FERMA members who have notified a claim or a circumstance to an insurer in the London market may have received a letter from the insurer imposing a reservation of rights, particularly on liability claims.
In essence, this is a notice from the insurer to make clear that none of its statements or actions during the investigation of the claim should be understood as waiving its rights to raise a defence to a claim under the express wording of the policy or otherwise.
Receiving such a reservation of rights should highlight to a policyholder that the insurer is giving serious consideration to whether or not the claim is covered under the policy.
Members of the UK risk management association Airmic have drawn attention to an absence in many such general reservations of rights of any explanation of the basis on which they have been imposed or the potential coverage issues that are being investigated.
It could be that the insurer is investigating a whole range of serious policy defences from material non-disclosure or misrepresentation and breach of warranty, to breach of condition or the application of certain exclusions.
If this is the case, risk and insurance managers will have significant difficulties, including a need to report to senior management the possibility of the insurance not responding to a major claim.
A reservation of rights notice may prevent the policyholder recognising the claim as an asset on its balance sheet. In any case, it should certainly indicate to the risk manager that the claim should be handled carefully, including seeking legal advice where appropriate.
Guidance
Airmic has, therefore, produced a guide for policyholders that sets out a series of practical steps to take when they receive a reservation of rights. It is designed to assist them in seeking clarification from an insurer on the reasons for the reservation of rights, what information or steps are required to enable insurers to lift the reservation or take the relevant policy point (if one is available), and how long it will be in effect.
Further, the guide explains that if the insurer is considering avoiding the policy or treating itself as discharged from liability, policyholders need to be proactive in understanding the risks, so that contingent coverage can be arranged if appropriate.
The aim of the guidance is, therefore, to educate policyholders about reservations of rights and their consequences and how to minimise their impact when imposed.
Airmic has also been working with its insurance partners and the law firm Herbert Smith to develop a clause for inclusion in insurance policies governed by English law.
The clause seeks to reduce an insurer’s scope to issue a reservation or rights by ensuring that the policyholder will not assert that actions during a prescribed period of time will be taken as a waiver of policy or other defences. It also prescribes a process for effective communication between policyholder and insurer during the investigation of the claim.
The Airmic guide to reservation of rights can be downloaded for free on registration on the Airmic site at https://www.airmic.com/research/reservation-rights
To learn more, contact John Hurrell/ Paul Hopkin at Airmic or Paul Lewis and Alexander Oddy, Partners at Herbert Smith.