Reservation of Rights – model wording on the way
More steps announced to curtail use of Reservation of Rights
Airmic is to produce a model clause for insertion into insurance contracts to make it more difficult for insurers to reserve their rights on claims without good cause
Speaking at a briefing to journalists attending the annual conference, chief executive John Hurrell admitted that a voluntary Code announced with market support in 2008 had not had the desired impact.
A recent survey of members found that the Code had gained widespread recognition within the market, but had not stemmed the trend towards greater use of Reservations of Rights (RoR). According to the findings:
- 33% of respondents had received at least one RoR letter within the previous two years
- 62% of those surveyed reported that they believe the RoR letter(s) was issued unfairly
- 57% of those responding to the survey indicated that the matter was not resolved to their satisfaction.
Reservation enables insurers to indicate that they may not accept liability for a claim. Although a legitimate tool under the right circumstances, Airmic believes that it too often becomes the default position on large claims.
The result is to reduce the scope for informal discussion between the parties and to introduce lawyers into the process early, adding to the time and cost of settlement.
The main point of the new clause will be to agree a period following a claim during which the insurer may not issue a notice to reserve rights. This is the same concept as the voluntary Code, which stipulates a 90-day cooling off period before there can be RoR.
In return, the insured party will agree that the insurer may still defend the claim even though it has not issued such a notice. If it does eventually issue a RoR, the insurer will be required to provide a detailed explanation.
“Our feedback from members, both formal and informal, indicates that Reservation of Rights remains a big cause for concern among buyers, who believe that too often insurers use it unfairly. It is very much in the interests of the market to resolve this issue, as it is reducing confidence in the insurance product,” said Hurrell.
Once the clause has been drawn up in draft form, hopefully by the end of the summer, Airmic will consult its insurer-partners over details of the wording. Airmic is being assisted by Herbert Smith, the law firm behind the non-disclosure model clause unveiled by Airmic earlier this year.
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Insurance Forum hears evidence that Reservation of Rights has increased