Insurers have traditionally reserved their rights to flag up to insureds that there may be issues with either the validity of a policy or the availability of an indemnity under it. Unsurprisingly, many insureds believe that they have received an unjustified reservation of rights in recent years and will doubtless welcome the recent guidance issued by Airmic. The guidance is aimed at reducing the incidence of reservation of rights letters and the uncertainty they engender for insureds. The advantage for insurers in adopting these proposals is that they have an opportunity to carry out investigations and voice any concerns to the insured without waiving any rights or putting their relationship with the insured at risk by formally reserving rights.
The Airmic guidance proposes that reservations of rights will “cease to be a routine procedure; will become less common; and that all reservations of rights letters that are issued will clearly indicate the basis on which this action has been taken”.
The suggested policy clause
The suggested reservation of rights policy wording provides a 90-day (or otherwise agreed) period in which insurers will not issue a reservation of rights. In order to preserve insurers’ rights, the wording includes an agreement by insureds not to rely on the actions or words of insurers during that period as a waiver of insurers’ rights under the policy, or at law.
This initial stage will allow for a period of without prejudice communication between the insured and insurers during which insurers can request documents and other information from the insured to decide whether a reservation of rights is truly necessary.
At the end of the 90-day period, insurers would have the option of confirming cover, subject to policy terms and conditions or issuing a detailed and reasoned reservation of rights. If a reservation of rights is necessary, then the clause requires such reservation to be in writing and to identify precisely why part, or all, of the claim might not be covered.
The reservation should also specify what steps can be taken (or information provided) by the insured that may allow insurers to lift the reservation of rights. The clause also stipulates that insurers should notify the insured as soon as they become aware, including during the 90-day period, of facts that may entitle them to avoid the policy or refuse coverage. Under these proposals, where a reservation of rights is imposed, a meeting is to be held between the parties to resolve outstanding requests for information and to allow the insurer to explain any actual or proposed reservation of rights. Any actions or statements at the meeting will not waive any rights either party may have.
This is not the first time that Airmic has proposed restrictions on the use of reservations of rights by insurers. The Statement of Principles Regarding Insurers’ Reservation of Rights, published in 2008 as a voluntary code between Airmic and its insurer partners, provided that reservations of rights would not be issued pre-emptively as a matter of course. It also provided for without prejudice communications between insurers and their insureds to determine how the policy might respond to a potential loss, and what further information was required. This current initiative from Airmic goes a step further by suggesting a clause to be incorporated into policies which would render the principles embodied in the voluntary code contractually binding.
In a recent Insurance Times article, the Chief Executive of Airmic said that he was optimistic that the clause would have “wide buy-in” and would become “viewed as a market norm”. There is no doubt that full and frank exchange of information regarding the availability of cover at an early stage in the claims process assists early identification of issues allowing them to be resolved in a timely and cost-effective manner. Whether or not insurers include a form of the proposed clause in their policies, they will still have to ensure that they review and assess information as it comes to light and if it impacts on either policy response or policy validity, notify the insured as soon as possible. A reservation of rights should in any event only be necessary where insurers are aware of an issue which might affect the availability of insurance cover but require further investigations before confirming their position.
It is still early days and the take up from insurers as regards the inclusion in policies of a form of wording controlling the use of reservations of rights remains to be seen. However, with this latest initiative from Airmic, coupled with Treating Customers Fairly (TCF) and other consumer protection inspired regulation from the FSA, the pressure is very much on insurers to reserve rights only when necessary and to resolve outstanding issues quickly.