There is overwhelming evidence to suggest that insurers continue to resort to a Reservation of Rights as a default option when faced with complex or high value claim notifications. This can clearly be unsettling and counterproductive for the insured especially in cases where there is no indication of policy breach by the insured. In these circumstances it is important to understand the nature, effect and scope of such reservations and how best to deal with them.
What is a Reservation of Rights?
A Reservation of Rights is a communication (usually by letter) from an insurer following notification of a claim which will make clear that an insurer’s right are reserved and that none of its statements or actions should be understood as waiving its rights to raise a defence to a claim under the express wording of the policy; for example, policy avoidance as a result of an insured’s non-disclosure or misrepresentation or claim declinature arising from non-compliance with the policy terms.
What are Insurers protecting?
A Reservation of Rights allows insurers to investigate a claim avoiding the need for an unnecessary rejection. Historically, insurers have been fearful of inadvertently confirming coverage where a valid defence may have existed. Previous case law has led insurers to believe that any equivocal behaviour in response to a claim; any reliance upon policy terms or any positive engagement with an insured in relation to a claim might amount to a waiver by the insurers of its policy defence and/or a confirmation of coverage.
There is no requirement of an insurer to provide an explanation as to why it has put a reservation of rights in place but an insurer must know or ought to know about the availability or existence of a potential defence.
Although a Reservation Letter can be issued at any time in the investigation process there is a tendency for insurers to issue a Reservation of Rights Letter as a default response in relation to any high value or complex claim notification.
More recently, the Association of Insurance Risk Managers in Industry and Commerce (AIRMIC) attempted to agree a voluntary code between AIRMIC and its insurer partners which was intended to reduce the frequency of use of Reservation of Rights Letters. In practice, however, many insurers continue to resort to the Reservation of Rights.
How to respond to a Reservation of Rights Letter
- A Reservation of Rights should put the insured on notice that the insurer has concerns in relation to the availability a defence to the claim;
- The insured should ensure that the Reservation of Rights has been recorded properly. For example, if it was received orally, the insurer should be asked for a written confirmation;
- The precise terms of the Reservation Letter should be scrutinised. If it is vague, the insurer should be asked to clarify the issues of concern and the reasons for the Reservation of Rights;
- If particulars as to the Reservation of Rights are received, the insured should start to address them;
- As the claim progresses the insured should regularly seek an update of the insurer’s position and, where practical, try and agree a time limit for a decision once all reasonable co-operation has been provided by the insured;
- If it is the case that the Reservation of Rights concerns either the insurer’s ability to avoid the policy for material non-disclosure or misrepresentation, or a breach of warranty, the insured should consider with the broker as a matter of urgency putting in place contingent cover; and
- The insured should consider whether the Reservation of Rights can be challenged. It may be necessary to take legal advice as to whether there has been any conduct by the insurer which is inconsistent with the reservation of rights for example:
- Accepting payment of premium under the policy where it is suggested there may be a right to avoid;
- Correspondence with the insured which expressly or impliedly suggests that the claim has been accepted;
- Taking steps consistent with the existence of ongoing coverage (premium adjustments, signing endorsements etc.) where it is suggested there may be a breach of warranty such that cover would be at an end; and
- The making of an interim payment or reliance upon a policy term or condition.
With the benefit of proper guidance the insured should try to maintain the pressure on insurers to reserve rights only when necessary and to resolve outstanding issues quickly.
If you would like further information please do not hesitate to contact the Edwin Coe Insurance Litigation team.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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