Wiki — Notification of circumstance

A notification of circumstance under a professional indemnity policy is not the same thing as a claim. Understanding the difference — and getting the timing right — is one of the most important things a professional firm does under a claims-made wording. This entry sets out what counts as a circumstance, when to notify, and what late notification can do to cover.

Circumstance versus claim — the distinction

A claim is a formal demand for compensation — a letter of claim, a court summons, a pre-action protocol letter, sometimes an ombudsman referral. A circumstance is anything short of a formal demand that the insured knows about and that might reasonably be expected to lead to a claim: an angry client email, a complaint being drafted, the discovery of an error in a file that has caused loss, a dispute over an invoice where the client has raised the quality of the work.

Under a typical PI wording both are notifiable events. A claim, once made, triggers the insurer's response. A circumstance, once notified and accepted, is deemed for coverage purposes to be a claim first made during the policy year in which the notification is given — so the wording that responds is the wording in force at notification, not the wording in force when the eventual claim is made.

Why the notification of circumstance matters

Because PI is written on a claims-made basis, the policy that responds to a claim is the one in force when the claim is made — unless a valid circumstance notification has already been made under an earlier policy. That earlier notification locks the exposure into the earlier policy. The reasons this matters in practice:

• The insurer, limit, excess and wording that respond are those of the year of notification, not those of the year the claim finally lands.
• If cover is later restricted, if the insurer's appetite changes, or if the firm has to change insurer, the notification protects position.
• If the firm ceases to trade before the claim is made, the notification is what activates run-off (or the pre-cessation policy) to respond.

Failing to notify a circumstance that you knew about can leave the eventual claim without a policy to respond to it.

What counts as a circumstance — the practical test

The wording usually says a "circumstance which might reasonably be expected to give rise to a claim". The test is deliberately low — it is not "will give rise" or "is likely to give rise", it is "might reasonably be expected to". The practical indicators:

• A client has expressed dissatisfaction in writing with the outcome or the quality of your work.
• You have identified an error, omission or oversight in a file that has caused, or may cause, financial loss to the client.
• A regulator, professional body or ombudsman has opened a matter concerning your services.
• A third party has intimated that they intend to pursue you or your firm.
• Your work has been the subject of criticism by another professional (a second-opinion valuer, a review counsel, a follow-on adviser).
• You have received a request for the file from a solicitor acting for the client or a third party.

Not every unhappy email is a circumstance; not every criticism is a notification event. But when in doubt, the direction of travel favours notification. It is easier to withdraw a notification that turns out to be unnecessary than to explain a notification that should have been made.

When to notify — "as soon as reasonably practicable"

The wording usually requires notification "as soon as reasonably practicable" once the insured becomes aware of the circumstance or claim. This is a wording obligation, not an absolute rule, and it is measured against what a reasonable insured in the firm's position would have done. Days rather than weeks is the norm for most matters; genuine urgency (a court deadline, a regulatory investigation) tightens the window.

The Insurance Act 2015 changed some of the older common-law consequences of late notification for commercial insureds, but did not remove the wording obligation. Late notification remains a live issue and can affect cover.

Consequences of late notification

The insurer's remedies for late notification depend on the wording, the delay, and whether the delay caused the insurer prejudice. Possible outcomes range from:

• No impact. The notification was accepted late but the insurer suffered no prejudice — for example, the eventual claim arrived within the same policy year and the file was intact.
• Deductions for prejudice. The insurer is prepared to indemnify but reduces the settlement by the amount of loss attributable to the delay — witnesses lost, evidence gone stale, opportunity to settle early missed.
• Coverage dispute. The insurer takes the position that late notification amounts to a breach of a condition precedent and declines to indemnify. This is a wording-dependent argument and one where the specific claims-made language becomes central.
• The wrong policy year. The notification is so late that the eventual claim is made in a year with a different insurer or different terms, and the firm is left arguing with two insurers about which one responds.

How to notify

The notification should go through the broker to the insurer in writing. It should identify the insured, the policy number, the client, the matter, the facts as known, the amount at stake if calculable, and the reason the insured considers this a circumstance. It should not admit liability, offer any settlement, or communicate with the third party in a way that prejudices the insurer's position — that is a standard condition of PI wordings and is one of the reasons the broker sits in the middle.