commercial insured to make to the insurer a fair presentation of every material circumstance which the insured knows or ought to know, or sufficient information to put a prudent insurer on notice that further enquiries are needed.^[4] A pre-existing claim or circumstance is almost always material, and failure to disclose it engages the insurer's remedies in section 8 — proportionate avoidance, contract variation, or proportionate claim reduction — depending on whether the breach was deliberate, reckless, or neither.^[4]

Before the 2015 Act came into force, the law was governed by sections 17 to 20 of the Marine Insurance Act 1906 (as extended by the common law to non-marine insurance), which imposed a strict duty of utmost good faith with avoidance as the only remedy for material non-disclosure.^[5] The 2015 Act softened the regime but did not eliminate it; the underwriter still expects the insured to volunteer material information, of which prior knowledge of likely claims is the most obvious example.

The Court of Appeal in HLB Kidsons (a firm) v Lloyd's Underwriters examined notification of circumstances under a PI policy at length, including the standard required for an insured to be aware that something might give rise to a claim. The decision is the principal authority for the construction of notification clauses and is regularly cited in the analysis of known circumstances exclusions.^[6]

In the solicitors' market, the SRA Minimum Terms and Conditions (MTC) restrict what insurers may exclude on the basis of prior knowledge. The MTC prescribe a limited regime for excluding claims known about before inception, and any exclusion that ventures beyond what the MTC permits will be unenforceable as against a third-party claimant under the principles built into the MTC structure.^[7]

How it works in practice §

In practice, known circumstances are usually addressed at three points. The first is at proposal. Insurers ask the proposer to declare known circumstances likely to give rise to a claim, and the answers are incorporated into the proposal form as part of the fair presentation. The second is at renewal. The insured is expected to refresh the disclosure exercise and notify any circumstances that have arisen during the expiring policy year before the new year commences. The third is during the policy itself, where the insured may at any time notify circumstances and trigger the deeming provision.

Where a circumstance is validly notified during the expiring policy, the claim falls under that policy. Where notification is missed, the claim, when it crystallises, falls under the current policy year — but the known circumstances exclusion may apply, leaving the claim uninsured. This is why brokers stress the importance of pre-renewal sweeps for known matters.

The objective component of the test was emphasised in HLB Kidsons. The court distinguished between a circumstance that a reasonable professional ought to appreciate could give rise to a claim and a mere unease about work that no reasonable professional would consider problematic. A vague concern is not enough to trigger a notification entitlement, but specific facts pointing to a substantive error usually are.^[6]

The exclusion also interacts with the doctrine of prior acts coverage and the policy's retroactive date. A claim relating to work done before the retroactive date may be barred by the temporal scope of the policy regardless of whether it was known about; a claim relating to work done after the retroactive date but where the underlying error was known about before inception may be barred by the known circumstances exclusion. The two operate on different axes and can both be engaged on the same set of facts.

The exclusion does not apply to circumstances genuinely unknown to the insured at inception, even if discovered shortly afterwards. Many insureds discover problems within weeks of a new policy commencing; provided they had no relevant knowledge before inception, the new policy responds.

Common variations §

Variations arise in the level of knowledge required, the persons whose knowledge is attributed to the insured, and the temporal scope of the exclusion. Some wordings refer only to actual knowledge of the principals or partners; others extend to constructive knowledge of any person within the firm. Some wordings refer to circumstances 'likely to give rise to a claim'; others use 'might give rise to a claim', which is a lower threshold and broader in scope.

The exclusion is also affected by step-in provisions in continuous coverage clauses. Where the same insurer has provided successive policies, a continuous coverage clause may waive the known circumstances exclusion to the extent that the matter would have been covered under an earlier policy year, even if not formally notified at the right time. This is a significant feature of the solicitors' market and a reason firms value insurer continuity.

In the solicitors' market, the MTC effectively replaces a free-standing known circumstances exclusion with a structured notification regime backed by the run-off provisions and the Solicitors Indemnity Fund post-six-year arrangements.

Example §

A surveyor signs a valuation report on a commercial property in January. In November, the client writes to query whether the report adequately reflected a flood risk highlighted in the planning history. The surveyor reviews the file and concludes the criticism may have substance but does not notify their PI insurer. The policy renews on 1 January. In April of the new policy year, the client issues proceedings. The new insurer relies on the known circumstances exclusion, arguing that the surveyor knew of facts in November that a reasonable professional would have appreciated could give rise to a claim. The expiring insurer denies cover, arguing no notification was made within the policy year. The surveyor may be left without indemnity, with the dispute turning on the objective test applied to the November correspondence.

References §

↑ Insurance Act 2015 — https://www.legislation.gov.uk/ukpga/2015/4
↑ HLB Kidsons (a firm) v Lloyd's Underwriters [2008] EWCA Civ 1206
↑ J Rothschild Assurance plc v Collyear [1998] CLC 1697
↑ Insurance Act 2015, sections 3-8 — https://www.legislation.gov.uk/ukpga/2015/4
↑ Marine Insurance Act 1906, sections 17-19 — https://www.legislation.gov.uk/ukpga/Edw7/6/41
↑ HLB Kidsons (a firm) v Lloyd's Underwriters [2008] EWCA Civ 1206
↑ SRA Minimum Terms and Conditions of Professional Indemnity Insurance — https://www.sra.org.uk/

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